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Back in 2008 I wrote two little noticed diaries about speculative buying that helped to drive food prices higher (here and here), and surprise, surprise, our friends from Goldman Sachs are well represented in this mix of global finance companies.

Two years later, the world food market is still seriously exposed to speculators artificially driving up prices and worsening the risks of malnutrition, and according to one of the world's leading agricultural researchers, Joachim von Braun, the head of the International Food Policy Research Institute (von Brown was one of the first to write about flawed regulatory regimes in banking and finance driving up food prices) an even bigger food crisis is looming, exacerbated as well by climate change. A visit to his site is well worth your time as he speaks eloquently about food and water.

The food crisis of 2007/2008 is now well documented. According to Paul Jay, from 2007 to 2008 the price of maize in Ethiopia went up 141 percent, retail wheat flour in Peshawar, Pakistan, went up 82 percent, rice in Thailand up 73 percent and this had little to do with supply and demand and much more to do with speculation by the usual suspects.

In March of 2008 the price of food commodities hit an all-time high, sending 100 million people into the ranks of the hungry, worldwide. Food price inflation got started with droughts, rising oil prices, and an increase in demand for grain (mostly coming from feedlots and biofuels plants). Then, as prices rose, investors-hungry in the aftermath of the housing bust-pounced on rising commodity futures, creating a "food bubble." There is now wide agreement that speculation in food was the major cause of the skyrocketing food prices that led to the 2008 global food crisis. Source

Enters Jayati Ghosh. She's a professor of economics at the Centre for Economic Studies and Planning at the School of Social Sciences at the JNU in New Delhi. Her recent book is titled After Crisis. It is an eye opener. Recently she gave one telling interview to a Washington news outfit, the indefatigable Real News Network; I am going to cherrypick quote her most salient points:

here she is asked why we're at the beginning of another global surge in food prices:

Actually, globally the world trade prices of food have been rising since about April 2009, and all the indications are that they're rising for the same reasons that they rose way back in 2007-2008, which is to say that it's not driven so much by global supply and demand factors, but it's driven by financial involvement in the commodity futures markets.

Mmmmm...I looked up the word speculation and I got this: The process of selecting investments with higher risk in order to profit from an anticipated price movement. More sophisticated investors will also use a hedging strategy in combination with their speculative investment in order to limit potential losses. Would that qualify as a derivative? Anyway, here she is asked about hoarding:

Hoarding is when individuals or small shopkeepers, or even companies, are holding it in anticipation of the price rise, and this used to be how people speculated in grain. But you have to hold the commodity. What's happened now, what's happened, really, in this decade, is that the possibility of speculation in food grain has been delinked from the physical holding of the commodity: you don't need to hold a commodity anymore; you can hold pieces of paper, which are contracts on the price for the future.

Ha! Pieces of paper! We know where that leaves us. So basically, finance entities like Goldman Sachs & all moved from the moribund sub-prime market to food futures:

But what tends to happen now is that when you look at the pattern of investment in these grain markets in terms of the futures markets, there's been more and more involvement of the non-grain dealers in what is called over-the-counter trade, OTC trade, and that was something that was allowed through this 2000 deregulation. From about late 2006, a lot of financial firms—banks and hedge funds and others—realized that there was really no more profit to be made in US housing market, and they were looking for new avenues of investment. Commodities became one of the big ones—food, minerals, gold, oil. And so you had more and more of this financial activity entering these activities, and you find that the price then starts rising. And once, of course, the price starts rising a little bit, then it becomes more and more profitable for others to enter. So what was a trickle in late 2006 becomes a flood from early 2007.

Here she expands on the incoming food bubble:

From about March/April 2009 the prices have started rising again, and more and more of these investors, index investors, as they're called, have now started entering and buying OTC contracts in the forward market. Meanwhile, consumers don't gain, consumers lose out, because what has been very strange, especially in the developing world, is that when world trade prices were rising, prices rose everywhere in the developing countries. When world trade prices were falling, prices haven't fallen. Consumer prices for food haven't fallen to the same extent.

What kind of mechanism should government institute to stop this kind of blatant speculation? She has some answers:

We have to ban finance speculation that does not physically hold food commodities. Because so much of this recent volatility is about global finance making hay while the rest of the world suffers, you have to control the finance. And what's important is that this financial regulation has to cover more than just how banks behave in general. It has to look specifically at the commodity futures market. We have to ban the entry of players who don't actually hold, physically, those commodities.

She hammers the point home in her final remarks:

The point about a futures market is that it's supposed to allow for hedging and it's supposed to allow people to hedge against future risk, both the producers and the consumers. But if it becomes so volatile because people are in there for speculative motives, then it doesn't serve that function at all. So we have to actually bring back regulation that prevents companies, financial companies, from entering into something without actually holding the physical stocks. That's number one. That means a range of financial regulation, which is, unfortunately, not being considered by the US properly. And when the US government suggests that it might do something like this, then they're threatened that, well, then we will move the trade to London.

There you have it. She goes on to note how deforestation in large parts of the Amazon play havoc with climate change for the sake of growing sugarcane to make ethanol. For the full interview go to the Real News link above.

With climate change expected to reduce yields by 15% by 2050 (FAO) even as demand grows from a rising world population, it is important for nations and international institutions to respond with strict regulations and of course more funds for sustainable agriculture and water conservation (drip-irrigation should be made mandatory, using government subsidies to pay for it).

Five weeks ago a letter was sent to Michel Barnier, European Commissioner for Internal Market and Services, from a variety of NGO's to stop food speculation.

With the banking reforms under way in Washington, one hopes to rein in the financial institutions with comprehensive legislation.

Originally posted to Patric Juillet on Sat May 08, 2010 at 12:12 PM PDT.

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