My Counterpunch article on hunger and financial speculation

Counterpunch, April 1 2012

Hunger and Financial Speculation

Why the World Price of Food Is Going Up

By Carmelo Ruiz-Marrero

   The fact that food prices are spiraling upward all over the world is not news.

Between June 2010 and June 2011 world grain prices almost doubled. Wheat went up 70 per cent between June and December 2010, and by June 2011 its price was 83 per cent higher than one year before. During the same 12-month period corn went up 91 per cent.

Quoting an article from the German publication Der Spiegel:

   "In March (2011), the Food and Agriculture Organization of the United Nations (FAO) reported new record high prices, which even surpassed the prices during the last major food crisis in 2008. According to the FAO's Food Price Index, overall food costs rose by 39 per cent within one year. Grain prices went up by 71 per cent, as did prices for cooking oil and fat. The index had reached 234 points in July, only four points below its all-time high in February." 

   This does not affect everyone in equal measure. The average American family spends no more than 10 per cent of its budget on food, whereas the world's poorest two billion spend between 50 per cent and 70 per cent of their scarce income on food.

   The political consequences of these price hikes can be explosive. During the 2010-2011 period several governments around the world were overthrown, there were riots in cities from Kyrgyzstan to Kenya, and three wars started in the Middle East: Syria, Yemen and Libya.

   The "Arab spring" has not been just about democracy, but also about access to food. A correlation can be drawn between spikes in food prices and the January 2011 overthrow of Tunisia's autocratic government, and, later that year, the revolt that forced Egyptian President Hosni Mubarak to resign. Egypt happens to be the world's top wheat importer (as well as the world's fourth biggest corn importer), one out of five Egyptians subsists on $1 a day, and the government subsidizes bread for 14.2 million of the country's 83 million inhabitants (Christian Parenti, "Reading the World In a Loaf of Bread: Soaring food prices, wild weather, upheaval," www.tomdispatch.com). The rise in wheat prices between 2010 and 2011 was simply devastating for Egyptian families, who on the average spend 40 per cent of their income on food.

   Nearby countries are also being affected by this situation. Parenti points out that Algeria and Morocco are among the world's top wheat importers. And Algeria, Saudi Arabia, Syria and Morocco figure among the top fifteen corn importers. The region's ruling classes are terrified, surrounded by hungry populations that are no longer afraid of state repression.

   But why are food prices out of control? There has been no shortage of explanations. Of all the voices that have ventured theories, one of the single most respected is that of ecologist Lester Brown. The influential Mr. Brown, founder of the Worldwatch Institute and now head of the Earth Policy Institute, blames weather disasters caused by global warming, the biofuels boom, skyrocketing oil prices, and the prosperous and growing Indian and Chinese middle classes' newly found taste for beef. But Mr. Brown and many other observers and commentators tend to downplay, sometimes even ignore, another factor: financial speculation in agricultural commodities.

   "Following heavy lobbying by banks, hedge funds and free market politicians in the U.S. and Britain, the regulations on commodity markets were steadily abolished. Contracts to buy and sell foods were turned into 'derivatives' that could be bought and sold among traders who had nothing to do with agriculture," says John Vidal, environment editor of the British daily the Guardian. "In effect a new, unreal market in 'food speculation' was born. Cocoa, fruit juices, sugar, staples, meat and coffee are all now global commodities, along with oil, gold and metals. Then in 2006 came the U.S. subprime disaster, and banks and traders stampeded to move billions of dollars in pension funds and equities into safe commodities, and especially foods."

   According to Catalonian activist Esther Vivas, acknowledged as one of the most outstanding critical voices on globalization and capitalism, halfway through 2010 "food speculation was attacking again and price of food was going up again." This "gave speculators the incentive to ask for new loans and buy commodities that foreseeably would increase rapidly in value. The very same banks, hedge funds, etc., that caused the subprime mortgage crisis are actually responsible for the speculation in raw materials and the rise in the price of food, taking advantage of profoundly deregulated global commodity markets." 

   And what exactly is a speculator? It's someone who deals in a commodity, but neither produces it nor consumes it. The speculator's profits come from futures contracts, which are basically bets that the price of X or Y commodity will go up or down. These contracts are themselves commodities, traded among financial institutions.

