Global food and fuel price crises have helped to drive an “obscene” £4bn increase in trading revenues for the world’s top five investment banks, new research has found.

The analysis, by Lighthouse Reports, raises serious questions over the UK’s proposed Financial Services and Markets Bill, which will have its second reading in Parliament today.

The bill would make it easier for investment banks to speculate on the price of commodities, which has been blamed for the current rampant inflation.

Experts have warned that investors seeking to profit from market volatility led prices of wheat and oil to soar far beyond what would be justified by Russia’s invasion of Ukraine.

Of the five investment banks, the biggest winner is Goldman Sachs, according to Lighthouse Reports. The bank has seen an increase of £1.9bn for its fixed income and commodity and currency (FICC) division.

Morgan Stanley, the Bank of America, JP Morgan and Citi have all also seen revenue increases as a result of commodity trading.

The proposed financial services bill largely removes the limits on the number of contracts that financial investors can hold in any given commodity.

The limits were set by the European Union in the wake of the 2008 food price crisis, which pushed at least 40 million people into hunger. Excessive speculation – where investors push futures prices out of line from market fundamentals of supply and demand – was a key driver of the crisis, according to the New England Complex Systems Institute.

During her leadership campaign, new prime minister Liz Truss cited the European rules as part of her intended “red tape bonfire”.

Campaign group Global Justice Now led the calls to introduce the rules after the 2008 crisis. The group’s director, Nick Dearden, warned the rules have already been “significantly watered down” – and removing them altogether would have dire consequences.

Dearden said: “If the British government gets away with removing these rules altogether, we will be back to square one, with financiers dictating who gets to eat.

“Rather than strengthening the rules to stamp out these destructive practices, the British government is this week debating a bill which would strip them away altogether.”

Hunger profiteers

This year’s rocketing prices were not in proportion to actual predicted shortfalls in food or fuel, according to the International Panel of Experts on Sustainable Food Systems (IPES Food).

Headlines declaring a quarter of the world’s wheat exports were threatened by the invasion, obscured the fact that this was just 0.9% of the global wheat supply.

But while fears of a shortfall may have been exaggerated, this didn’t stop the price increases from having a real impact on the availability of food. By April, more than one in five households with children in the UK were experiencing food insecurity, according to the Food Foundation.

IPES Food reported that speculators trying to profit from the gains were partly responsible for the skyrocketing prices – and a Lighthouse Reports investigation published earlier this year found Russia’s invasion of Ukraine had sparked record flows of investor cash into the futures markets, particularly in food.

Traditionally, businesses could use futures markets to manage fluctuations in the price of their goods – buying futures contracts to offset the risk of a price increase or selling them to offset the risk of a slump.

Speculators help to ensure that there are enough market participants for farmers and millers to offset their risks in this way. But since the liberalisation of rules on speculation in 2000, speculators have dominated futures markets, meaning they are now also the primary determinants of the futures price.

In the fortnight after the war began in late February, the wheat futures price rose by more than 50%. By April, two commodity funds that buy only agricultural futures had attracted net investor investment of $1.2bn – compared to just $197m for the whole of 2021.

The food price hikes helped push an additional 71 million people around the world into poverty this year.

Olivier de Schutter, UN special rapporteur on poverty and the chair of the International Panel of Experts on Sustainable Food Systems, said banks were “betting on hunger, and exacerbating it”.

He said: “Their herd-like behaviour can make upward price swings higher and affect hunger levels of the world's poorest people.”

In total, $26bn of investor cash flowed into commodities funds between February and April, according to data from Morningstar. Then, from May to July, $23bn flowed almost as quickly out.

Wheat and other grains have now settled back at pre-invasion prices – but the increased trading activity has led banks’ trading divisions to boom.

Revenues for the commodities divisions of the top 12 investment banks grew by $3.4bn in the first six months of 2022 compared to the previous year, according to figures from industry analyst Coalition Greenwich.

Campaigners have condemned the banks’ rising revenues. Nick Dearden said: “One of the great under-reported drivers of the cost of living crisis is the role of the speculators pushing up food and energy prices for a quick buck.

“While people will struggle to feed themselves or warm their homes this winter as a result of this trading, the speculators are making a killing. It’s really obscene.”

Watering down the rules

After the 2008 crisis, regulators moved to limit the dominance of speculators.

In the US, the Dodd Frank Act gave the Commodity Futures Trading Commission powers to introduce ‘position limits’. These were intended to put the brakes on commodity trades by limiting the number of contracts any company can own in a particular commodity.

But an industry coalition led by the International Swaps and Derivatives Association (ISDA) sued the commission and prevented them from introducing the rules.

Lighthouse’s investigation earlier this year showed that ISDA, whose members include Goldman Sachs, Morgan Stanley and Citi, had also lobbied the European Commission to water down its rules, the Mifid II regulations.

Both the EU and the UK weakened these rules as part of emergency rules introduced during the pandemic.

In March, veteran oil analyst Phil Verleger wrote: “A flea on a dog’s tail is now wagging the oil market and the global economy.”

Now, as well as largely removing limits on the number of contracts financial investors can hold, the British government’s reforms under the Financial Services and Markets Bill will hand regulation of position limits from the Financial Conduct Authority to the commodity exchanges.

Economist Ann Pettifor wrote in the Financial Times that the bill would make the FCA into a cheerleader for volatile global markets.

“Rather than stabilising price volatility, the government will use this moment of market turmoil to exacerbate the crisis,” she wrote.

Goldman Sachs and Citi Bank declined to comment for this article. Morgan Stanley, J P Morgan and Bank of America did not respond to requests for comment.