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World food crisis rerun?
Food prices have
been rising since 2003. By mid-2008, the food commodity price index peaked at 230
percent of its 2002 value, with most of the increase due to the grain prices. Corn
and wheat both reached 350 percent and rice 530 percent respectively of their
2002 values . The United Nations declared 2008 the year of the global food
crisis even before prices peaked , and an estimated 150 million were added
to the world’s hungry that year . Although food prices have fallen from their
peak, they remained well above 2002 levels;. By the end of 2009, more than a
billion people are critically hungry, with 24 000 dying of hunger each day, over
half of them children [3, 4]. The UN Food Programme
faces a budget shortfall of US$4.1 billion.
UN’s special rapporteur on the right to food Olivier de
Schutter blames  “inaction to halt speculation on agricultural commodities
and continued biofuels policies”, and warns of a rerun of the 2008 food price
crisis in 2010 or 2011. What happened in 2007-8 was a “price crisis, not a food
crisis”, he says, precipitated by speculation in the financial market that was
not linked to insufficient food being produced.
would be a mistake to dismiss other threats to food production, notably the
inherently unsustainable “green revolution” agricultural model that is highly
dependent on rapidly depleting resources such as fossil fuels and water, and monoculture
crops especially vulnerable to physical and biological stresses associated with
climate change (see  ‘Land Rush’ as Threats to
Food Security Intensify). Nonetheless, the disproportionate influence of
the unregulated financial market on the real economy of goods and services (see
 Financing Poverty,
SiS 40) is most devastating for people’s access to food, a basic
commodity food trade and its deregulation
Food is produced
by farmers everywhere in the world; but it is mostly bought and sold as
commodities by ‘middlemen’, now mostly big corporations that trade globally,
not just in a commodities market, but also in an elaborate financial derivatives
market that pushes food prices up and creates price volatility.
are the raw materials while ‘commodities
derivatives’ are financial contracts derived from the value of the underlying
commodity . At the bottom of the commodities derivatives is the ‘futures’
contract, which brings together buyers and sellers in a regulated auction market
like the Chicago Board of Trade (CBOT) in the United States, to bid and settle
a price for the delivery of a quantity of a commodity, say corn, at an agreed
time (usually 90 days) and place. This futures contract enables commodity
sellers, such as grain elevator operators, to avoid sudden price drops and
commodity users or traders to avoid sudden price increases; and is generally
regarded as a kind of insurance. But it ceased to work as such after the deregulation
of the global agricultural markets.
The deregulation of global agricultural markets was part
of the economic deregulation driven by the World Trade Organization (WTO), the
World Bank and the International Monetary Fund. It was a process initiated by
the Breton Woods Agreements of 1944 to standardize international trade and
marketing policies to facilitate global trade . It eliminated government
intervention in agricultural markets, dismantling global commodity agreements,
price supports, and other mechanisms that had helped stabilize global supplies
and prices. The WTO’s Agreement on Agriculture, and other multi-lateral and
bilateral free-trade agreements including the North American Free Trade
Agreement (NAFTA), opened up markets in the developing world to an increasingly
powerful global agribusiness industry.
consequence of deregulation was  “to replace local market access for the
majority of small farmers with global market access for a few global transnational
companies. Thanks to non-existent anti-trust enforcement and rampant vertical integration,
[t]hree companies - Cargill, Archer Daniels Midland (ADM), and Bung - control
the vast majority of global grain trading, while Monsanto controls more than
one-fifth of the global market in seeds.”
may have benefited from a windfall in higher prices paid for their produce in
the short term, but they have had to pay more for inputs like fertilizers and diesel
for tractors. Only big agribusiness corporations could profit from the long
term rise in the market [10, 11]. Cargill’s 2007 third-quarter profits
increased 86 percent, General Mills’ were up 60 percent, and Monsanto’s 45
percent. Bunge saw profits of the last quarter of 2007 increase by 77 percent
compared with the same period of the previous year. ADM, the second largest
grain trader in the world gained a 65 percent rise in profits to a record
US$2.2 billion. Thailand’s Charoen Pokphand Foods, a big player in Asia, predicted a revenue growth of 237 percent for 2008.
Deregulation in the agricultural market is worse than the
financial market, as the Organic Consumer Association points out ; while US
Federal Reserve and central bankers across the globe still maintain the ability
“to soften the spikes and plunges of our monetary system”, no such buffer
exists in food markets. Grain reserves that helped stabilize prices for
centuries have been allowed to drop, and are now at their lowest in three
After the mortgage crisis that tumbled stock markets across
the world, investors put their money instead into commodities, and to cash in
on the new biofuels boom. Grain traders started withholding supplies in the
hope of higher prices, knowing that grain reserves were down, and prices
volatile. At the same time, speculative investors began hedging their bets on grain
futures, driving up prices even further. The biofuels boom has exacerbated
speculation and high prices, but that boom would not have been possible without
a deregulated global market .
top tier of big unregulated players
has brought even bigger players to the derivatives market, the big investment
banks. Steve Suppen of International Institute for
Agriculture and Trade Policy points out that these big, unregulated, financial
institutions – non-commodity users - now dominate the commodities markets much
more than the commodity users [12, 13]. In March 2008, Goldman Sachs (charged for
fraud over sales of ‘toxic’ mortgages ) and Morgan Stanley owned 1.5
billion bushels of Chicago Board of Trade corn futures contracts, while all the
regulated hedgers together owned only 11 million bushels (a ratio of 136:1). These investment banks operate
through commodity index funds that bundle together up to 24 agricultural
and non-agricultural commodities in a single investment portfolio that usually bets on prices to go up.
