Casino Capitalism and Crops

Three years ago, people in the village of Gumbi in western Malawi went unexpectedly hungry. There had been no drought and there was plenty of food in the markets. There was no evidence that the local merchants were hoarding food. For no obvious reason the price of staple foods such as maize and rice nearly doubled in a few months. UN and food experts came up with their explanations that US farmers had taken millions of acres of land out of production to grow biofuels for vehicles, that oil and fertiliser prices had risen steeply, that the Chinese were shifting to meat-eating from a vegetarian diet, that climate-change linked droughts were affecting major crop-growing areas. However, the International Grain Council says global production of wheat actually increased at the time. Nor was it because demand grew as Professor Jayati Ghosh of the Centre for Economic Studies in New Delhi has shown, demand actually fell by 3 per cent.

The UN said that an extra 75 million people became malnourished because of the price rises.

Olivier de Schutter, UN rapporteur on the right to food, is in no doubt that speculators are behind the surging prices. "Prices of wheat, maize and rice have increased very significantly but this is not linked to low stock levels or harvests, but rather to traders reacting to information and speculating on the markets".
Professor Jayati Ghosh's research shows that speculation was "the main cause" of the rise as some crops such as millet ,cassava and poatoes are not traded on the futures markets and their price rose only a fraction of the others which were traded

The same banks, hedge funds and financiers whose speculation on the global money markets caused the sub-prime mortgage crisis are causing food prices to yo-yo and inflate. They are taking advantage of the deregulation of global commodity markets and are making billions from speculating on food and causing misery around the world. Following heavy lobbying by banks, hedge funds and free market politicians in the US and Britain, the regulations on commodity markets were steadily abolished. Contracts to buy and sell foods were turned into "derivatives" that could be bought and sold among traders who had nothing to do with agriculture. In effect a new, unreal market in "food speculation" was born. Cocoa, fruit juices, sugar, staples, meat and coffee are all now global commodities, along with oil, gold and metals. In 2006 came the US sub-prime disaster and banks and traders stampeded to move billions of dollars in pension funds and equities into safe commodities, especially foods. In 2006, financial speculators like Goldmans pulled out of the collapsing US real estate market. They reckoned food prices would stay steady or rise while the rest of the economy tanked, so they switched their funds there. Suddenly, the world's frightened investors stampeded on to this ground. So while the supply and demand of food stayed pretty much the same, the supply and demand for derivatives based on food massively rose – which meant the all-rolled-into-one price shot up, and the starvation began. The bubble only burst in March 2008 when the situation got so bad in the US that the speculators had to slash their spending to cover their losses back home. The speculative food market is truly vast. Hilda Ochoa-Brillembourg, president of the Strategic Investment Group estimates speculative demand for commodity futures has increased since 2008 by 40-80% in agricultural futures.

Farmers at one time engaged in a process where to protect themselves against risk, Farmer Giles agreed in January to sell his crop to a trader in August at a fixed price. If he has a great summer, he'll lose some cash, but if there's a lousy summer or the global price collapses, he'll do well from the deal. When this process was tightly regulated and only companies with a direct interest in the field could get involved, it worked . These days Farmer Giles still agrees to sell his crop in advance to a trader for £10,000. But now, that contract can be sold on to speculators, who treat the contract itself as an object of potential wealth. Goldman Sachs can buy it and sell it on for £20,000 to Deutsche Bank, who sell it on for £30,000 to Merrill Lynch – and on and on until it seems to bear almost no relationship to Farmer Giles's crop at all. Until deregulation, the price for food was set by the forces of supply and demand for food itself. This was , of course , already deeply imperfect since it left a billion people hungry. But after deregulation, it was no longer just a market in food. It became, at the same time, a market in food contracts based on theoretical future crops – and the speculators drove the price sky-high.

Mike Masters, fund manager at Masters Capital Management, says the markets are now heavily distorted by investment banks: "Let's say news comes about bad crops and rain somewhere. Normally the price would rise about $1 a bushel. But when you have a 70-80% speculative market it goes up $2-3 to account for the extra costs. It adds to the volatility. It will end badly as all Wall Street fads do. It's going to blow up."

Ann Berg, one of the world's most experienced futures traders, argues "There is no way of knowing exactly what is happening. We had the housing bubble and the credit default. The commodities market is another lucrative playing field where traders take a fee. It's a sensitive issue. Some countries buy direct from the markets. As a friend of mine says: 'What for a poor man is a crust, for a rich man is a securitised asset class.' "

Yet one thing we do know as Deborah Doane, director of the World Development Movement explains "People die from hunger while the banks make a killing from betting on food,"

The world's wealthiest speculators set up a casino where the chips are the stomachs of hundreds of millions of innocent people. They gamble on increasing starvation. It was only a matter of time before this all happens again. Food prices once more soar again to and beyond 2008 levels. Just how many people will it kill this time?

Taken from here and here