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How Financial Speculation is Artificially Inflating Staple Food Prices

In 2011 investments in food derivatives stood at $126 billion compared to $3 billion in 2003 (World Development Movement WDM, Retrieved from web 14/08/13, http://www.wdm.org.uk/blog/infographic-how-banks-cause-hunger)

The top three food commodities – wheat, rice and maize – are also the staple diet of the world’s billion poorest people (UN FAO, The State of Food and Agriculture 2010 – 2011; Retrieved from web 14/08/13, http://www.fao.org/publications/sofa/2010-11/en/). When massive, powerful investors start pouring money into food markets, prices start behaving in strange ways. One aspect of what investors are speculating on is the scarcity of the product, which in part defines it’s value in an open market.

staple foods

Markets and the prices of the products become aggressively volatile and do not conform to patterns which we might rationally understand. Stock markets are notoriously hard to anticipate and are subject to ‘animal spirits’. Animal spirits is a term John Maynard Keynes coined to describe the instincts, inclinations and emotions that influence human behaviour (Page 130 IIV, John Maynard Keynes, The General Theory of Employment, Interest and Money, ISBN-10: 9650060251).

Robert J. Shiller Professor of Economics Yale University argues that trust is also included in or produced by ‘animal spirits’. (“Animal Spirits Depend on Trust: The proposed stimulus isn’t big enough to restore confidence” by Robert J. Shiller, The Wall Street Journal, 27 January 2009; taken from internet 27.10.2013 – http://online.wsj.com/news/articles/SB123302080925418107)

Such magnitudinal shifts which go on when money floods in and out of these ‘virtual’ trading places, accentuates the instability of the value systems which come to be applied to the demand and supply of goods and services. Thinking through the extent of automated stock trading is a very important discussion to help us understand what is happening to staple food prices, particularly in the light of the so-called ‘Flash crash’.

Flash Crash

In the report of the Staffs of the CFTC and SEC on the trading events of May 6th 2010, there is considerable interest paid to the involvement of algorithmic trading (Findings Regarding The Market Events of May 6, 2010; Report of the Staffs of the CFTC and SEC to the Joint Advisory Committee on Emerging Regulatory Issues; Taken from Internet 27.10.2013 – http://web.archive.org/web/20101010194307/http://www.sec.gov/news/studies/2010/marketevents-report.pdf).

Also known as ‘The Crash of 2:45’, the ‘2010 Flash Crash’, it was a moment in history in which there was a US stock market crash in which the Dow Jones Industrial Average plunged about 1000 points (about 9%) only to recover those losses within minutes. It was the second largest point swing on an intraday basis in Dow Jones Industrial Average history.

This amount of instability in a stock market is dangerous and has wide ranging effects that impact on parts of culture distant to the machinations of stock broking wheeling dealing. In short, computers are buying and selling in high frequency without the knowledge and awareness of a human to watch for moral hazard or other catastrophic effects of trading.

Some illustrators of the instability of the stock markets are that in January to February of 2008, the price of wheat rose by 46 per cent over 3 weeks to then fall back again to it’s original price by May before surging up again by 21 per cent by the end of May. (Page 3, Food Commodities Speculation and Food Price Crises. Regulation to reduce the risks of price volatility”, Briefing note by the Special Rapporteur on the right to food, September 2010: Taken from Internet 27.10.2013 – http://www.srfood.org/en/food-commodities-speculation-and-food-price-crises)

The price of maize went up by 102 per cent in 2011 from is beginning to April (Page 30, Broken markets – How financial market regulation can help prevent another global food crisis, World Development Movement, September 2011: Taken from Internet 27.10.2013 – http://www.wdm.org.uk/stop-bankers-betting-food/broken-markets-how-financial-regulation-can-prevent-food-crisis)

artificial agora

These modern day agoras (market places) suffer from the strengths and weaknesses of the ancient market places plus more – that which modernity has offered up in technology and reified group behaviours. Technology has enabled people to work together and harness resources previously unaggregatable. By investors working together knowingly, tacitly or incidentally there has been the result of the inflation of food prices by an average of 83 per cent between 2005 and 2008.

