Food Speculation: 'People Die from Hunger While Banks Make a Killing on Food'

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The Guardian/UK

Food Speculation: 'People Die from Hunger While Banks Make a Killing on Food'

It's not just bad harvests and climate change – it's also speculators that are behind record prices. And it's the planet's poorest who pay

by
John Vidal

(Illustration: Katie Edwards)

Just under three years ago, people in the village of Gumbi in western
Malawi went unexpectedly hungry. Not like Europeans do if they miss a
meal or two, but that deep, gnawing hunger that prevents sleep and dulls
the senses when there has been no food for weeks.

Oddly, there
had been no drought, the usual cause of malnutrition and hunger in
southern Africa, and there was plenty of food in the markets. For no
obvious reason the price of staple foods such as maize and rice nearly
doubled in a few months. Unusually, too, there was no evidence that the
local merchants were hoarding food. It was the same story in 100 other
developing countries. There were food riots in more than 20 countries
and governments had to ban food exports and subsidise staples heavily.

The
explanation offered by the UN and food experts was that a "perfect
storm" of natural and human factors had combined to hyper-inflate
prices. US farmers, UN agencies said, had taken millions of acres of land out of production to grow biofuels
for vehicles, oil and fertiliser prices had risen steeply, the Chinese
were shifting to meat-eating from a vegetarian diet, and climate-change
linked droughts were affecting major crop-growing areas. The UN said
that an extra 75m people became malnourished because of the price rises.

But
a new theory is emerging among traders and economists. The same banks,
hedge funds and financiers whose speculation on the global money markets
caused the sub-prime mortgage crisis are thought to be causing food
prices to yo-yo and inflate. The charge against them is that by taking
advantage of the deregulation of global commodity markets they are
making billions from speculating on food and causing misery around the
world.

As food prices soar again
to beyond 2008 levels, it becomes clear that everyone is now being
affected. Food prices are now rising by up to 10% a year in Britain and
Europe. What is more, says the UN, prices can be expected to rise at least 40% in the next decade.

There
has always been modest, even welcome, speculation in food prices and it
traditionally worked like this. Farmer X protected himself against
climatic or other risks by "hedging", or agreeing to sell his crop in
advance of the harvest to Trader Y. This guaranteed him a price, and
allowed him to plan ahead and invest further, and it allowed Trader Y to
profit, too. In a bad year, Farmer X got a good return but in a good
year Trader Y did better.

When this process of "hedging" was
tightly regulated, it worked well enough. The price of real food on the
real world market was still set by the real forces of supply and demand.

But
all that changed in the mid-1990s. Then, following heavy lobbying by
banks, hedge funds and free market politicians in the US 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. 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 US
sub-prime disaster and banks and traders stampeded to move billions of
dollars in pension funds and equities into safe commodities, and
especially foods.

"We first became aware of this [food
speculation] in 2006. It didn't seem like a big factor then. But in
2007/8 it really spiked up," said Mike Masters, fund manager at Masters
Capital Management, who testified to the US Senate in 2008 that speculation was
driving up global food prices. "When you looked at the flows there was
strong evidence. I know a lot of traders and they confirmed what was
happening. Most of the business is now speculation – I would say
70-80%."

Masters says the markets are now heavily distorted by
investment banks: "Let's say news comes about bad crops and rain
somewhere. Normally the price would rise about $1 [a bushel]. [But] when
you have a 70-80% speculative market it goes up $2-3 to account for the
extra costs. It adds to the volatility. It will end badly as all Wall
Street fads do. It's going to blow up."

The speculative food
market is truly vast, agrees Hilda Ochoa-Brillembourg, president of the
Strategic Investment Group in New York. She estimates speculative demand
for commodity futures has increased since 2008 by 40-80% in
agricultural futures.

But the speculation is not just in staple
foods. Last year, London hedge fund Armajaro bought 240,000 tonnes, or
more than 7%, of the world's stocks of cocoa beans, helping to drive chocolate to its highest price in 33 years.
Meanwhile, the price of coffee shot up 20% in just three days as
a direct result of hedge funds betting on the price of coffee falling.

Olivier de Schutter, UN rapporteur on the right to food,
is in no doubt that speculators are behind the surging prices. "Prices
of wheat, maize and rice have increased very significantly but this is
not linked to low stock levels or harvests, but rather to traders
reacting to information and speculating on the markets," he says.

"People
die from hunger while the banks make a killing from betting on food,"
says Deborah Doane, director of the World Development Movement in
London.

The UN Food and Agriculture Organisation remains
diplomatically non-committal,saying, in June, that: "Apart from actual
changes in supply and demand of some commodities, the upward swing might
also have been amplified by speculation in organised future markets."

The
UN is backed by Ann Berg, one of the world's most experienced futures
traders. She argues that differentiating between commodities futures
markets and commodity-related investments in agriculture is impossible.

"There
is no way of knowing exactly [what is happening]. We had the housing
bubble and the credit default. The commodities market is another
lucrative playing field [where] traders take a fee. It's a sensitive
issue. [Some] countries buy direct from the markets. As a friend of mine
says: 'What for a poor man is a crust, for a rich man is a securitised
asset class.'"

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