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Inflation and Speculation: Ingredients for the Next Food Crisis?
First Lady Michelle Obama was heartily cheered last week when she visited a food bank and then went home to break ground for an organic "victory garden" on the White House lawn. Mrs. Obama's high-profile activities are good news to anti-hunger groups and advocates of good, local, healthy food. This upbeat news contrasts starkly with the increasing probability of a return to the 2008 global food crisis.
In March of 2008 the price of food commodities hit an all-time high, sending 100 million people into the ranks of the hungry, worldwide. Food price inflation got started with droughts, rising oil prices, and an increase in demand for grain (mostly coming from feedlots and biofuels plants). Then, as prices rose, investors-hungry in the aftermath of the housing bust-pounced on rising commodity futures, creating a "food bubble." There is now wide agreement that speculation in food was the major cause of the skyrocketing food prices that led to the 2008 global food crisis.
Though commodities prices are down, some investors are already betting on a rebound by the third or forth quarter. Despite low prices now, all the ingredients of 2008's toxic, speculative bubble are still with us today. This year, the specter of widespread drought will be added to the mix. A simple map overlay of countries with the highest agricultural output and the countries facing drought led one analyst at Britain's Market Oracle to predict a "catastrophic fall" in global food production for 2009. Even a small shortfall in global food production (or the threat of it), combined with a weak dollar and rising oil prices could be enough to create another burst of speculative activity in food commodities. Last year food price inflation kicked of a financial crisis and the global recession. This year's recession-and rising unemployment-could turn the even a small upswing in prices into a full-blown global disaster.
But, there is no need to wait passively for the next "silent tsunami." Simple measures could be taken to pull us back from this brink. Until 2000, speculation and index investing in commodities markets was regulated, preventing these very boom-bust cycles. Calls are mounting for a return to those policies.
Last week, nearly 200 organizations delivered a letter to president Obama asking him to re-regulate the commodities markets. The letter points out that the 2008 food price volatility "could have been stopped with sensible rules that, if enforced, would have staved off the malnutrition and starvation... caused by excessive gambling on food prices." Speculation put our economy at risk and may yet crash Wall Street. Speculation in food could crash the world's food systems.
"Investors need to realize that their apparently innocent investments in food and energy commodity futures have driven up world food prices. This has forced hundreds of millions of people already living on the edge into desperate situations. Children are going hungry, even dying." said David Kane of the Maryknoll Office for Global Concerns, one of the letter's authors. "It is absolutely unacceptable that investors are enriching themselves off of the suffering of so many. President Obama and the Congress must act quickly in order to avoid another food crisis this year."
In order to weather the economic crisis, we will need victory gardens like Mrs. Obama's. But to protect both the economy and the food system, Mr. Obama must put a stop to food speculation.
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25 Comments so far
Show AllWhy the hell is there speculation on anything? Why is betting on the outcomes of growing seasons and business performances legal?
First off, let me say I'm a big government supporter. I grow corn and beans. If drought cuts my yield in half, I need double the price to stay even. If the market is not allowed to 'speculate' and find an appropriate price then what? Do we want government control of virtually everything? Unless there's a reasonable hope for profits, there's no point in farming. My choices then would fall to selling out, renting my land to a big operator if the price was good enough, or farming with cheaper seeds, lower planting rates, less fertilizer, less weed control, etc. In other words lower yields, which would simply increase the food shortage situation. We need to get back to basics. Plant a garden. Learn how to eat well with simple, inexpensive foods like corn tortillas and refried beans. If you smoke (I hope not), plant your own tobacco. And pushing for more ethanol, is just asking for trouble. If we keep burning our food, one of these years, that might really bite us in the pocketbook.
The speculation on food and energy we witnessed during the past year was 5% driven by supply and demand and 95% driven by government monetary policy.
US Federal Reserve monetary policy enabled the housing bubble, and enabled the past year's food and energy speculation.
By lowering interest rates between Sept. and Dec. 2007, US Federal Reserve Chairman Ben Bernanke provided speculators (the same ones who brought you the power price manipulation of 2000, and subsequent housing bubble) cheap money in an unregulated environment. Commen sense dictates that speculators plus cheap money = speculation.
Since Snobama has not yet fired Bernanke, we can only conclude that the food bank appearance and white house garden are more window dressing than policy statements.
Greg, I did not know that.
So are you saying that the speculation in the commodities market or bets on the future prices is what sets the price for you?
So you don't determine what you want for your crops because the price is determined by how many investors bet that the conditions mean the price will go up?
