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TechnoratiWho Benefits From High Food Prices?
Last week, new consumer price data released by the US Labor Department confirmed what most shoppers already suspected: Food prices, which took their biggest one-month leap in nearly two decades in April, rose even further in May. Energy costs, too, went up last month. The big question, though, is why?
Commodity analysts are quick to pinpoint reasons: Midwest flooding affecting food, livestock feed overdrive provoked by the Chinese, biofuel-related demand, and a weak dollar. These reasons all have some merit, but I'd argue it's speculation that's skyrocketed prices higher faster, not supply vs. demand.
At the financial leaders G8 summit that wrapped up over the weekend, food and oil speculation were front and center.And G8 leaders aren't the only ones expressing concern over traders profiting from the world's pain.
Major hedge-fund stars like George Soros and Michael Masters are also screaming moral foul on commodity speculation-a clear signal there's more fire than smoke on the horizon.
As Masters told a Senate committee last month, "Institutional investors have purchased over 2 billion bushels of corn futures in the last five years. [They] have stockpiled enough corn futures to potentially fuel the entire United States ethanol industry at full capacity for a year."
Indeed, the current agricultural price bubble has produced record highs in soybeans and wheat as well. Against this backdrop, a clueless Congress passed US farmer and food-stamp aid within the recent farm bill, without addressing the possibility that speculation could be to blame, or that curtailing speculation could help alleviate the domestic and global food crisis. They should have looked toWall Street's lead.
The latest grain and oilseed trading report from the Chicago Mercantile Exchange cited first quarter of 2008 trading volume up 32 percent over the last quarter of 2007. That's extra money coming in from speculators, not corn or wheat farmers hedging their crop prices in case of bad weather.
Additionally, the hot new favorite among traders is betting on packages of energy and agricultural futures. Called CCO's (collateralized commodity obligations), they are like their subprime cousins, CDO's (collateralized debt obligations). Their performance is linked to rising commodity prices; the higher the prices, the more profit to the CCO.
There's another group, besides the standard speculator crew, literally reaping extreme profits from the price squeezes-the crop equivalents of Exxon, multinational agricultural biotechnology corporations. Monsanto, which recently told the 12th Annual Goldman Sachs Agricultural Biotech Forum that its profits would double by 2012, is buzzing (PDF); the firm's stock price doubled during the past year. ADM, the nation's second-largest ethanol producer, saw its annual revenues increase by 64 percent. Even agriculture conglomerate Cargill's third-quarter profits rose 86 percent.
Last week, a group of senators led by Carl Levin (D-Mich.) introduced the Close the London Loophole Act, which would curtail a situation that allows speculators to bypass all Commodity Futures Trading Commission regulations by trading on foreign exchanges.
But without strong regulation of electronic exchanges and the derivatives products that enable speculators to move huge proportions of the futures markets underlying commodities, putting a bit of regulation into the London-based exchanges will not alleviate anything. Unless that's addressed, this bubble is going to take more than homes with it. It's going to take lives.
Nomi Prins is a Mother Jones writer and former Bear Stearns analyst.
© 2008 The Foundation for National Progress
12 Comments so far
Show AllGrowing biofuels (ethanol etc.) on land that could be used for food will cause food shortages, and converting vast quantities of the food crop that was previously available for humans/animals will cause food prices to rise and increase starvation.
Someday we'll understand that people should be paid for what they produce, not the risk they take. Speculators should attend Gamblers Anonymous. Let's get our priorities straight. A financial market economy is not sustainable, nor productive in the conventional sense.
Someday Americans will take to the streets if they have the strength to march.
" SallyUUKent June 20th, 2008 5:05 pm
It's getting bad enough to where I am struggling just to buy groceries and am considering going to a local food bank just so I can afford to eat. ..."
A suggestion and based on an article highlighted on the cover page of the local Sherbrooke (Quebec, Canada) Tribune today, Sat., June 21, is to get rid of your car and replace it with use of a bicycle just because the fuel prices now being around $1.45 to $1.50, if not already higher, per LITRE (33.8oz, so 1.8oz more than a U.S. quart) for fuel was TOO MUCH. He's employed, married, and they have three children, but he got rid of the car, so all related costs, and replaced it with a bicycle behind which he pulls a buggy in which he can carry around his children as well as groceries, etcetera.
