(Image: JR / TO; Adapted: petyr.rahl, Travel Aficionado)In August, two European banks announced that they would be scaling back investment in agricultural commodities. Germany’s Commerzbank and Austria’s Volksbanken both removed agricultural products from their index fund products. Several months earlier, similar moves were made by three other German banks, including Deutsche Bank.

The banks’ initiatives followed criticism from NGOs about the role of financial speculation on agricultural commodities in driving up food prices. With food prices already facing upward pressure this summer as the US faces a severe drought, the campaigners have lambasted banks and other financial institutions for seeking to profit from such a volatile situation.

The fact that a number of banks have chosen to restrict their involvement in agricultural commodity-based investment products is a noteworthy victory for civil society groups that have been tirelessly working on this issue since the 2007-08 food crisis. The World Development Movement, Oxfam and Friends of the Earth Europe, for example, have been at the forefront of NGO research and public education about the role of financial speculation in exacerbating world hunger.

There has been a lively debate in policy circles about whether financial speculation does in fact lead to higher food prices. A number of financial institutions and economists (often referring to this OECD report) have argued that such a link is not supported by evidence. As a result, they have resisted the idea of policy change, including stepped up regulation for these markets.

NGOs have highlighted the strong correlation between financial market deregulation, increased financial investment in agricultural commodities, and food price volatility. Reports such as the World Development Movement’s Broken Markets, Oxfam’s policy brief Not a Game, and Friends of the Earth’s Farming Money, have made this case.

Many international organizations tried to stay neutral in this debate in the heat of the food price spikes in 2007-8. But since that time, some organizations have been more willing to wade in. The Bank for International Settlements, for example, pointed out in its 2011 annual report that whether or not speculation is the central driving force determining food prices, it does appear that increased financial investment in agricultural commodities exacerbates food price volatility.

It may be that the sudden moves by the banks to scale back their agricultural commodity investments have been driven by a desire to save their reputation in the face of criticism. Indeed, it is interesting to note the new focus of corporate social responsibility initiatives in this area. The banks’ announcements followed the publication of The Responsible Investor’s Guide to Commodities by the Global Compact, the UN Principles for Responsible Investment and the Swiss government last September. One of the report’s specific recommendations for agricultural commodity markets is: “Do not participate in markets where financial investors’ contribution to increased volatility could be substantial.”

But the motivations for the banks’ recent moves could also be more complex than they appear the surface. The banks themselves did not elaborate in any great detail on the reasons behind their decisions. It could be driven by market demand for those products. Some reports noted that exchange traded agricultural products were already losing favor with investors in the months leading up to the most recent bank withdrawals from agriculture. Financial gains on commodity futures might not be as promising as they seemed to investors in 2007-08.

At the same time, most banks are not admitting any link between their financial activities and food prices. Deutsche Bank, for example, stressed that it was only temporarily ceasing to introduce any new products while it studied the issue. A note devoted to the issue on the Bank’s website stresses that “…agricultural derivatives markets remain a crucial tool in providing financing mechanisms across the agricultural value chain.”

The Financial Times also noted in a recent article that the European banks have only stepped out of the higher profile investment products that trade on exchanges, and not “the far larger and more opaque world of over-the-counter swaps, notes and structured products.” Most financial institutions are in fact deeply involved in much more sophisticated financial products linked to the agricultural sector that reach deeper into agricultural commodity chains than the index funds that simply track prices of commodities. They are also getting into investments that track the performance of agricultural commodity related firms, and also directly into farmland.

It’s not just the big banks that are offering a suite of complex financial investments in the sector, either. The large commodity trading firms, as pointed out in Oxfam’s recent report, Cereal Secrets (by Sophia Murphy, David Burch and myself), are also offering financial investment products to third party investors in addition to their own financial investments in the sector. These firms don’t appear to be pulling back on these investments. Indeed, just last week, CEO of Glencore Chris Mahoney bragged that the current volatility in food prices should be “good for Gelncore.”

Financial speculation in agricultural commodity markets is an enormously complex issue that requires continued close study and attention. The recent moves by major European banks to scale back agriculture related financial investments is a positive step, but it is not by any means the only move that needs to be taken. Tighter regulation of these markets is still sorely needed.