Rampant Speculation Inflated Food Price Bubble – Wall St./Grain Traders Pushing Price Rises

“Hunger is not a food production problem. It is an income problem”

By Stephen Leahy

UXBRIDGE, Canada, Jan 28, 2011 (IPS)

Billions of dollars are being made by investors in a speculative “food bubble” that’s created record food prices, starving millions and destabilising countries, experts now conclude.

[This is the second of a multi-part series investigating what is driving food prices higher]

Wall Street investment firms and banks, along with their kin in London and Europe, were responsible for the technology dot-com bubble, the stock market bubble, and the recent U.S. and UK housing bubbles. They extracted enormous profits and their bonuses before the inevitable collapse of each.

Now they’ve turned to basic commodities. The result? At a time when there has been no significant change in the global food supply or in food demand, the average cost of buying food shot up 32 percent from June to December 2010, according to the U.N. Food and Agriculture Organisation (FAO).

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Nothing but price speculation can explain wheat prices jumping 70 percent from June to December last year when global wheat stocks were stable, experts say.

“There is no food shortage in the world. Food is simply priced out of the reach of the world’s poorest people,” said Robert Fox of Oxfam Canada in reference to the estimated one billion people who go hungry.

“Hunger is not a food production problem. It is an income problem,” Fox told IPS.

The conditions that created the 2007-08 price hike and food riots have not changed, he said. It is no surprise to see record-high food prices and riots again in Egypt, Algeria, Jordan and elsewhere.

Weather used to be the big determinant of food prices, but not anymore. Trillions of dollars have been pumped into food commodities markets in the last few years thanks to deregulation of commodities trading in the U.S., reports Olivier De Schutter, the United Nations Special Rapporteur on the Right to Food.

In an analysis of the food price crisis of 2007-08, De Schutter documents how the U.S. government passed legislation in 2000 deregulating the food commodity markets and for the first time permitted speculation on speculation.

Here’s how it used to work. In January, Farmer Brown would sign a contract to sell his 2011 future crop to a grain trader like industry giant Cargill for 100 dollars a tonne. In the fall, Cargill would then sell Farmer Brown’s grain at whatever price they could get to a bakery or feedlot company for cattle. These “futures” contracts insulated both the farmer and the grain trader from wild price fluctuations.

Now, after the passage of the U.S. Commodity Futures Modernisation Act in 2000, Cargill could sell Farmer’s Brown “futures” contract to an investment bank on Wall Street for 120 dollars a tonne, who could in turn sell it to a European investment company for 150 dollars a tonne and then sell it to a U.S. public pension fund for 175 dollars a tonne and so on. Add in some complex financial instruments like ‘derivatives’, ‘index funds’, ‘hedges’, and ‘swaps’, and food become part of yet another highly-profitable speculative bubble.

A deeply-flawed global financial system was largely responsible for the 2007-08 food crisis, concluded De Schutter in a September 2010 briefing note.

“Speculators increasingly entered the market in order to profit from short-term changes in price,” wrote agricultural economist Jayati Ghosh, in a more recent analysis of the 2007-08 food price spike.

With the pending implosion of “the U.S. housing finance market, large investors, especially institutional investors such as hedge funds and pension funds and even banks, searched for other avenues of investment to find new sources of profit,” said Ghosh, a professor at Jawaharlal Nehru University in New Delhi in the Journal of Agrarian Change.

Food commodity speculation became the “hot ticket” and unregulated trading zoomed from 0.77 trillion dollars in 2002 to seven trillion dollars in 2007. Food prices shot upwards until the speculators took their profits in the first half of 2008 to cover their losses in the U.S. housing and other markets, she concluded. By the fall of 2008 prices stabilised but remained substantially higher than they were before the speculative bubble.

“At the end of December 2008, the FAO estimated that 33 countries were experiencing severe or moderate food crises, with conditions in at least 17 countries worse compared to October 2008,” Ghosh said.

And 2008 was a year of record grain production internationally.

