§ 10.13 p.m.
§ Mr. Ray Carter (Birmingham, Northfield)
The subject of this debate is the need for an immediate inquiry into the affairs of the London commodity markets. All hon. Members who are interested in the rising prices of commodities will have immediate sympathy with the intention behind this debate. Like me, they will have seen the soaring prices on the food and metal commodity markets which have gone to all-time highs. This is due to speculation of a kind that we have never seen before. Already there has been one quite disastrous fatality—Rowntree's, which lost about £20 million in the cocoa market. However, for everyone who has lost in the commodity markets—admittedly, so far, there has been no one else in that particular category—there are probably a hundred or more who have gained.
It is no good for the apologists to say that speculation makes no difference. I expect the Minister to be an apologist for the markets ; or, for that matter, any other hon. Member who intervenes in the debate. But on the contrary, from what I have been able to gather from experts in these matters, it seems that speculation is a prime mover in the whole question of inflation. Indeed, in the United States people are languishing in gaol precisely because of the part they played in various aspects of the spectacular rises which have occurred in the commodity markets there. Investigations are afoot into the way in which the United States commodity markets are operating.
I ought to make it clear that I have no intention of attacking the traditional operations of the commodity markets. That is not the object of the exercise. Already today I have met two representatives of the commodity markets. I made it quite plain to them that, as far 358 as I and most reasonable people are concerned, the markets when operating in their traditional manner do a valuable service. In times of great currency difficulties of the kind that we have today, however, it seems that the traditional system of operation is to a large extent irrelevant.
§ Mr. Carter
Perhaps the hon. Gentleman will go to his constituency this weekend and have a word with one or two ordinary people about the prices of various commodities, and then relate to them the way in which the commodity markets have operated over the past few years and the kind of fortunes that have been made out of speculation. If the hon. Gentleman listened to ordinary people, he would not return with a retort such as "Rubbish ".
It is no good for the Prime Minister to criticise world prices alone as the sole contributor towards rising prices. It is my contention that speculation of a quite immoral and unjustified kind has led to many unjustified price increases. What we ought to do is to look at the root causes rather more than we do. That is why I sought this Adjournment debate. Speculation is greatly to blame for the runaway indexes on the commodity market, and they fire the whole process of runaway commodity prices.
I do not claim to be an expert in these matters—
§ Mr. Carter
—unlike hon. Members on the Government back benches would claim to be. But they have a finger in the pie. This is their particular field. They would seek to justify almost any of the quite outrageous operations that have taken place in the commodity markets over the past three or four years.
If we look at the future's markets, we see quite the worst aspects of these affairs. A small deposit can lay claim to some future supply of a commodity, be it food or material. Having made that small deposit, the paper money that the transaction now represents can be traded time and again, and fortunes can be made out 359 of that trading with no practical end result and absolutely no benefit to anyone save the speculator. It is indeed a speculators' paradise. The gentlemen I saw this afternoon, who represent the commodity markets, have very serious doubts about the way in which this aspect of the market operates, and I would rather listen to them than to Conservative Members who would merely seek to defend rather than examine it in in a clear and impartial way.
1 should like to quote from the Economist of July this year. It stated :Little of the turnover on London's commodity exchanges is ending in actual deliveries. Cocoa, which has surged £200 a ton in three weeks, provides an example of what is happening. In one day this week 100,000 tons of cocoa were turned over in London but a mere 400 tons of actual cocoa beans were purchased in Ghana during the whole of the previous week.Hon. Members cannot say "Rubbish" to that. It is quite outrageous and simply should not have happened. One might add that, as a result of that speculation, the price of cocoa soared to unparalleled heights. The article went on to state thatThe markets have become unreal.The net result of all this activity is a quite staggering increase in final prices, principally because at a time of great monetary uncertainty people have been putting their resources, their spare liquid cash, into tangible things such as commodities.