The buyers and sellers in the commodity markets set the basic price. Local buyers adjust the price they are willing to pay mainly according to the amount of the physical commodity in the area and transportation costs. Last summer, when prices for corn and beans skyrocketed, quite naturally many buyers either quit buying (eg shut down ethanol plants) or simply lowered their bids. When these things happen, then it's just a matter of time until prices overall will come down. Greed, hoarding, it's all just human stuff. I think the current system is nearly as good as we poor humans can hope to accomplish.
OK,
since the price can be adjusted according to the area, does this speculation betting help you sell your crops?
Do you think that over speculation or losses from those bets should be paid by taxpayers?
I still don't get why he thinks speculation is necessary. If there was no speculation, he wouldn't be able to just sell his crops to the companies that process them at a profitable price?
Two good reasons for speculation are 1) it allows everyone who wishes to participate, to have a voice (dollar) in place to say what they think the value of something is at a given time and place, and 2) without speculation large companies might be tempted to collude on keeping prices artificially low. In the short run, this might help the corporations and consumers, but in the long run, shortages and higher prices would likely be the end result.
Let me make a distinction here and say that the problem with the market is that it is being driven to extremes because investors are basically fleeing the dollar. Commodities have increased in popularity as a currency or store of value. Even small players can now play via ETFs. The extremes in oil and food prices are directly linked to the financial crisis.
Actually, the dollar has been hanging in there quite strongly as of late. The whole world is in such turmoil that people have been buying dollars for its relative stability. How long this can continue is of course debateable.
Thankyou for your voice from the soil.As a horticulturist and smoker(cough)I have grown tobacco and curing it properly is a science I have not mastered.Today I bought a pack of Bugler rolling tobacco for $4 twice what it cost last time.I will now quit!With 1.34 Quadrillion dollars in derivitives(only a portion protected by credit default swaps)I believe the dollar is toast.The global gross domestic product being in the 70-80 trillion dollar range there is not enough wealth in the universe to bail out these speculators. peas in
When I smoked many years ago, I bought cans of Top tobacco and it made a great cigarrete. I grew my own tobacco once, but like you say, it's difficult to come up with a really superior product. Stick with the quitting business. The sad thing is it takes most people, myself included, years to really feel they've mastered that addiction. The inflation question is when will it really kick in? soon? several years from now?
Gains or losses from food commodity speculation have but small impact on taxpayers. Commodity speculation in general tends to temporarily overshoot the expected value of a substance, both up and down. Thus sometimes consumers benefit and sometimes they suffer. A smart consumer will buy plenty when cheap and less when expensive. Speculation nearly always allows me to sell at a profit. The trick, of course, is to sell at the right time, which is often surprisingly difficult.
You are lucky you have land to grow food.
Farm subsidies help some as well as the speculation, I suppose.
When the coming inflation really kicks in, do you wonder if a food speculation bubble will force more millions to go hungry?
I hope that new regulations will prevent that but does the above article give you reason to worry also?
My land ownership is relatively small, but I do feel fortunate. Something like 90% of government farm subsidies go to well-off farmers and land owners. They're a kick in the teeth to low wage taxpayers. Inflation-deflation, over-abundance and shortage, it's all going to happen sooner or later. With billions of stomachs to fill, small shortages can cause a lot of pain. Nothing is more important than birth control and education.
"Why is betting on the outcomes of growing seasons and business performances legal?"
Because a lot of people in high places in an "unregulated market" can make a lot of money. Aside from following the usual technicals and fundamentals in a "so-called" free market, speculators who are savvy to interventionist moves by the President's Plunge Protection Team (created by Ronald Reagan to allegedly intervene in markets for the purpose of stabalizing them?) stand to make fortunes in the speculation market. Are these speculators geniuses or are they politically connected?
Either way, they are obviously influencing the price of stock shares of the corporations that you and I own as direct investors or via mutual funds.
As I see it, speculation is just another branch of the market fraud and ponzi-scheme mentality that permeates Washington and Wall Street.
To me, the biggest problem with corporate stock pricing, is the natural high concern with short-term profits. Long-term health and viability should be the only consideration. Thus, we are currently stuck with a perversion of the common good.
"Thus, we are currently stuck with a perversion of the common good."
Greg,
Talk about perversion of the "common good": Congress just gave more power to the privately-owned Federal Reserve Bank whose job is to protect the common good.
According to the Federal Reserve’s own website, their duties fall into four general areas:
1. Conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.
2. Supervising and regulating banking institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
3. Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
4. Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation's payments system.
