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The trading frenzy that sent prices soaring

Iain Macwhirter

Published 17 April 2008

Iain Macwhirter on why the price of basic foodstuffs rocketed, from London to Haiti

Four people were killed in food riots in Haiti. From Bolivia to Uzbekistan there have been violent protests against the doubling of food prices. In Italy, mothers are marching against the price of pasta. The World Food Programme has seized up and the World Bank on 13 April forecast that 100 million people face starvation. It should not have come as a surprise.

Conventional explanations for the food crisis range from climate change to dietary change in China, from global overpopulation to the switch of agricultural production to biofuels. These long-term factors are important but they are not the real reasons why food prices have doubled or why India is rationing rice or why British farmers are killing pigs for which they can't afford feedstocks. It's the credit crisis.

This latest food emergency has developed in an incredibly short space of time - essentially over the past 18 months. The reason for food "shortages" is speculation in commodity futures following the collapse of the financial derivatives markets. Desperate for quick returns, dealers are taking trillions of dollars out of equities and mortgage bonds and ploughing them into food and raw materials. It's called the "commodities super-cycle" on Wall Street, and it is likely to cause starvation on an epic scale.

The rocketing price of wheat, soybeans, sugar, coffee - you name it - is a direct result of debt defaults that have caused financial panic in the west and encouraged investors to seek "stores of value". These range from gold and oil at one end to corn, cocoa and cattle at the other; speculators are even placing bets on water prices.

Just like the boom in house prices, commodity price inflation feeds on itself. The more prices rise, and big profits are made, the more others invest, hoping for big returns. Look at the financial websites: everyone and their mother is piling into commodities. It is the great bull market of the Noughties. The trouble is that if you are one of the 2.8 billion people, almost half the world's population, who live on less than $2 a day, you may pay for these profits with your life.

This speculation doesn't happen on its own, however. Commodities such as gold and oil are favourite "hedges" against falling currencies. But this time all manner of other commodities, such as wheat and rice, have been swept along in the inflationary slipstream.

Investment houses, pension funds, private equity groups and banks are driven by profit not morality, and they invest wherever they can see the biggest return. It is not a conspiracy, but it is a conscious strategy, backed by the central bankers of the west as they try to help Wall Street back on its feet. Put another way, the banks are exporting our debts to the developing world. The collapse of the dollar means that most international commodities are more expensive for poor people to buy. The dollar's decline is a direct result of the low interest rate policy of the US Federal Reserve and the Bank of England, which shockingly cut interest rates on 10 April even as inflation spiralled.

When interest rates are below the rate of inflation, investors have to keep moving their funds from sector to sector in search of higher returns. In the 1990s they piled into internet stocks. When that bubble burst in the 2000 stock-market crash, they shifted into property and complex collateralised debt dealing based on US "sub-prime" mortgages. Now, with the collapse of the property bubble - not just in the US but across the world - investors are on the move again, and the only place left is commodities. It's the third bubble and it's hitting the developing world hard.

There are other reasons for food shortages: the diversion to biofuels because of the depletion of oil reserves, the increasing population, changing eating habits in south-east Asia - all these are putting long-term pressure on agricultural resources. But the efforts of institutions such as the US Federal Reserve to revive the economy on the back of a commodities boom have dramatically speeded up global inflation.

Will it work? Will the new "asset bubble" restore the profits of the banks and revive the US economy? In the short term, possibly yes - but at terrible human cost. In the end, the US may be cutting its own throat. Once speculative prices get out of control, there is no knowing when they will stop. Oil is now more than $100 a barrel. Resource-rich countries such as Russia are suddenly world powers again. Hungry people are desperate people. This might be the bubble to end all bubbles.

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10 comments from readers

Pierre
17 April 2008 at 13:43

The world is overpopulated by at least 3 billion people....................

writeon
17 April 2008 at 21:31

I believe the rocketing price of food is yet another symptom of the collapse of the neo-liberal economic model we've suffered under for the last thirty odd years. The system is collapsing around our ears and has no sustainable future. We have a stark choice ahead as a civilization, either we develope some kind of socialism and turn away from crass consumerism, or we slide into chaos, anarchy and eventually global warfare on a massive scale.

However, reversing the last thirty years of Reaganism/Thatchrism is going to be very difficult as so many among the ruling elite have profitted so wildly from it. Before it's too late ordinary people have to sieze power and re-introduce Democracy once more, so we create a society that benefits the majority and not the super-rich minority. We are entering a prolonged era of scarcity and instability, where ordinary people will suffer greatly. The time for reforming the current system has passed, no the only real alternative to market bararism is Revolution.

supercorm
18 April 2008 at 03:06

Right, like communism is the best system to fight food shortage (!!!).

Stop bio fuel, which is a bad alternative anyway.