   The speculator does not work in the real world economy, in which goods and services are sold to real people (ostensibly) for the benefit of society, but works instead in what has come to be known as the finance economy. "The finance economy is that which makes money by speculating with money, without involving the production of something that is sold, that is, with practically no exchange of matter, work or energy," says an educational document of Spain's Right to Food Campaign. "In the finance economy, for example, shares are bought in order to attempt to sell them later, thus receiving an economic benefit without having contributed anything to society." 

   There has always been speculation; it's been documented as far back as ancient Greece; it is not necessarily an evil per se. But today it's a whole different game. The difference between the speculation of yesteryear and today can be summed up in one word: deregulation. As a result of the financial deregulation of recent years, particularly the 2000 U.S. Commodity Futures Modernization Act, speculation has rapidly grown to an alarming degree. Between 2003 and 2008, investment in indexes linked to commodities was multiplied times twenty, going up from $13 billion to $260 billion. When there is that much speculation, the postulates of liberal supply-and-demand economics no longer apply.

   If it were not for speculation, then how else can one explain rice futures going up 31 per cent in a few hours on March 31, 2008? Did the whole world get up that morning with an unusual craving for rice? How can mere supply and demand explain the price of wheat rising 46 per cent between January 10 and February 26, 2008? The price descended almost all the way to its former level in May and then hiked up 21 per cent in early June, and then went down again in August. If this is not due to speculation, then how else to explain this? Did whole swaths of the global middle class get on and off the Atkins diet simultaneously several times that year?

   In a 2010 shenanigan reminiscent of the comedy film Trading Places, the London-based Armajaro trading firm bought up some 7 per cent of the world's cocoa reserves - that's over 240,000 tons of the stuff, a lot of chocolate. As said before, speculators do not use or consume the commodities they trade in, so the fine folks at Armajaro had no intention of eating up all that chocolate. But they might as well have done just that because, as a result of their action, worldwide chocolate prices jumped up to their highest point in 33 years.

   The mildly worded way in which Armajaro describes itself is a jewel of the English language: "We specialize in the sourcing and delivery of cocoa, coffee and sugar, and we are committed to being the partner of choice in the Agri-commodity supply chain. Our established customer base includes all of the major global chocolate manufacturers and most of the world's leading coffee manufacturers and roasters. Sugar trading is a recent addition to our business and continues to grow and develop." 

   According to Olivier de Schutter, United Nations Special Rapporteur on the right to food, "there is a reason to believe that a significant role was played by the entry into markets for derivatives based on food commodities of large, powerful institutional investors such as hedge funds, pension funds and investment banks, all of which are generally unconcerned with agricultural market fundamentals. Such entry was made possible because of deregulation in important commodity derivatives markets beginning in 2000. These factors have yet to be comprehensively addressed and, to that extent, are still capable of fuelling price rises beyond those levels, which would be justified by movements in supply-and-demand fundamentals. ... The logic has become purely speculative, in which investors adopt a herding behavior (they follow what other investors do), and do not made decisions anymore based on the 'fundamentals' of supply and demand. The result is more volatility, bubbles that form and bubbles that explode. This hurts in particular small producers and the poor food-importing countries". 

   So, when it comes time to formulating effective strategies to fight world hunger, rather than joining the "send aid" bandwagon or embracing the high-tech fixes of Monsanto and the Gates Foundation, we would be better advised to take a critical look at the faulty economics of so-called free markets. Perhaps the protests of Europe's "indignados" and Occupy Wall Street are more relevant to the world's hungry than all the do-gooderism that is so much in vogue today.

   "As former National Director of Intelligence, Dennis Blair told a stunned U.S. Senate Select Committee on Intelligence on February 12, 2009, the global economic crisis, triggered by financial and commodity market deregulation, has replaced Al-Qaeda as the number one U.S. national security threat," said a report from the Institute for Agriculture and Trade Policy. "Blair's intelligence agencies forecast widespread regime destabilization if the economic crisis continued to fester without major policy and political reform within two years. His agencies did not specify what reforms were needed nor advocate for their enforcement. That is up to us." 

   In the words of Nobel laureate economist Joseph Stiglitz, "Neoliberal market fundamentalism was always a political doctrine serving certain interests. It was never supported by economic theory. Nor, it should now be clear, is it supported by historical experience." 

CP

Carmelo Ruiz-Marrero is a Puerto Rican author, investigative journalist and environmental 

educator. He is a fellow of the Oakland Institute and a research associate of the Institute for Social Ecology.