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Paper short abstract:

Despite the intended benefits of providing hedging against price volatility, application of financial derivatives of futures, forward and options in food price speculation are equally capable of driving up food prices beyond the reach of consumers, thereby threatening food security in the long run.

Paper long abstract:

Financial derivatives are being erroneously promoted as viable tools for ensuring food-price stability by mitigating against food price volatility especially in developing countries. Empirical evidence suggests quite the opposite. Our findings show that farmers in developing countries, majority of whom are small scale practitioners, are not able to fully harness the benefits of derivatives to mitigate against price volatility and ensure food security. This, in part, is due to the exorbitant cost of using derivatives, especially if the value of underlying assets is insignificant. This leaves the doors open for large scale commodity traders, to use futures and forward contracts to create large scale artificial demand for speculative purpose and in anticipation of arbitrageurs opportunity. This very act distorts basic economic fundamentals and drives up food prices well beyond the reach of average consumers, wrecking havoc and bank-made calamities across several countries.

This paper seeks to highlight the relationship that exists between food-price speculation and prices of food items. The paper also seeks to proffer solutions, which are capable of curbing application of derivatives to drive up food prices and guarantee food security for all. The prospect of applying this initiative to minimise food-related poverty by ensuring food security is not insignificant.