1 Apr 2011

Food prices caused by speculation: Tories stopping safer system

Friday a week or so ago I went to the Coffee House Discussion on Food Security - sponsored by the Green party but also for the first time in conjunction with WDM. Martin Whiteside, the Green Party parliamentary spokesperson who works with development agencies introduced the topic then Christine Haigh, the WDM spokesperson spoke before the floor was opened up to questions and comments.

This blog covers a new report by nef and the shocking revelations about Barclays - scroll down and click on 'read more'. Basically the international trading prices of major grains are 70% higher than they were this time last year, and near or above the levels during the price hikes of 2008. We have seen demos in Tunisia, Jordan, Algeria and India but it isn't just about the weather - the financial markets are playing a massive role.

UN officials referred to the effects as, 'a silent mass murder', and the desperation and violence appearing as, 'the new face of hunger'. So how is it that hedge funds and investment banks can have such an influence on the food? 

See WDM on food speculation here. Amazingly it is 'the market' itself that played the lead in creating this crisis. Even the IMF have admitted that speculation causes food price hikes when it wrote that 'pure financial factors, including the mood of the markets, can have short term effects on the price of oil and other commodities'. 

Schnews explains it; "the 'mood of the markets' in this case had put 120 million additional people into poverty in 2008 and around 100 million into chronic hunger. It's estimated that during 2011 the number of chronically hungry people in the world could top one billion....Food has long been traded in 'futures' contracts, which do what they say on the tin. A buyer has a contractual arrangement with a producer to buy their wares for a fixed price at a fixed future date. This is designed to give those involved in the agriculture industry some stability....Until the late nineties, regulation was in place that only allowed food to be traded in this way by those directly involved in the industry. These regulations were weakened after aggressive lobbying by the finance industry - and this caused the commodity market to detach from the 'real' economy. Now hedge funds, pension funds and derivatives traders could bet huge sums of money on food prices in the futures market with the possibility of achieving a huge profit.

"To ensure the profit potential in these futures contracts, something needed to be done to separate them from real supply and demand factors (which could, naturally, lead certain commodities to drop in value, at the cost of investors). The answer of traders at the likes of Goldman Sachs is to 'bundle' commodities into a 'special index fund'. In the case of Goldman Sachs, each fund has an average composition of 30% agricultural and 70% non-agricultural commodities, mostly oil. This diversifies risk to, supposedly, reduce them for investors. In 2004, further exemptions from regulation were granted after a petition by some of the biggest hitters in US banking, Lehman Brothers, Morgan Stanley, Bear Stearns and JP Morgan, who had argued (laughably) that they were so well capitalised and sophisticated in risk management they couldn't fail. Following the exemptions, the banks released billions of dollars more for speculation.

The spinning plates were balanced precariously, and it was the 2007 sub-prime mortgage crash in the US which saw them come tumbling down. The influx of new speculators in the commodities market after the property crash drove up prices at an alarming rate. It was this price 'bubble' - the rate of food prices reaching an artificial high - that caused the scenes of hunger and panic. In 2008, Goldman Sachs earned $1.5 billion of their bottom line from commodity speculation, about a third of their estimate net income."
(see Schnews here).

Now history is repeating itself. Worse still George Osborne is the only EU Chancellor digging his heels in about banking regulation - a subject on the EU agenda for this spring.
A new report by nef 'Subverting Safer Finance. How the UK holds back global financial regulation' report argues that the UK is subverting progress towards a safer financial system, and has become a major barrier to international efforts for reform. Compared even to the US, a jurisdiction with a reputation for market friendly regulation, and other major international jurisdictions, the UK is found to be part of the problem in key areas of financial reform, and not leading the search for solutions. See report here.

So what was this about Barclays I mentioned earlier? Well The Ecologist had an article this last week "Barclays 'making up to £340 million profit' on food price speculation" by Tom Levitt. Here's what he writes after WDM release a new report: "High-street customers could be subsidising the role of Barclays Capital in driving up global food prices and leaving millions facing hunger and malnutrition, says campaign group. Barclays could be making as much as £340 million a year in profit through gambling on the price of key commodity crops like coffee, sugar and wheat, the Ecologist has learnt. By creating funds to allow investors to speculate on the price of food, in the same way they would invest in the shares of a company, Barclays and others are  able to bet on the price of food." See Ecologist here.

But as WDM and others have shown food commodity trading is leading to higher and more volatile prices. A World Bank report in February showed an extra 40 million people had been pushed into poverty as a result of rising food prices since June 2010.

"Barclays are proud to be the UK’s number one food gambler. They are not only making large amounts of profit from pushing up food prices but they are also actively finding new ways for other financial institutions such as pension funds to further flood the food markets with speculative cash, making a serious situation even worse." WDM food campaigner Heidi Chow.

WDM are planning protests at Barclays at their AGM on 27th April. It is clear excessive speculation must be reigned in. The government must stand up to the banks and back this vital European legislation that will curb this shameful behaviour by the banks.


Anonymous said...

New thinking needs to take place within the food commodity market.
One item that would defuse the speculation effect of hiking food prices would be to divorce speculation from food by replacing speculation with food price guarantee through insurance. The insurance policy would be coupled to farming improvements, with practices like below ground field drainage / irrigation systems which can store excess water by draining into below ground storage tanks, which can then be pumped back into crops below ground during droughts.
Improvements like these can help relieve the uncertainty of harvest due to weather.... it is and idea who's time has come.

Andy said...

A very interesting idea from the last comment...is there something I can read on that?

Anonymous said...

What's especially disturbing to me, next to the tragedy of increased poverty, hunger and starvation, is the likelihood that this Wall Street speculation will not result in criminal prosecution.

If you were to deliberately set about to throw millions into poverty and hunger, and no doubt a certain percentage into death, we might treat this as a war crime. When Wall Street does it, it's simply capitalism at work--no moral examination is necessary, no justice need be pursued.

Anonymous said...

Never thought of it as a war crime but that is what it surely is

Anonymous said...

Gotta wonder how many people read "speculation" to mean what happens within markets and supply chains after the credit from nothing has been made avaliable ? Strike the root. Money from nothing and the massive credit bubble is causal in all this. We need money from something. Money from something applies supply constraint according to market laws and market fundamentals. Money from "pen & ink" is based on man's law. Never forget the gifts of the Magi or you'll be lost at the end.