Now there is a new and bigger food price bubble that began midway through 2010. It’s no surprise since nothing was done to change the conditions, Ghosh wrote. Regulations that could prevent or at least limit such speculative financial activity are not in place. The 2010-11 food price bubble is blamed on last summer’s Russian drought and increased consumption by India and China. However, FAO figures clearly show grain consumption by those latter two countries has actually fallen, mainly because many simply can’t afford to buy as much grain, Ghosh told IPS in an email interview. In India, there has also been “diet shifts to more vegetables and dairy products”, she said.

The Russian drought simply sparked this latest speculative bubble. Russia did lose 33 percent of its wheat harvest, but it had plenty of wheat stocks on hand to make up the difference. Instead of using those stocks, the Russian government was persuaded by multinational grain companies to ban wheat exports.

That enabled those companies to break their low-price export contracts with Egypt, Bangladesh and other countries and sell their grain on the inflated domestic wheat market, says Devlin Kuyek of GRAIN, a small international non-profit organisation that works to support small farmers.

“Big companies now control much of the Russian agriculture,” Kuyek said in an interview.

GRAIN has documented how foreign and local investors have set up huge, vertically integrated “agro-holdings”, particularly in the southern grain belt where they now control 40-50 percent of total grain production.

Russia is a major wheat exporter and Swiss-owned Glencore exports most of Russia’s wheat. However, GRAIN research reveals that Glencore lobbied to get an export ban allowing the company to cancel its low-price contracts without penalty.

To ease the ‘sting’ of the ban, Russia also promised one billion dollars in low-interest loans and subsidies for grain producers.

“Countries like Egypt really got screwed and the grain traders made a killing,” Kuyek said.


See also Part I In Corrupt Global Food System, Farmland Is the New Gold and Africans the New Share-croppers

5 thoughts on “Rampant Speculation Inflated Food Price Bubble – Wall St./Grain Traders Pushing Price Rises

  1. Rising food prices will be the story of the decade. Climate instability will add to the rise in prices, and eventually shortages.

    Its only a matter of time when the American wheat and corn belts suffer a ‘Russia like summer’.

    With heat and drought in the American agricultural heartland becoming the norm.

  2. How does this actually work. At some point someone has to take possession of the food commodity? Does the pension fund or whomever finally gets the last contract actually purchase the foodstuff?

