Food speculation: 'People die from hunger while banks make a killing on food'

http://www.guardian.co.uk/global-development/2011/jan/23/food-speculation-banks-hunger-poverty

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


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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