Investment newsletters are now featuring headlines like “How You Can Profit from the Global Food Crisis.” The recommended investments include agribusiness stocks and exchange-traded funds (ETFs) that speculate in agricultural commodities. These investments will no doubt do very well in the global food crisis; but before you put your money down, you may want to explore whether you will be helping to alleviate the problem or actually contributing to it. Do you really want to “invest” in starvation? In an April 23 article in the German news source Spiegel Online called “Deadly Greed: The Role of Speculators in the Global Food Crisis,” Balzli and Horning note, “Many investors . . . are simply oblivious to the fact that by investing in the global casino, they could be gambling away the daily food supply of the world’s poorest people.”
Jean Ziegler, UN Special Rapporteur on the Right to Food, has called the exploding food crisis “a silent mass murder.” In an interview in the French daily Liberation on April 14, he said, “We are heading for a very long period of rioting, conflicts [and] waves of uncontrollable regional instability marked by the despair of the most vulnerable populations.” He blamed globalization and multinationals for “monopolizing the riches of the earth,” and said that a mass uprising of starving people against their persecutors is “just as possible as the French Revolution was.”
In some places, in fact, this is already happening. In Haiti, where the cost of rice has nearly doubled since December, the prime minister was fired this month by opposition senators after more than a week of riots over the cost of staple foods. Violent protests over food prices have been set off in Bangladesh, where rice has also doubled; in the Ivory Coast, where food prices have soared by 30 to 60 percent from one week to the next; and in Egypt, Uzbekistan, Yemen, the Philippines, Thailand, Indonesia and Italy. In an April 21 Wall Street Journal article titled “Load Up the Pantry,” Brett Arends observed that the food riots now seen in the developing world could soon be affecting Americans as well. Rocketing food prices are not a passing phase but are actually accelerating. He recommends hoarding food – not because he is actually expecting a shortage, but as an investment, because “food prices are already rising here much faster than the returns you are likely to get from keeping your money in a bank or money-market fund.” Arends goes on:
“The main reason for rising prices, of course, is the surge in demand from China and India. Hundreds of millions of people are joining the middle class each year, and that means they want to eat more and better food. A secondary reason has been the growing demand for ethanol as a fuel additive. That’s soaking up some of the corn supply.”
That’s the rationale published in the Journal of Wall Street, the financial community that brought us the housing bubble, the derivatives bubble, and now the commodities bubble, producing the subprime crisis, the credit crisis, and the oil crisis. The main reason for the food crisis, says this author, is that the Chinese and Indian middle classes are eating better. Really? Rice has been the staple food of half the world for centuries, and it is hardly rich man’s fare. Moreover, according to an April 2008 analysis from the United Nations’ Food and Agriculture Organization, food consumption of grains has gone up by only one percent since 2006.
That hardly explains the fact that the price of rice has spiked by 75 percent in just two months. The price of Thai 100 per cent B grade white rice, considered the world’s benchmark, has tripled since early 2007; and it jumped 10 percent in just one week. The fact that corn is being diverted to fuel, while no doubt a contributing factor, is also insufficient to explain these sudden jumps in price. World population growth rates have dropped dramatically since the 1980s, and according to the U.N.’s Food and Agriculture Organization slot online , grain availability has continued to outpace population. Biofuels have drained off some of this grain, but biofuels did not suddenly happen, and neither did the rise of the Asian middle class. If those were the chief factors, the rise in food prices would have been gradual and predictable to match.
Another explanation for the sudden jump in grain prices, not mentioned by this Wall Street Journal writer, is suggested by William Pfaff in the April 16 International Herald Tribune:
“More fundamental is the effect of speculation in food as a commodity – like oil and precious metals. It has become a haven for financial investors fleeing from paper assets tainted by subprime mortgages and other toxic credit products. The influx of buyers drives prices and makes food unaffordable for the world’s poor. ‘Fund money flowing into agriculture has boosted prices,’ Standard Chartered Bank food commodities analyst Abah Ofon told the media. ‘It’s fashionable. This is the year of agricultural commodities.'”
The “hot money” that has fled the collapsed real estate bubble is now moving into the commodities bubble, and that includes food. “Hot money” is an influx of speculative capital in search of high rates of return, quickly moving from one market to another. It moves, however, not because the products are better (the traditional justification for price-setting according to “free market forces”) but because the speculative “spread” is better. Money is invested not in making real goods and services but simply in making more money. Food prices are being driven by speculators, and today that includes ordinary investors like you and me, who can now gamble in agricultural futures through ETFs that have opened up a lucrative market formerly available only to big investment players.
Conventional economic theory says that prices are driven up when “demand” exceeds “supply.” But in this case “demand” does not mean the number of hands reaching out for food. It means the amount of money competing for existing supplies. The global food crisis has resulted from an increase, not in the number of mouths to be fed, but simply in the price. It is the money supply that has gone up, and it is investment money in search of quick profits that is largely driving food prices up. Much of this seems to be happening in the futures market, where fund managers seek to maximize their profits by using futures contracts. Balzli and Horning explain:
“The futures market is a traditional tool for farmers to sell their harvests ahead of time. In a futures contract, quantities, prices and delivery dates are fixed, sometimes even before crops have been planted. Futures contracts allow farmers and grain wholesalers a measure of protection against adverse weather conditions and excessive price fluctuations. . . . But now speculators are taking advantage of this mechanism. They can buy futures contracts for wheat, for example, at a low price, betting that the price will go up. If the price of the grain rises by the agreed delivery date, they profit. Some experts now believe these investors have taken over the market, buying futures at unprecedented levels and driving up short-term prices. Since last August, this mechanism has led to a doubling in the price of rice.”
The authors quote grain wholesaler Greg Warner, who says what is happening now in the grain futures market is unprecedented. “What we normally have is a predictable group of sellers and buyers — mainly farmers and silo operators.” But the landscape has changed since the influx of large index funds into the futures market. “Prices keep climbing up and up.” Warner calculates that financial investors now hold the rights to two complete annual harvests of a type of grain traded in Chicago called “soft red winter wheat.” He calls these developments “stunning” and points to them as “evidence that capitalism is literally consuming itself.”