Eric Holt-Gimenez, Food First Director & AGRA Watch partner, on how Wall Street has been occupying our food system

Food Scarcity à la Wall Street

by Eric Holt Gimenez

A day doesn’t go by that the media, industry or even many scientists don’t repeat the eternal mantra: “The world must increase food production by 70% by 2050 or there will be mass starvation.” The present food crisis — in which nearly a billion people are going hungry — is used as proof of the food scarcity plaguing the planet.

There is scarcity — but not of food.

The world produces 1-½ times enough food to feed every man, woman and child currently living. Studies show that sustainable agricultural practices can produce enough food to feed 10 billion people, the planet’s expected peak population.

People are going hungry today not because there is not enough food, but because they are poor and can’t afford food, especially when prices spike — as they have been doing since 2008. Simple supply and demand doesn’t explain the extreme price volatility and price spikes that regularly plague our global food markets and push hundreds of millions of people into poverty, hunger — and rebellion.

In fact, there’s hardly been any change in world food demand over the last three years. And despite often repeated arguments about high food prices due to increased demand from China and India, aggregate and per capita grain consumption has, on the contrary, fallen in both of these countries.

Fundamental market pressure exists on the supply side, not in demand. The falling land productivity of industrial agriculture, the spread of agrofuels diverting arable land to fuel crops, massive land grabs that displace poor farmers (and urban communities), climate change and inadequate investment in agroecology are all adversely affecting food supply. But despite their devastating impacts, these supply-side factors don’t explain the extreme volatility and price spikes in global food markets seen in recent years.

Food price surges are the result of a new phenomenon: massive hoarding of food commodity derivatives. These are specialized financial products invented by powerful financial institutions. These institutional investors include Wall Street in general, and investment banks, hedge funds, mutual and pension funds, university endowments and sovereign wealth funds in particular.

How does it work?

First, institutional investors “financialize” food commodities by turning them into a speculative asset class. As a result, speculative profit — not demand for food — becomes the dominant force guiding food prices. Second, powerful investors lobby, pressure, and bribe lawmakers to deregulate financial markets in order to cut the strings tethering them to public responsibility. Third, these institutional investors hoard these newly-created and unregulated food derivatives by repeatedly rolling over “buy” contracts prior to their maturity date waiting for prices to go up. By refusing to sell futures of food commodities they create a scarcity of futures. No grain in the future drives up the price of grain today.

End result? Prices skyrocket because these institutional investors have created a financially-induced demand shock on food, thereby imposing immense artificial scarcity on the global food market. In 2008 and again in 2010, prices for staple crops like rice, wheat, and corn doubled and tripled and extended the grip of poverty and deprivation to hundreds of millions of people around the world. And what’s more, institutional investors knew their speculation was driving food prices higher. Hedge fund managers Michael W. Masters and Andrew K. White note a few of these comments in their exposé on the role of financial speculation in the food and energy commodity markets:

“You have a generalized commodity bubble due to commodities having become an asset class that institutions use to an increasing extent.” – George Soros, April 17, 2008

“The entry of new financial or speculative investors into global commodities markets is fueling the dramatic run-up in prices” – Greenwich Associates, May 2008

“Without question increased fund flow into commodities has boosted prices.” – Goldman Sachs, May 5, 2008

The financialization of our food began in 1991 when the Wall Street investment bank Goldman Sachs created the Goldman Sachs Commodity Index fund (GSCI). The GSCI is a tradable index which lumps together basic agricultural commodities such as wheat, corn, sugar, and livestock with oil, gas and metals like aluminum, copper, gold and silver. Commodity indexes of this sort turn some of the basic necessities to life into a speculative asset to be hoarded and traded by financial firms seeking to buy low and sell high.

The trading of agricultural commodities in itself is not new and serves an important function amongst physical hedgers because they use it to smooth and plan their operations. Physical hedgers have a real stake in agricultural commodities because they grow, harvest, store, transport, market, manufacture, or sell retail food. On the other hand, financial speculators are concerned with financial profit — not the destination of the food commodity or the functionality of the global food system.

Then in 2000, and on the back of a wave of deregulation starting with Reagan, President Clinton signed the Commodity Futures Modernization Act into law, officially deregulating financial products traded Over-the-Counter (OTC).[6] This allowed institutional investors to trade commodity futures contracts without position limits, disclosure requirements or regulatory oversight. As a result, financial capital flooded the market, taking massive positions in food and concentrating them in just a few, corporate hands — without having to report any of it!

With the crash of the housing bubble, followed by the economic recession, banks moved money back to safer assets to cover their losses in the subprime market. Institutional investors flocked to the unregulated commodity index funds. The funds promised stock market-like returns on safe, fundamental assets like food commodities, livestock, and important metals. Massive amounts of capital poured in. According to the Bank of International Settlements, excluding gold and precious metals, investment in these commodity index funds went from $0.77 trillion in 2002, to $5.9 trillion in June 2006, to $7 trillion in June 2007, to a whopping $12.6 trillion in June 2008 when food prices reached their first peak.

By opening up food commodities to financial speculation, global food commodity markets have seen the most price volatility and biggest price surges ever. The Occupy Wall Street protestors are not off the mark. Wall Street has been occupying our food system for far too long–with disastrous results.

co-authored by Vishrut Arya,b=facebook


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