More taxes on meat. I am a meat lover, but you gotta admit a beef eat a lot of grains. The return is not that great.

Tax overweight people. I believe a $100 tax for every 25 extra pounds should force some to consume less. You want to be fat and starve people around the world, pay for it.

supercorm
18 April 2008 at 03:08

Stop bio-fuel. Its a bad alternative anyway as it pollute even more and less grains are available for food.

Special tax on meat ... I love a good steak, but producing beef is not efficient onsidering the huge amount of grains pigs and Beef consume ...

Tax fat ... $100 for every 25 extra pounds ... will incite some to eat less and go back in shape. You want to eat like a pig and starve people out around the world, then pay for it.

writeon
18 April 2008 at 07:58

The problem is we have an economic and social model based on infinite growth on an ecosystem/planet that is finite. Roughly speaking if everyone was to adopt or strive for a sandard of living comparable to that of the United States, which is, after all the model we have adopted globally as the norm, then we will need another four planets like Earth to satisfy our desire/dream. Where are these extra planets going to come from? I find it difficult to imagine a way we can conjure another four planets out of thin air, does anyone really, seriously believe that technological progress is going to cover this shortfall? The truth is we are going to find it extremely difficult to just stay where we are, let alone factor in even more economic growth and China and India adopting US lifestyles and rates of consumption of energy and other resources.

We are going to need very different form of social and ecnomic organization where scarce and limited resources are distributed on a just and equitable basis. Energy, food, water, jobs, will require some form of rationing and control. We could start by radically slashing the extraordinarily wasteful expenditure on the world's military and diverting these resources towards food production and developing alternative forms of energy to fossil fuels. Britain could lead the way by cutting military funding by fifty percent to start with and rejecting the doctrine of 'humanitarian imperialism' definitively. The answer to the world's problems isn't more imperialism and militerism, fighting and destroying to control our unfair share of scarce resources, it's the opposite. We can choose between democratic socialism and barbarism, and unfortunately our current bunch of leaders will choose the later course because imperialism is Capitalism in war-mode and the democratic socialist alternative would require another form of society, and perhaps more importantly, a different form of elite rule.

spad600
18 April 2008 at 16:26

From a nation that is literally eating itself to death, further evidence that we are basically just too greedy...

Douglas Chalmers
18 April 2008 at 19:18

Here are some basic links regarding "man-made famines" of the 20th century:-

http://en.wikipedia.org/wiki/Bengal_famine_of_1943

http://en.wikipedia.org/wiki/Holodomor

http://en.wikipedia.org/wiki/Great_Leap_Forward

and the latest real reason......... http://en.wikipedia.org/wiki/Overpopulation

Mr
20 April 2008 at 04:45

"It's the credit crisis"?

Utter baloney. This would only translate into more expensive food in the shops if the big-time speculators described were hoarding it, yet world grain stocks are at a record low - see http://www.earth-policy.org/Updates/2008/Update72.htm.

Those people hoarding grain, e.g. in the developing world, are a quite separate category, doing so only because of the prices already spiking.

Carl Jones
20 April 2008 at 12:11

This is what I was posting over two years ago on the BBC Today message board.

Oil prices are much higher than they need to be. For many years, the MSM used Iraq for an excuse. China has become a factor. But OPEC says present production is correct.

Second and Third World farmers have much higher cost due to oil. Local consumers have no slack in their budget, so can only reduce the food they would normally by, so farmers sell less food and as a consequence, they grow less food for their local market.

Some countries have stopped exporting food. India has stopped all rice exports, apart from Basmati. These export blocks are only a short term solution, In the long term, food production will decline further.

The Bush neocon policy on biofuels and the rigged oil price, is a pincer attack on a rising global population.

Many people, not just those in countries affected by food riots, will now be limiting the number of children they plan to have, or will have stopped starting a family.

Alex Brummer in his latest NS article, talks about the IMF. Pay attention to the end of his article and then read my comment. This is an example of how poorly people understand the issues and then blathers about stupid solutions...of course, its an excellent NWO solution.

http://www.rumormillnews.com/cgi-bin/forums.cgi?read=122824

Now ask yourself where the price of oil is set?

Its a NWO construct, just like the sham war on terror.

Tom Usher
25 April 2008 at 09:49

There is a financial bubble in commodities, but there is also a real shortage. We have what has developed into a just-in-time food system. The capitalists don't want money tied up in inventory (grain stocks) any more than they think they have to. They want to turn over their inventory as quickly as possible. It's the Wal-Mart model writ globally. It's selfishness rather than thinking about the general welfare of all. It's the so-called self-regulating/self-correcting system that Milton Friedman ignorantly and even callously touted.

Real Liberal Christian Church

http://www.realliberalchristianchurch.org/wordpress

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