  3. “Foreclosure of American Dream By Wall Street” – E N D O F A N E M P I R E

    – Nalliah Thayabharan

    Wall Street is a confidence trick, a dazzling edifice built on paper promises, gambling, bets and rampant speculation. Wall Street doesn’t manufacture or produce anything. The Wall Street however attractive it may appear is built on paper.
    Modern day bank robbers are at Wall Street but they wear grey suits and not masks. Rampant speculators, propagandists and financiers of Wall Street are given some unfair advantage over the average consumers and taxpayers and the cumulative effect of the people watching selfishness prevail over the public interest has been an undermining of the public’s trust in the present US government. There’s no question the Wall Street is rigged against the average consumers and taxpayers. The Wall Street has a lot more information. Wall Street jerry-rig the system so that Wall Street always win. If the Wall Street loses trillions, the US Treasury will bail the Wall Street out so it can go back and do it again.
    50 trillion dollars in global wealth was erased between September 2007 and March 2009, including 7 trillion dollars in the US stock market, 6 trillion dollars in the US housing market, 8 trillion dollars in the US retirement and household wealth, 2 trillion dollars in the US individual retirement accounts, 2 trillion dollars in the US traditional defined benefit plans and 3 trillion dollars in the US nonpension assets. Greed, arrogance and incompetence created a massive meltdown, cost trillions, and still Wall Street comes out richer and more powerful.
    There are trillions dollars of new money taken again from Americans to make deals and hand out outrageous bonuses. And when these trillions run out Wall Street will come back for more until the dollar becomes junk. The value of the US dollar declined very significantly during the last 70 years. The value of the US dollar in 1940 was worth 2,000% more than the value of the US dollar now.
    Many big US manufacturers are outsourcing to Mexico and China to increase their profits, adding more unemployment in the USA. Manufacturing jobs in the USA declined 37% between 1998 and 2010. Since manufacturing industries declined in the USA, the US competitiveness in the global marketplace is also declined.
    Robust financial markets don’t imperil capitalism. In the early 1980′s Wall Street began to escape reasonable important regulations of the marketplace. The US government gradually adopted a “too big to fail” policy for the Wall Street, saving lenders to failing businesses from losses. The demise of Glass Steagall act helped spawn the credit crisis by allowing the Wall Street to create financial instruments that escaped reasonable limits, including constraints on speculative borrowing and requirements for the disclosure of important facts. The extremely liucrative hedge funds and other risk management derivatives including credit default swaps don’t fund or invest in successful growing businesses. The credit default swap market was the single biggest cause of the crash 4 years ago.
    The Wall Street’s suicidal capitalism built on rampant speculation eventually posed an untenable risk to the US economy—a risk that culminated in the trillions of dollars’ worth of the US government bailouts and guarantees that the US government scrambled starting in late 2008. But in 2008 the US government was compelled to replace private risktakers at the Wall Street with government capital so that money and credit flows wouldn’t stop, precipitating a depression. As a result, these Wall Street became impervious to the vital market discipline that the threat of loss provides. The Wall Street lenders to financial markets continue to understand that the US government would protect them in the future if necessary. This implicit guarantee by the US government harms capitalism and economic growth.
    The top 6 US banks had assets of less than one fifth of US GDP in 1995. Now they have two third of US GDP. The financial crisis was created by the biggest US banks to consolidate power. The big banks became stronger as a result of the bailout by the US Treasury. The big banks are turning that increased economic clout into more political power. Wall Street has undue influence on the US government policies and this situation reflects a failure of democratic representation for the other 99 percent Americans.
    Oligarchy is the political power based on economic power. And it’s the rise of the Wall Street in economic terms, that it’d turn into political power. And Wall Street then feed that back into more deregulation, more opportunities to go out and take reckless risks and capture trillions of dollars.
    Wall Street only has the lobbyists. Today more than 42,000 Wall Street lobbyists manipulate USA’s 537 elected officials with huge campaign contributions that fund candidates who support their agenda. It no longer matters who’s the President of USA.
    The political and economical leadership of the US has chosed to cartel profits and transformed the US economy to serve the colluding and unlawful oligarchy. The political and economical leadership of the US is bailing out failed paradigms with trillions of dollars while committing social injustice to its people. The political and economical leadership of the US including the US Congress have now become Wall Street’s “Trojan Horses”. The US banks are borrowing money at near zero interest from the US government, then lending it back to the US government at even mere fractions higher interest than they are paying. The net interest margin made by the US banks by lending the money back to the US federal government in the first 6 months of 2011 is 210 billion dollars.
    Due to the oligarchs’ rapacious looting and their purchase of a politically protected luxurious lifestyle, the people of the US are on the road to permanent serfdom under a police state. The democracy was not given to the people of the US on a platter. It is not theirs for all time, irrespective of their efforts. Either people of the US organize and they find political leadership to take this on or they are going to be in deep trouble.
    The failure of governance to address the current critical issues have already produced catastrophic consequences. Now we are experiencing a major global paradigm shift and it is still unfolding. Thirty-two US states including California, Illinois, Nevada, Arizona, Florida, New Jersey and Michigan are on the brink of insolvency as their tattered and fading economy is now more dire than ever. Inevitably in very near future the US government will order police or military to martial law which may lead to a second American revolution.

    “There is no calamity greater than lavish desires, no greater guilt than discontentment and no greater disaster than greed”
    – Laozi
    “Greedy desire is endless and therefore can never be satisfied”
    – Buddha

  4. Wheat raises blood sugar higher than most of the other foods. 4 slices of whole wheat bread raise blood sugar higher than 12 teaspoons of sugar. That’s a simple fact as per the table of glycemic index.
    Almost all wheat in USA is from a dwarf strain, which produces a far greater yield but has contributed to the current obesity epidemic.

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