Christian Aid explores this issue in a report which discusses markets, conflict, land grabs, tax, climate change, the demography of food, and sustainable solutions. (Christian Aid, Hungry for Justice: Fighting Starvation In An Age Of Plenty, May 2011: Taken from Internet 27.10.2013 – https://www.christianaid.org.uk/resources/policy/christian-aid-week-report-2011.aspx)

In the developing world, food can account for 70 per cent of income. The World Food Programme examined the conditions in Haiti and found that ‘rural households spend almost 60 percent of their income on food; the poorest groups spend more than 70 percent’. (World Food Programme; Haiti: 10 Hunger Facts; Taken from internet 27.10.2013 – http://www.wfp.org/stories/haiti-10-hunger-facts).

The impact of inflated food prices are that people eat fewer and less nutritious meals, and become separated from healthcare and schooling.

To provide a comparator, the Department for Environment, Food and Rural Affairs, examined the percentage spend of households on food in the UK. “The relative affordability of food can be measured by the share of the household budget that goes on food. Low income households are of particular concern as they tend to have a greater percentage of spend going on food. Food is exerting greater pressure on household budgets since 2007 when food prices started to rise in real terms. Averaged over all households 11.3% of spend went on food in 2011, 0.8 percentage points above the 2007 level.

For households in the lowest 20% by equivalised income 16.6% of spend went on household food, 1.4 percentage points above 2007. Energy content of food purchases in income decile 2 fell by 15% between 2007 and 2011.

(Page 24, Food Statistics Pocketbook 2012, Department for Environment, Food and Rural Affairs, Taken from Internet 27.10.2013 – https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/183302/foodpocketbook-2012edition-09apr2013.pdf)

The World Bank estimates that from June 2010 to November 2011, food prices catapulted an additional 44 million people into poverty and hunger. The moral issues include getting rich from hunger, the creation of hunger to acquire wealth, starvation, and malnutrition.

Banks are quick to deny any correlation between the billions of dollars flooding food markets and the under fives dying of malnutrition. The response of Goldman Sachs to ‘The Food Bubble’ by Frederick Kaufman was published in Harper’s Magazine, July 2010, was to say that prices reflect a squeeze on supply caused by:

  • Failing harvests
  • A run on demand caused by biofuels
  • China’s appetite for meat
  • A growing world population

 

(Response to “The Food Bubble” by Frederick Kaufman in Harper’s Magazine, Letter to the Editor, Harper’s Magazine, By Steve Strongin; Taken from Internet 27.10.2013 – http://www.goldmansachs.com/media-relations/in-the-news/archive/harpers/letter-harpers-content.html; ‘The Food Bubble; How Wall Street starved millions and got away with it’ by Frederick Kaufman; Taken from Internet 27.10.2013 – http://frederickkaufman.typepad.com/files/the-food-bubble-pdf.pdf)

Olivier De Schutter, the United Nations Rapporteur says these factors are at best minor catalysts and maintains that the wild fluctuations and price inflation are caused by a ‘speculative bubble’ (O De Schutter, Food Commodities Speculation and Food Price Crises; Taken from Internet 27.10.2013 – http://www.srfood.org/en/food-commodities-speculation-and-food-price-crises). Here is an excerpt:

food speculation

“In this briefing note, the UN Special Rapporteur on the right to food examines the impact of speculation on the volatility of the prices of basic food commodities, and he identifies possible solutions forward. The global food price crisis that occurred between 2007 and 2008, and which affects many developing countries to this day, had a number of causes. The initial causes related to market fundamentals, including the supply and demand for food commodities, transportation and storage costs, and an increase in the price of agricultural inputs. However, a significant portion of the increases in price and volatility of essential food commodities can only be explained by the emergence of a speculative bubble.”

 

A wealth of reportage can be found on Frederick Kaufman’s website: http://www.frederickkaufman.com/

 

Question 1: Using the internet, research and write down three examples of “speculative bubbles” which have happened in history, and include the sources of where you got your information.  Included in the information for each example document its name, when it happened, what commodity the bubble formed around and a short description of how it played out.

 

Question 2: Using the internet, research and retrieve some current comment on food speculation, quoting the sources and documenting where the information came from. Try and bring together a series of quotes which help contextualise each other, developing an exlanatory picture of the details which you are focusing on.

 

This is part of a series of articles and exercises exploring food speculation and its relation to famine:

Click Here For Index

 

 

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