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Just a few years after one major global food crisis, a new worldwide spike in agricultural commodity and food prices is generating both predictable and extraordinary fallout. The search for causes once again leads to a conjuncture of flawed policies – in trade, environment, finance and agriculture – that is likely to produce more dangerous volatility in years to come.
Over the past year, food prices around the world shot sharply upward, surpassing the previous price surge in 2007-2008 to set a new record, as measured by UN’s Food and Agricultural Organization (FAO). In February, the UN’s food price index rose for the eighth consecutive month, to the highest level since at least 1990.
As a result, since 2010 began, roughly another 44 million people have quietly crossed the threshold into malnutrition, joining 925 million already suffering from lack of food. If prices continue to rise, this food crisis will push the ranks of the hungry toward a billion people, with another two billion suffering from “hidden malnutrition” of inadequate diets, nearly all in the developing countries of Africa, Asia and Latin America.
That deprivation will shorten lives and stunt young minds, hitting the most vulnerable populations, such as the urban poor of food importing countries – in cities like Cairo, Tunis and Dhaka – hardest. The poor spend more of their budgets on food – 50 to 80 percent of household income in some developing countries, compared to less than 10 percent of household income on average in the U.S. and Europe. So the food price hike cuts deeply into their spending on other needs, and into already strapped budgets of poor countries trying to provide food aid to their citizens.
Some of those urban poor have not been quiet since prices began rising again. They waved loaves of bread as they joined in protests in Tunis, Cairo and other cities in recent months. Their immediate, concrete grievance added a spark to long smoldering discontent with authoritarian regimes, producing the beginnings of democratic revolutions, not just the usual, unsettling “food riots.”
Bad weather, worse policies
But beyond those movements for democracy, the world will also need to adopt a new model for food and agriculture policy to prevent future food crises, which seem highly likely if current conditions continue. The core cause of the current crisis, like the one three years ago, is failed policies, not bad harvests and disastrous weather. (And it’s worth noting that part of the intensity and unusual patterns of that weather results from flawed environmental and energy policies.)
Nightmarish weather during the last year -from floods in Sri Lanka, Pakistan and Australia to droughts stretching from Russia and the Ukraine to Argentina and now China – set off the hike in grain and food prices. But even if natural phenomena like La Nina in the Pacific played a role in weather that depressed crop yields, global warming has intensified weather extremes and disrupted regional weather patterns. No one event can be blamed on climate change, says University of California at Berkeley visiting scholar Raj Patel, author of Stuffed and Starved, but “we can certainly say climate change is responsible for exacerbating and causing more severe weather problems.”
In October, the FAO Committee on World Food Security concluded that climate change will ultimately affect “the livelihoods, food security, and way of life of billions of people.” In recent decades, “hydrological disasters” have increased an average of 7.4 percent each year, and even faster over the past few years. The FAO study projects that the number of people affected, the loss of arable land, the incidence of harmful pests, and the risk of hunger as a result of climate change will rise rapidly in the next few decades, and crop and animal productivity will “suffer.”
The FAO committee concludes that “climate change multiplies existing threats and …increases the vulnerability…to food insecurity,” especially for women and children. Ironically, industrial agricultural practices, including pesticides and fertilizers, clearing new land for crops and global agricultural trade all contribute to climate change.
While harvests have suffered, demand for food grains globally only increased 1.2 percent last year, according to Jawaharlal Nehru University economist Jayati Ghosh, even taking into account a growing population, higher incomes and changing tastes in food in countries like China. The diversion of 40 percent of U.S. corn into biofuel annually, an unsustainable long-term strategy for a variety of reasons, may have pushed prices up some.
But the biggest factor in the current crisis is not increasing demand but lower production. At the same time, hunger is currently a result of poverty and inequality, not lack of food.
Food commodity fetishism
Ultimately, the food price crisis stems only in part from an imbalance of supply and demand. More importantly, it grows out of decades of bad policy that subordinates food as a commodity to global markets that are dominated by large multinationals and distorted by speculators. Yet the dominant multilateral elite – mainly U.S. and European officials from governments, corporations and international financial institutions – still prescribes more trade and less encumbered markets as the solution.
By contrast, many countries, civil society groups, environmentalists, advocates for the poor, and representatives of peasants and small farmers say that food should be treated as a human right. And countries should strive for food security and as much self-sufficiency as can be reasonably achieved, as Karen Lehman, former senior fellow at the Minneapolis-based Institute for Agriculture and Trade Policy, argues.
In one recent dispute, free traders criticized Russia for halting wheat exports last year after drought and fires reduced wheat crops so drastically that the country might have faced shortages. The ban undoubtedly created anxieties that pushed up wheat futures prices. But food security advocates note that people rightfully expect their governments to protect their food supply. Food policy must permit them to do so (as global trading rules still do to some extent).
Over several decades, the global grain trade, especially the dumping of subsidized crops from the United States and Europe, depressed peasant incomes in developing countries and accelerated their leaving the land for life – and usually a different kind of poverty – in the city. (Mexico after NAFTA is a prime example. South Korea’s development strategy of raising rural incomes while industrializing offers an impressive contrast.) The result: less self-sufficiency, less security and grain prices that were often lower but much more volatile than they would have been with more of a managed trade system.
Free trade and domestic deregulation have meant “that changes in world prices are, for the most part, being transmitted more rapidly and more fully to domestic markets,” the FAO committee reported in October. Global availability of cheap food may help a country relieve problems of a moderately bad domestic harvest, but disruption in a major exporter also transmits a big jump in prices around the world. The increased volatility “threatens farm viability (low prices), food security (high prices), undermines investment decisions, and threatens domestic security and political stability,” the committee says.
One group of economic actors loves that volatility: traders in futures markets, both in open exchanges like the Chicago Board of Trade and private over-the-counter contracts. “Traders make money out of price volatility and now help to exacerbate it,” Patel says. But futures markets, when closely regulated, also enable both buyers and sellers to hedge against uncertainty of future prices, locking in delivery of a product at prices that are acceptable or at least known. Speculative traders provide liquidity for the markets, making transactions simpler and faster. The futures markets also help “discover” prices.
But futures markets are not the only way to bring predictability to agricultural markets. Historically they have worked best when combined with government policies to manage supply and thus prices of commodities within a certain range, partly by maintaining reserves of key food products. Since the rise of the first urban states, governments have maintained reserves of grain as protection against bad harvest. But contemporary versions of such policies, dating in the United States from the New Deal, lost force over the past four decades, and were virtually abandoned in the 1996 “freedom to farm” legislation, signed by President Bill Clinton.
Today, China is one of the few countries that does maintain large reserves, though their size is secret. Going into this crisis, known world stocks of commodities were low, especially for corn, says Gerald Bange, chair of the U.S. Department of Agriculture’s World Agriculture Outlook Board. Private firms held much of the world’s reserves. “The big picture about rising food prices is that one of the things that globalization has done is to increasingly put food reserves in private hands,” says Tim Wise, policy research director for Tufts University’s Global Development and Environment Institute. “You get speculation and hoarding if people feel there’s a shortage of supply.”
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.
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David Moberg, a former senior editor of In These Times, was on staff with the magazine from when it began publishing in 1976 until his passing in July 2022. 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 received fellowships from the John D. and Catherine T. MacArthur Foundation and the Nation Institute for research on the new global economy.