We ought to look at the way in which the indices for commodities have moved over the past three years. The Economist All-Items Commodity Index stood in June 1970 at 123.8 ; by June 1973 it had risen to 230.6. If we take food, in which the Minister will be interested, in June 1970 the index stood at 132.3 ; in June 1973 it had risen to 250.5. To take fibres, wool and cotton, in June 1970 the index stood at 79.7 ; in June 1973 it stood at 270.3. Changes of that kind simply cannot be put down to alterations in supply and demand. There has not been a dramatic change in either supply or demand. What is most ludicrous—
§ Mr. Carter
It is nearly 25 minutes past 10. I should have thought that even if Members who clearly do not know very much at all about the subject wish to defend what has happened they could sit back for a moment and listen to what someone who cares about these matters has to say. I admitted that I am not an expert.
§ Mr. Norman Lamen (Kingston-upon-Thames) rose—
§ Mr. Carter
I will not give way because there is not time. What is quite ridiculous is that small changes on either side of the supply/demand equation can lead to quite dramatic changes in the final price situation.
There are other aspects of the goings-on in the commodity markets which we should clearly look at. There is the whole question of monopoly. It was suggested in the same article in the Economist that a monopoly wave may well be developing once again in the pepper market. It stated thatsomeone seems out to corner that old favourite, the pepper market ".Prices have risen 28 per cent. this month to £900 a ton. Then, again, there is the overstocking of materials by major manufacturers and industries. Should not this question be looked at? After all, quite unjustified overstocking, if done on a sufficiently large scale, can have a quite disastrous effect upon overall prices.
There is also the question of what happens to the profits that are made by individuals. I wonder whether the Inland Revenue knows enough about profits which are being made and have been made in the commodity markets over the last few years. Has it sufficient information? I sincerely hope so. There was a well-known legal case some years ago. Precisely what part of the profits made in these activities is taken into account for tax? I sincerely hope that the Inland Revenue is not losing sight of the people who are making hundreds of thousands if not millions of pounds in this way.
It would be a scandal if at the time of wage restraint those individuals were able to make profits which did not attract the kind of taxation they so obviously deserve. I believe that the markets themselves would welcome an inquiry. 361 The conversations I have had so far today have led me to believe that to be so, in spite of the shouts by Conservative Members. The people I have spoken to have grave doubts about the way some forms of speculation have been occurring over the last three and a half years and I am sure that if the Government wished to carry out an inquiry they would receive the support and co-operation of the market.
If an inquiry is established—I do not hold out a lot of hope—it should examine the extent and level of speculation of the last few years. It should also examine what the Government themselves can do to try to stabilise and control situations of the kind we have had over the last three and a half or four years when, because of monetary uncertainty, people have rushed to put their finance into tangible things like commodities in order at least to keep pace with inflation and, if possible, to get ahead of it.
There are other matters that I have already mentioned like possible monopoly situations, and we know from the past that these are not imaginary happenings ; they actually exist. There is the other question of overstocking. Should not firms be told, in the interest of maintaining the lowest possible prices, that overstocking will not be tolerated and. what is more, that Governments will intervene to ensure that that does not happen?
There is then the question of tax avoidance. The commodity markets are a speculator's paradise, and unless the Inland Revenue is diligent many people will be making money undetected. I sincerely hope, although the appropriate Treasury Minister is not with us, that that Department will ensure that no one is avoiding tax.
I have highlighted the principal problems. We should remember that there is great agitation in this country about the way prices have risen to unprecedented levels. It is a pity that we in this Chamber have never looked at the root causes of these price rises—such as the commodity markets—but instead have just passed them off. I believe that speculation of a most outrageous kind has been responsible for some of the price increases of the past few years. This is not conjecture on my part.
362 In the United States people are in gaol because of speculation. Massive inquiries are afoot there because of the way speculation has run amok.
§ Mr. Carter
That is true, but on the periphery it is exactly the same and what has happened in the United States can happen here. It is true that the way in which the market traditionally operates does not leave room for that kind of thing, but in the free market, I am assured by people in a position to know, there is opportunity for people to speculate in a way that enables them to make unjustified profits and in doing so to force up prices to unreasonable levels.