And the costs for automobile insurance are much less here than they are in the U.S.; MUCH LESS. Even if it costs around $200 a year to register a car, that and the additional insurance (the registration cost covers some insurance, already, and provided by the provincial govt), it's still and very MUCH less than in the U.S.; generally, for most Americans, anyway.
If we have more winters like the one we just had, then I guess he and family will get monthly bus passes, and that's around $56 to $60 a month per person, but maybe there are reduced rates for families; or maybe the parents can get bus passes while the children, if old enough to travel about on their own, can borrow their parents' passes (am not sure of that's an available option though). If it's not an option, then it'd be five passes at roughly $60 per month, which'd more than pay for registration and additionally insuring a car, but winters don't last more than around four to five months, and some people will manage to use bicycles during winter; but not road bikes. They'd have to have tires like on mountain bikes.
Anyway, that's not an issue for most Americans; and up here, during winter months, people on tight budgets can stay home more and/or WALK to economically survive.
As for corn for food for humans, I will tend to NEVER buy any of this, even when so-called certified organic; unless the farmer is proven to be honest. Even then though, there are plenty of other foods.
My issue with corn is that it's mostly GMO, a-la Monsanto and its roundup-ready crap, which is NOT food for humans as far as I'm concerned. It's not that, and has NEVER been needed; it's all corporate RACKETEERING.
" lizard June 20th, 2008 11:09 pm
Sigurdur: you have a few problems there. ... You may be right that ethanol production is good but I don't see a convincing argument."
Thing is, Nomi Prins's article does not have the ethanol as the main focus, but SPECULATION in the commodity markets. It just so happens that ethanol is from corn, much anyway, and corn is a generally main food crop, for both humans and animal feed, although I've read that what's used for animal feed is not the same corn as is used for food for humans. Nonetheless, as the corn used for ethanol increases in prices for farmers, those who grew plenty of corn used for human food won't see similar rises in prices, so profits, for themselves; therefore, they'll follow the "wave" of growing corn for ethanol.
And Sigurdur evidently does NOT care about many millions if not hundreds of millions of humans STARVING; instead focusing on the way the futures markets [financially] work.
Also, some of what he or she described also applies in the stock market; not all of what he or she said, but certainly some of it.
Nonetheless, what I focus on is Ms Prins' focus on rising food costs or prices, while we have a world, here, of MANY STARVING PEOPLE, and for NO justifiable reason whatsoever, really.
I notice this article doesn't mention the disappearing bees, what's called Colony Collapse Disorder, that threatens world food supplies. It's understandable, since the topic is economic. But it certainly could add to shortages. So I hope massive bee loss doesn't play into massive food shortages, because food shortages were mentioned as a possibility LAST year, long before the floods and hyper inflated fuel costs we're seeing now.
I'm left wondering how many ways the US and the world might be left starving, and it's taking more than one hand to count the ways, now.
Sigurdur: you have a few problems there. How does eating your exports improve your balance of trade? Who says there has to be a loser in an up market? Both buyer and seller can be winners in an up market, as both will be losers in a down one. Low prices don't bring high prices eventually. Decreased production does not necessarily lead to a shortage. The fact that the corn costs less than the box doesn't mean ethanol from corn is good. It means processing trees into boxes is more expensive than producing corn. You may be right that ethanol production is good but I don't see a convincing argument.
"Who Benefits From High Food Prices?"
Ummm... the poor people? High priced capitalism... money trickles down, right? Am I right?
To hell with gas and oil, go organic!!! Stop feeding the capitalist beast and let it die of starvation!
Ok.......a bit of truth and logic.
1. Here is how the commodity futures work. And remember, they are called futures because it is a price discovery method to ascertain the future price of grains etc in present time.
A buyer has to find a willing seller on the futures market. Each and every trade is a closed loop. Buyer/seller. So for each buyer that makes money in an up market, there is a seller who is losing money. The total net effect is flat.
