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Diet Hard: With a Vengeance (cont’d)

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The speculators return

After the federal government deregulated markets in the late ’90s, futures and other financial derivative products became even more important as speculative investments among global high rollers. Big financials firms entered the food commodity markets. For example, Goldman Sachs and American International Group, leaders in the marketing of mortgage-backed securities whose collapse brought on the Great Recession, began selling commodity index securities, whose value was supposedly based on a basket of commodities including food and almost always oil and other non-agricultural goods.

In the run-up to the previous food price crisis, a study last January from the Federal Reserve Bank of St. Louis reports, large investors – from hedge funds to pension funds – saw these “investments” as a way to earn higher profits than on less risky options. Many also saw commodity indexes as a balance or alternative to stocks and other securities. They also thought they could use other derivatives to manage those risks.

Rather than buy, as a farmer or grain miller might, to guarantee delivery at a fixed price, the new speculators – from hedge to pension funds – disproportionately made and renewed their investments on an expectation of rising prices, creating a bubble that burst as part of the financial crisis. They believed that the long-term trend in commodity prices was up. And given the weight of oil in the index, oil price increases drove agricultural prices up, not only because of increased costs of agricultural production (fertilizer, machinery operation, transport) but also because of the packaging of these derivatives.

The Fed study found “the massive increase in trading in commodity derivatives over the past decade…far outstrips the growth in commodity production and the need for derivatives to hedge risk by commercial producers and users of commodities…. The gross market value of commodity derivatives rose by a factor of 25 between June 2003 and June 2008–reaching $2.13 trillion.” The financial investors rose to dominance partly because the Commodity Futures Trading Commission rules do not limit the size of investment, or position, they can make, unlike the traditional commercial users of futures who face position limits.

Now speculators are back, seeking to exploit–and in the process drive up–prices. Barclays Capital reports that new global investments in agriculture derivatives reached $2.6 billion in December, double the level a year earlier. And such investments have likely increased dramatically since then with news of further price increases. “Once again, it is likely that a combination of panic buying and speculative financial activity is playing a role in driving world food prices up well beyond anything that is warranted by real quantity movements,” Nehru University economist Ghosh writes on “the triple crisis” website.

And that means everyone in the market for real agricultural products is receiving distorted signals about prices, as speculators enrich themselves on another bubble. The root of the problem lies in the growing and still inadequately regulated power of financial capital. The owners of that capital – big Wall Street firms like Goldman Sachs – are unwilling to make the long-term investments in useful production that society needs, and are intent on stripping revenue from those productive enterprises for the benefit of the financial elite.

The details differ this time on precisely which weather events tightened supplies of what commodities, setting off speculative frenzy. And the political consequences in countries like Egypt are more dramatic. But the dynamics of the crisis and its roots in failed policies are the same. In many countries, Patel argues, “what’s different in 2011 is that governments are fighting inflation or budget deficits, not recession.” And politicians often see safety nets for the poor or unemployed, including direct food and nutrition aid, as targets for cuts.

Stopping the needless tragedy

Looking ahead, the world needs a new model for farming and food to avoid repeated worsening food crises. The bottom line is that much more needs to be done to protect the poor. Regulators should immediately limit positions of financial speculators in commodity future index derivatives.

In the longer term, such derivatives should simply be banned, agricultural derivatives contained to exchanges (as last year’s financial reform law permitted the Commodity Futures Trading Commission to do), and agriculture futures markets returned to their original use under tight supervision.

Individual countries, regions and global institutions should return to maintenance of commodity reserves and, as a corollary, policies to stabilize prices. The campaign to deregulate and expand global agriculture “free trade” should give way to guaranteeing more domestic policy freedom aimed at a reasonable degree of domestic self-sufficiency.

Instead of a push toward export-oriented production, there needs to be action by the guilty countries to stop dumping of subsidized products, as well as pressure in international forums (like the WTO) for the countries’ right to protect indigenous agriculture through trade barriers. Investment should be encouraged in more ecologically and socially sustainable agriculture, as well as infrastructure to raise productivity of traditional peasants and small farmers. It shouldn’t be directed toward the unrealized hype of bio-engineered crops – or the exploitative speculation on food and other farm products.

Broader policies to halt and reverse global warming, which include changes in agricultural production and different sources for biofuels, are also critical to avoid price volatility. Without substantial change, the modest progress toward reducing hunger after World War II will shift into reverse–despite the great, needless tragedy of more than 1 billion people starving in a world capable of producing food enough for all.

David Moberg, a senior editor of In These Times, has been on the staff of the magazine since it began publishing in 1976. Before joining In These Times, he completed his work for a Ph.D. in anthropology at the University of Chicago and worked for Newsweek. He has received fellowships from the John D. and Catherine T. MacArthur Foundation and the Nation Institute for research on the new global economy. He can be reached at

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