Thursday, 21 May 2009

Speculation in the food markets

While most of the solutions to the current crisis of high food prices will require substantial reworking of our global, fossil fuel-dependent food system to create a more localized and organic one, one relatively easy solution could bring quick and significant reductions in world prices. Financial speculation in commodities’ futures markets has increased dramatically in the last 3-4 years, artificially driving up prices of a host of commodities, from food crops to oil and natural gas, to metals and minerals.

Commodities markets were formed because for farmers, selling grains was a very unpredictable and chaotic task. Individual farmers negotiated with sellers and faced widely varying prices and uncertainty. After this farmers agreed with a buyer to deliver grain at a specific date in the future for an agreed upon price, this is called a forward contract. Later futures contracts were created, these are similar to forward contracts, but instead of being directly between a producer and a buyer, are traded on an open exchange called the futures market where others can participate. Buyers on the futures market rarely, if ever, actually receive the physical product but are able to profit off changing commodity prices.

By the late 1800s, futures markets had been created for various products, with speculators betting on whether prices would rise or fall. But the influx of investors not actually involved in agriculture or food production was a problem. A casino-type atmosphere reigned with huge amounts of money entering the market procuring easy profits. Abuses, from fraud to spreading rumours in order to alter prices to buying inside information, were used to influence the market. Large fluxes in investments also affected food prices unnecessarily.

Financiers did not immediately invest in the food commodities markets as they provided lower profits than other areas of investment. This changed after the stock bubble burst in the year 2000 and the further deregulation of commodities futures markets in 2001. Investors pulled vast amounts of money from the stock market, deflating the bubble. Much of that money was placed in the housing market, thus creating a bubble in that market. As the housing bubble burst, many investors have now switched to commodities futures, and they are able to plough immense amounts of money in these markets.

Hedge fund manager Michael Masters recently testified before the US Congress on this issue. He said that institutional investors (pension funds, university endowments, sovereign wealth funds, etc.) have increased their investments in commodities futures from $13 billion in 2003 to $260 billion in March 2008, and the price of 25 commodities have risen by an average of 183 percent in those five years. He explained that “commodities futures prices are the benchmark for the prices of actual physical commodities, so when speculators drive futures prices higher, the effects are felt immediately in the real economy.”

Clearly these huge influxes of money are having dramatic effects on today’s rising food prices. One particularly troubling aspect of speculator demand is that it actually increases the more prices increase. We already see this happening as investment advisors increasingly encourage clients to invest in commodities futures. This would result in catastrophic increases in food prices.

If the financial markets devised a scheme whereby investors bought large amounts of pharmaceutical in order to profit from the resulting increase in prices, making these essential items unaffordable to sick and dying people, society would be justly outraged. This is happening now in our commodities’ system, driving up food prices worldwide, and the poor, especially in the Third World, are those that suffer the most.

The financial markets are making everything a commodity but food is not a commodity to be traded because food is a need, not a want. In trading food what is really being traded are lives.

In the Lord’s Prayer the first request after the salutations to God is “Give us this day our daily bread”. Food is one of life's essentials, not the chips in some surreal poker game.

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