As G.W. Bush said: Heck-of-a-job Brownie!
"We can have democracy in this country or we can have great wealth concentrated in the hands of a few, but we cannot have both." - Justice Louis Brandeis
It appears that the opportunists on Capitol Hill have chosen concentrated wealth to the few over democracy and fair-play for the many.
Sioux Rose
GAIL: Good points.
GREG R: Notice the analogy of the short-term profit mentality to the way "health care" is being distributed/consumed, and it also governs the waste on war as short term profits indeed accrue to the MIC few at great risk and cost to so many. Disaster Capitalism is a far better description than "free" trade.
Speculation on food stuff, energy should be shutdown and made illegal as we face a run down and changing Earth Resources.
Middle Men have always played this game and are to blame for famines from the early 1900 till now ( ref. Dr. Sen (noble prize in economics) Study on causes of Famine in 1900 ) . Spiking energy cost since 1970's .
Hoarding is overcome by rationing of foods and energy.
These are all games businessmen play to reap enormous profits. Doesn't matter which GDP strata they do business in.
toophat for you!
"Hoarding is overcome by rationing of foods and energy."
I'm wondering if one reason that food commodity prices are still fairly high is that countries like China, who have actively been buying soybeans, are concerned that civil unrest will occur if food shortages show up. So, one question toophat, should we refuse to sell more than a set amount to China and other countries? And who should have that power?
Sioux Rose
TOOPHAT: I totally agree with you. How dare the same moneychangers occupying the Wall ST temples that have gutted whatever integrity existed in the global economy make equal chaos of the basic foodstuffs the poorest require for essential sustenance? Makes me wish Jesus would manifest to throw over the now computerized gaming tables of these modern loan shark/moneychangers... the paradigm is so insane as to seem unreal. It probably is within reason to suspect they are gaming the same odds for or against war and seeing that bet as the next exotic derivative that the bankers can bank upon. An absolute absence of shame, conscience, or any remotely humane traits seems to govern those who make financial determinations today. Depraved doesn't begin to describe it.
the average person's utter dependency on both purchased food grown elsewhere delivered to local markets and purchased land containing homes constructed by others from distant materials that cost so much they require 30 years of employment to secure is incredibly debilitating to successful protests against current direction on almost any front...a rapid movement toward de-paving and re-planting, and a sister-movement regarding socialization of housing are fundamentally necessary to moving forward toward a 'smaller' impact lifestyle...the basics of life must become the basics again, and the rest, for the most part, abandoned...an individual able to directly provide for themselves and their family through their own direct contact with the planet is in a much stronger postition philosophically and psychologically...we are, esentially, operating below the lowest level of Maslow's hierarchy ~ we Americans are currently unable to provide our own water, food and shelter without becoming enmeshed in economic chicanery...no wonder we're insecure about the future...
The futures market was developed to promote price stability in agriculture. For a "premium" investors could profit from good harvests or could lose from drought, rain, pests or government policy. Farmers receive a fixed price and could plan inputs, labor and guarantee a profit.
These markets were tightly regulated, but along with other markets, suffered through the deregulation of the past 25 years. The outcome is detailed above.
In the 1970s, farmers were paid to produce a surplus. They were guaranteed a price for this surplus production. In good years, the surplus went into storage or was used as food aid. In bad years, the storage stabilized food prices.
Food aid could be delivered to developing countries at an extremely low cost. It was cheaper to ship food from Kansas to Africa than from 100 miles inland. Local farmers were put out of business and entire nations becoame dependent upon cheap food inports.
With indigenous systems eliminated, food prices rising and aid decreasing, developing countries cannot feed their people.
We must encourage production by whatever means possible. If we are to have community gardens, the government should pay these gardens to overproduce.
In the short-term, large corporate farms should be paid to overproduce to feed the world.
In the longer-term, foreign aid should be used to guarantee prices in developing countries, so local farmers can replace imports.
There are many other ideas that can encourage local production including land titles, collateralization of land and a system of micro-loans (all were described in two Nobel Prize winning documents).
"Investors need to realize that their apparently innocent investments in food and energy commodity futures have driven up world food prices."
The age of innocence was over eight years ago. Everyone knows the gloves are off now as capitalism is "in its last throes, if you will". The two elite parties in Washington circled their wagons together, and now focus fully on trying to save their elite establishment.
We can halt all of our exchange/association with the elites and shift it toward our local community to bring the economic/political power back home where it belongs. Or we can continue supporting the status quo of economic/social collapse.