Try unconventional medicine

G20/Commodities: Nicolas Sarkozy thinks he has radical ideas for the G20 to address volatile commodity prices, stopping just short of guillotining traders. A world burdened by inflation in oil, other commodities and food may share his frustration. The president hopes the French and other Europeans will, too. But dividing the world's commodity trades between the "commercial" and the "speculative" ones isn't easy. This means G20 finance ministers may realise little in their discussion on the matter - even though Sarkozy is right that speculation in commodities is part of the price problem.

The speculation reflects loose global money and the perhaps exaggerated appeal of the commodities story. The amount of assets under management in commodity funds has exploded in the past decade, rising 60-fold, according to Barclays Capital. For investors, the happy story is based on fast growth in developing countries, rising demand and potential constraints to supply. Throw in global warming, too. Paul Krugman, the Nobel Prize-winning economist, has, calling soaring food prices the first sign of "the disruption we'll face in a warming world."

But the inconvenient facts argue against that. Despite extreme weather this year, the International Grains Council still expects global grain production to be 8.7 per cent higher than it was four years ago. All the more affluent but hungry new mouths in the world economy have indeed caused demand to rise - but by a similar 9.7 per cent over the same period. Global grain stocks are up by 43 per cent in the past four years. Production has easily kept up with demand. It is probably the huge amount of fresh money invested in commodity funds that has tended to drive prices up.

Guido Mantega, Brazil's finance minister, appears to think so. Although Brazil is largely a beneficiary of high commodity prices, he is "totally" against any Sarkozian trading curbs. Mantega argues that commodity prices will correct when developed economies pick up and tighten their monetary policy. The tightening is more necessary first, however, in fast-growing emerging economies. China's broad money supply rose by a fifth in 2010 but came down to an annual growth of 17 per cent in January. As developing countries tighten, commodity prices may begin to ease. There may already be some tentative signs of that. The G20 might see anti-speculative merits in conventional monetary medicine - rather than in Sarkozy's mooted punishments.