World Bank Offers Farmers Money to Hedge Against Volatile Food Prices

Monday, June 27, 2011

The World Bank has teamed up with JP Morgan to offer farmers and food manufacturers in poor countries access to financial derivatives to hedge their risk from volatile food prices. Two other banks, one in sub-Saharan Africa and one in Europe with Middle East partnerships, as yet unidentified, are expected to launch similar products with the World Bank shortly.

Excessive speculation in agricultural commodities has been attacked by development charities for fuelling price swings that undermine poor farmers’ livelihoods. However, the World Bank believes that giving them access to the markets will act as an insurance policy. It says safeguards are in place to ensure participants cannot bet against themselves and add to the speculative pressure that NGOs want curbed.

In the first phase, the World Bank will underwrite $200m in credit risk through its private sector arm, the IFC, which will be matched by up to $200m from JP Morgan. The IFC calculates this will enable the private sector in developing countries to buy up to $4bn of protection against price volatility.

The hedging products will be aimed at medium-sized farm groups and businesses in developing countries. The World Bank does not rule out larger players, such as the leading grain traders, making use of the credit facility but says it expects them only to be involved at the margins. The derivatives will be plain swaps or forwards, with farmers only allowed to insure against losses by hedging against prices going down and manufacturers only insuring against the big rises in costs they suffer when prices go up. JP Morgan, which will take profit from fees, said that the partnership with the World Bank would enable it to offer risk management to entities it would not have considered before.

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