As the component contracts are about to expire - 90 days for agricultural
futures, six months for non-agricultural commodities - the banks sell the contracts
to take profits, creating price volatility in the wake of selling. Since 2003, commodity
index speculation has increased 1 900 percent, from an estimated $13 billion to
Economist Christopher Gilbert
at the University of Trento in Italy  is among those calling attention to
these unregulated index-based investment in commodity futures that controlled
33 percent of all US agricultural futures contracts in 2006-2008, but are not
yet incorporated into academic market models.
In June 2008, financier, philanthropist
and author George Soros testified to US Congress that investment in instruments
linked to commodity indices had become the “elephant in the room”, arguing that
they might exaggerate price rises . The commodity-index
investment funds, though the sheer amount of money involved, both increased
commodity prices and made them so volatile that many physical hedgers such as
grain importers, particularly from developing countries, could no longer use
the futures markets to manage price risk . The UN Food and Agriculture
Organization estimated that the developing country’s food import bill rose from
$191 billion in 2006 to $254 billion in 2007.
“Investment banks play the
market not to manage inherent commodities price volatility (e.g., weather
related), but to induce volatility through huge “bets” allowed by financial
services deregulation.” Suppen writes . Commodity prices rose with their
bets until July 2008. When aggregate commodities prices fell from their July
peak by 60 percent in mid-November, these banks lost their bets, and had to ask
the government for taxpayer bailouts. By then, according to The Wall Street
Journal, commodities speculation had contributed $1.5 billion to each
investment bank , about a third of their projected net income in 2008.
Regulation at last?
In May 2008, the
newly appointed chair of the Commodities Futures Trading Commission (CFTC) Gary
Gensler, a former Goldman Sachs partner, proposed new regulatory measures on over-the-counter
(OTC) trades, and capital reserve requirements to cover losses. OTC trades take
place between private parties; they are unreported and not cleared on a public,
regulated exchange. An
estimated 85-90 percent of non-commercial investment (by investment banks) in
commodities markets occurs through OTC trades, about which the CFTC has no data
and over which it has no authority. In other words, the CFTC has little or no
information on the quantity of OTC contracts and the credit-worthiness of the
parties to those contracts; so insolvent parties may well continue to depend on
the government to bail them out of their imprudent trades. Goldman Sachs and Lehman
brothers were among a handful of banks that were exempted from prudential
capital reserve requirements in 2004 by the US Securities Exchange Commission. This
led to extremely high debt ratios relative to reserves and other equity
Gensler’s proposal, OTC trades are still allowed, but the criteria for reported
price risk managements between private parties will be tightened; at the same
time capital reserve requirements to cover losses will be increased.
The UN Conference on Trade and
Development (UNCTAD) has gone one step further, calling for an international
agreement to prevent excessive speculation in commodities markets. The
agreement could be financed by a Financial Transactions Tax (FTT), which if
applied by national exchanges to the commodities futures share of all financial
transactions in 2007 at a rate of .01 percent, would have generated about $10
billion. An FTT would have an added benefit of reducing the frequency of
trading, one of the drivers of price volatility.
Policies on food and energy security
To put world
trade commodity in perspective, the total world grains output in 2009 was 2
122.99 Mt, of which only 275.59 Mt, i.e., 13 percent was traded on the global
commodity market . It is absurd that so much taxpayers’ money and
bureaucratic effort is dedicated to global trade and its regulation, which end
up profiting agribusiness and big banks and starving people, many of whom the
very farmers and farm workers that produce the grain. Of the one billion hungry,
half are small farmers, a quarter are landless labourers
working on plantations and the rest are urban poor who have migrated from rural
areas because they can no longer find a living there .
UN special rapporteur on the right to food notes  that many developing
countries, previously exporters of food, have become net importers because they
were convinced they could always buy food at cheap prices on the international
market, an illusion shattered by the global food crisis of 2007/8.He says
those countries are now re-orienting investments toward feeding themselves, and
it is vital for them to “decrease their dependency on the international
inter-governmental agencies need to devote much more effort towards promoting
self-sufficiency in food and sustainability in agriculture instead of trade, or
only promoting trade when the food needs of its own people are satisfied. Food
and energy self-sufficiency should be the most important step to sustainable
development (see  (Sustainable Agriculture and
the Green Economy, paper presented at Multi-year Expert Meeting on
Commodities and Development, 24-25 March 2010, UNCTAD, Geneva, available
for download here).
Governments need to put in place a variety of policies and
practical action programmes that support small-scale organic,
agro-ecological farming, improve access to land and land tenure for small
farmers, encourage local production and consumption for both food and green
energies, recover indigenous crop varieties adapted to local conditions and
hence much more resistant and resilient to climate change than industrial
monoculture crops, stimulate local markets and help establish consumer-farmer
cooperatives, and promote regional trade and cooperation in sharing resources
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