§ Mr. Dennis Skinner (Bolsover)
I endorse my hon. Friend's arguments. He talks about people in the City informing him of their problems and dilemmas over the massive speculation taking place in the commodity market. A City editor rang me last week on the same subject. There was no doubt in his mind that the speculation was about 30 per cent. above what would be expected at this time.
When my hon. Friend talks about the impact that speculation has on food and many other prices, he is beginning to hit the nail on the head. But there is another point. When speculation takes place and there is a cash outflow from this country, it is something the Government cannot control. They have some control in a monetary sense over the way in which paper money—
§ Mr. Deputy Speaker (Mr. E. L. Mallalieu)
Order. The hon. Gentleman's intervention is becoming a speech.
§ Mr. Skinner
There is no control by the Government in respect of speculation in commodities. I agree with my hon. Friend that the subject is most important and one on which we must concentrate to a greater extent.
§ Mr. Carter
My hon. Friend has, as usual, understated the case. He is right to say that there is an enormous amount of unjustified speculation.
363 I return briefly to my point that there is a clear need for an investigation. I do not make it in a narrow political sense. All Governments have an interest in ensuring, for the benefit of the economy and social well-being of the nation, that prices do not rise to unreasonable levels. Some of the activities in the commodity markets over the past three and a half to four years have in part been responsible for unjustified price increases. I have not much optimism, but I sincerely hope that the Government will give the question of an investigation serious consideration.
§ 10.33 p.m.
§ Mr. R. A. McCrindle (Billericay)
I first declare my interest. I am associated with a commodity firm in the City.
Predictably, the hon. Member for Birmingham, Northfield (Mr. Carter) has turned his attention to the effect on food prices of speculators' activities. He might also have mentioned the prices of metals, which are basic to British industry.
Although the hon. Gentleman will find it hard to believe the effect of speculators' activities is to make markets less volatile than they otherwise would be. He has overlooked that with a strong speculative interest there is a broad and continuous market. There is always a speculator to buy from the producer when the user is out of the market and to sell to the user when the producer is out of the market. That produces stability in a market and controls rather than exacerbates what would otherwise be a wide fluctuation of prices. I remind the hon. Gentleman that futures markets were started by merchants, producers and consumers for the very reason that they protected them against wild and violent price movements.
Certainly speculation has intensified over the past few years as stock markets have tended to turn sour, and the hon. Gentleman is right to say that large gains can be made. But he moved quickly over the fact that large losses can also be made. The critics have overlooked the fact that the law of demand and supply has a much greater effect on the movement of commodity prices than have the activities of speculators, upon which the hon. Gentleman has concentrated. It is a fact that the increased 364 standard of living in underdeveloped countries, as a result of which they now consume products they previously exported, has created shortages. Added to that, there have been famines in different parts of the world. That is at least as much the reason for the movement of which the hon. Gentleman complains as the activities of speculators.
I will prove my point with facts and figures. The hon. Gentleman bandied around the facts and figures from his point of view. Palm oil, in which there is no futures market and, therefore, no speculation, has moved from £90 a ton in February to £230 a ton in September and back to £175. Aluminium, again with no speculative development, tells the same story.
I question what the hon. Gentleman has put forward concerning the violent movement in prices which has affected consumers. He is not justified in putting the responsibility wholly at the door of the speculators.
§ 10.36 p.m.
§ The Parliamentary Secretary to the Ministry of Agriculture, Fisheries and Food (Mrs. Peggy Fenner)
I am glad of the opportunity this debate has provided to clear the air over the allegations that have been made both in the Press and in the House about the operation of the London commodity markets dealing in food. The hon. Member for Birmingham, Northfield (Mr. Carter) has in recent weeks made unsubstantiated remarks about speculation in these markets, and this evening he has gone into rather more detail. But he has fallen some way short of demonstrating that anything untoward has been happening.
By raising the subject tonight the hon. Member has stimulated the expert opinion of my hon. Friend the Member for Billericay (Mr. McCrindle), who has just enlightened the House. The hon. Gentleman must take account of my hon. Friend's comment about palm oil if he is to substantiate his argument. My hon. Friend has done most of my job for me, but I shall draw attention to some of the main points as I see them.