2. Ethanol from corn. Will someone smart finally read the economics of this? The raw value of commodities in the food basket is approx 19.2%. The raw value equats the cost the first purchaser pays for said commodity. The rest of the value in the food basket is for transportation/packaging/labor/depreciation etc.
The raw value of corn in a box of corn flakes 2 years ago was 4.7 cents. It is now 7.1 cents. The box costs more than the corn in said box.
A standard box of corn flakes contains
approximately 10 ounces of corn, or
about 1/90th of a bushel. Even when
corn is priced at $4 per bushel, that's
less than a nickel's worth of corn.
That sums it up in a nutshell. The opponents of ethanol keep reporting false information, and the masses suck it up so they can blame someone who has a very small voice.
3. Think of the economic value of those ethanol plants on the balance of trade. What is spent for ethanol stays here, and at a multiplyer of 5, increases economic activity in the US. That is an excellent thing.
4. Ethanol is blamed for reducing the cost of a gallon of gas by 22 cents now. Is that a bad thing?
5. Five years ago the US produced a record corn crop of around 10 billion bushels. This year, even with the flooding it will prob be around 12.3 billion bushels. The reason for the increase is economic. Five years ago farmers were going broke left and right, decreasing production because it wasn't feasable to do so. Low prices bring high prices eventually as a lack of production produces a shortage.
Thank you. I could write more but this is prob long enough.
A disgruntled person who is tired of the lies and people watching the tube and believing the lies.
It's getting bad enough to where I am struggling just to buy groceries and am considering going to a local food bank just so I can afford to eat. Food prices are ridiculous anymore and between that and fuel prices, I am watching my once healthy paychecks disappear in as short as one week, meaning it's a long stretch until the next payday. I'm left counting pennies, nickels and dimes anymore and am struggling just to make ends meet. I struggle just to pay rent anymore, even. Between health care, food and gas, I am left wondering just how much more I can be squeezed to death, and I have a 25 year career in a professional field - go figure. Sure, I'm not pulling down big bucks and I live in a tiny cluttered student apartment just blocks - and walking distance - from downtown, and drive a small fuel efficient car and live as frugally as I can, but still, these days of runaway inflation are killing me. And I am sure that I am not alone in this, either.
How are we supposed to manage in this economic climate? How are people supposed to eat, drive and live normal, stress free lives? How are people supposed to eat, pay bills, go to work and take care of their health when it's become too prohibitively expensive to do so?
And I agree - why isn't every fourth word out of Obama's mouth "Failed Republican economic policies"? Seems to me that the evidence of such is right before our eyes. Drive to the gas station to tank up, go grocery shopping, pay a visit to your health care provider. Then see how much you're stuck paying for it. The Bush administration is directly to blame for all the economic ills that our country is suffering. Eight years of Republican rule is enough. Every time they come to power, they end up wreaking havoc on our country and every time, people forget and continue to elect them to high office, only to see their failed policies drive our country into the ground.
Well, enough is enough. It's time for a change of regime. Impeach the bastards!
Grain stockpiles are already at all time lows, by the harvest this fall there will be enough ethanol distilleries built in the U.S. to convert every bushel of corn we used to export into fuel. The United States accounted for 70% of the world's corn exports. Corn is one of four crops that makes the foundation of the food chain along with wheat, rice and soybeans.
Speculators are driving up the prices of these commodities in anticipation of massive shortages of food when food is converted into energy in the coming months. Images of mass starvation from around the world will drive prices even higher. There have already been food riots in some of the poorest cities around the globe.
The insane economic policies of the neocons that has created a mountain of federal debt on top of the massive debt created by America's trade deficit, on top of the massive consumer debt, on top of the massive mortgage debt, on top of the economic collapse of America's middle class and working poor while at the same time residential and commercial; real estate prices are plummeting have all but destroyed the American economy. All of these trends are combining to slash the value of the dollar in international currency markets further inflating the prices of grains and energy.
The next president is going to inherit a disastrous economy, why every fourth word out of Obama's mouth isn't "Failed republican economic policies" is a mystery to me.