The commodity markets with which we are mainly concerned tonight are the futures markets for grains, cocoa and sugar although, as the House will appreciate, there are also markets in coffee 365 and vegetable oils and, of course, important markets for a number of raw materials other than foodstuffs. The procedures and mechanisms of the markets are respected the world over. They provide an invaluable centre for the buying and selling of some of our basic foods. They facilitate the flow of international trade and, in addition to the profits and commissions earned by the markets direct, they make a significant contribution to the balance of payments through the banking, insurance and shipping services which they bring into play, since these commercial and financial services associated with the trading on these markets tend to be provided in this country.
Where commodities are bought forward, covering commitments some months into the future, there is, as the hon. Gentleman will realise, always the risk that prices may move against the buyer or seller in the period before the physical delivery is made. Some mechanism to limit these risks is, therefore, essential if the smooth operation of international trade is not to be hampered.
For commodities, this useful function is provided through the medium of dealing in futures. By entering into a futures contract, a trader is effectively reducing the risks he faces from an adverse movement in market prices. But the benefits of this insurance can only be obtained if there is an active market—that is to say, a substantial number of traders willing to do business on this basis.
That brings me to the element of speculation, to which the hon. Gentleman has referred at length. To my mind a degree of speculation is inherent in the effective work of these markets. The speculator may not be interested in reducing any risk in his physical trading in the commodity. He is backing his own judgment of the way the market will move. If there were not sufficient people willing to back their judgment in this way, the futures market could very well be too thin to function properly.
The essential rôle of the speculator—and his value to the market—lies in the way he maintains the flow of business by being willing to take the risks that the other traders are concerned to avoid.
§ Mr. Skinner rose—
§ Mrs. Fenner
Speculation, therefore, in this sense is very far from being a dirty word, although it is too readily thought of in that way by Labour Members. It should be recognised for what it is—namely, a vital part of the market mechanism.
That is not to say, of course, that unbridled or uninformed speculation works to the advantage of the markets or of trading in the commodity as a whole. Clearly this is not so. But the rules and procedures of the markets themselves are designed to impose a necessary check on the speculative element. These rules, which command international respect, provide, for example, for the payment of deposits on each transaction and involve the liability to pay additional margins to maintain the relative value of the deposit when prices move against the trader. There is also provision for further safeguards, such as breaks in trading, but these have not so far been found necessary in the food markets. The hon. Gentleman referred to cocoa. In fact, such deposits for cocoa were doubled earlier this year.
The hon. Gentleman has suggested that the Government should inquire into the operation of these markets. I have two comments on this. First, I have heard no convincing evidence that the market associations' own procedures are ineffective. Secondly, the Bank of England itself maintains an overall watch on the operation of commodity markets. Both these mechanisms enable speculation to be kept within reasonable bounds.
Quite apart from that, however, speculation by its very nature involves the risk of losses as well as the possibility of profits. Indeed, knowledgeable people involved in these markets often tend to take the view that speculators inevitably make a loss in the end. Moreover, it must not be forgotten that, to realise a gain, a speculator must sell the commodities he has bought forward. It is not possible, therefore, for him to hold up market prices against the trend dictated by the balance of supply and demand.
§ Mrs. Fenner
No. I was left with very little time.
367 It has been alleged that speculation has nevertheless operated to the detriment of consumers' interests by exaggerating the reaction to news affecting the market. It is argued that it has pushed prices to a higher level than the supply and demand factors themselves would justify. If this were true, it would follow that similar exaggerated reactions to news of bumper crops, or a cutback in demand, would lead to a greater slump in prices than the market would think reasonable. These things work both ways.
368 The truth is, however, that the futures market is only one factor affecting commodity prices. Futures may follow the general pattern of commodity prices—
§ The Question having been proposed after Ten o'clock and the debate having continued for half an hour, Mr. DEPUTY SPEAKER adjourned the House without Question put, pursuant to the Standing Order.
§ Adjourned at seventeen minutes to Eleven o'clock.