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Droughts, storms, floods – after this year's washout of a summer, it is hardly a surprise that farmers are warning of rising food prices on supermarket shelves.
The price of wheat is 16% higher than this time last year; corn costs are up 7%; and there is an increasingly fierce battle about how to make the best use of agricultural land.
But don't be fooled into thinking this is a simple tale of supply and demand – crops keeling over in the baking midwest sunshine and hungry mouths to feed thousands of miles away. The world market for food includes not just farmers and shoppers, but hundreds of millions of dollars of complex financial bets.
Wall Street's geniuses are forever looking for new products to package and sell. Over the past decade, helped by a convincing pitch about hungry Chinese factory workers and harvests ravaged by climate change, they have persuaded investors, including ordinary pension funds, to plough billions of dollars into commodities, including food.
The Institute of International Finance has estimated that by the middle of last year, $450bn of financial assets was invested in commodities – or derivatives, betting on future price movements.
In principle, there would be nothing wrong with financiers moving into the food market if it directed billions of dollars of investment towards expanding production, bringing new land into cultivation and developing new technologies to boost yields.
But – as the thoroughly mad market for mortgage-backed securities in the run-up to the credit crisis, and the resulting building boom across the US, illustrated very clearly – the price signals emerging from the stampeding herds of Wall street can be deeply misleading.
In a recent paper, provocatively titled "Don't Blame the Physical Markets," the UN's trade and development arm, Unctad, argued that the wall of money flooding into commodities has badly distorted the price signals a well-functioning market should send to producers and consumers.
"It is not commonly recognised that demand from financial investors in the commodity markets has become overwhelming during the last decade," Unctad says.
It uses a striking pair of charts to show that over the past 10 years, the prices of food, and of commodities more generally, have moved closely into synch with other financial assets, such as stocks and shares.
In 2002, west Texas oil prices, and an index of other commodities, shifted up and down largely independently of European equities – due to fluctuating supply and demand in those markets. But by the early part of this year, the three indices were moving in lockstep; and responding dramatically to each twist and turn of the ongoing eurozone crisis. "Eurozone events and market sentiment determine commodity prices, regardless of trade logistics issues, war, drought and other ongoing supply shocks," Unctad says.
In other words, the financialisation of the market for basic foodstuffs has led to prices drifting far away from the fundamentals of supply and demand, as investors treat betting on the future price of food as just another asset for their portfolio, bringing uncertainty and volatility, and masking the true balance between supply and demand.
When the sub-prime bubble burst, it wrecked the livelihoods of millions of Americans who had battled hard to afford their own home. But in this case, it is the very lives of poor consumers that are at stake, as the price of food zig-zags about because of all-but-irrelevant events in Brussels or Berlin.
Unctad urges the world's regulators to take a series of measures to check speculation. One of the steps it recommends, a financial transaction tax, now looks almost certain to be adopted by a coalition of at least 11 willing European countries, though it seems most likely that trading will simply shift to other jurisdictions – including the UK.
Any tougher crackdown – forcing greater transparency about who is betting on what, with whom, for example – looks highly likely to be scuppered by the same kind of concerted lobbying that sank proposals for regulating other derivatives markets in the years before the crisis.
In the US, for example, the Commodity Futures Trading Commission is facing a legal battle over its attempts to impose "position limits", constraining the share of the market single investors can hold in a number of commodities, including corn and cocoa. The proposal was struck down by a court in Washington, in a case brought by several financial sector trade bodies – though the CFTC has not given up on introducing position limits in some form.
As the world struggles to adapt to a changing climate, and a rapidly expanding population with shifting nutritional needs, it is as important as it has ever been to ensure that farmers, policymakers and consumers are receiving the right signals about supply and demand.
But as we should now have learned repeatedly, allowing the financiers to pile in en masse brings not the hard-nosed judgement of the market, but uncertainty, chaos and confusion.
Comments
14 October 2012 1:11AM
And that's all you need to know really.
The finance crash didn't burn anyone other than those of us unfortunate enough not to be able to afford lobbyists. The same thing is clearly going to happen again.
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Share14 October 2012 2:37AM
So if 2013 is a repeat of 2012 will said financial groups be tried for genocide?
Sad and disconnected world we have created here :-(
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Share14 October 2012 2:39AM
also we should reconsider our approach to biofuels. right now it seems to be an utter irresponsibility and cruelty to continue supporting that idea, which 10-15 years ago were considered as a solution for diminishing oil reserves.
we are starting to live in interesting times :/ (like chinese proverb says)
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Share14 October 2012 3:50AM
I don't understand on what level we can all accept it as ethical that there is even a commodities market for food, considering what's at stake. Seriously, take a step back and explain to me how that is ethical.
People's lives are at stake, pegged to the whim of the 'market', chained to a bunch of traders in the city of London and Wall st, and a bunch of computers that are programmed to buy and sell in the blink of an eye.
As BIll Mollison said, "The only ethical decision is to take responsibility for our own existence and that of our children". By which he means provide for them directly (not relying on others) and preserve our natural environment which provides the necessary preconditions for life - without which our precious 'market' could not exist.
The food crisis is a problem we already have the answer to. We have the technology, we have the knowledge, and we have the experience - we just seemingly lack the will to change to sustainable, diverse, polycultural systems of food production that will give us the resiliency that we need to continue. Research permaculture for example. The solutions are not complex.
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Share14 October 2012 3:51AM
Huples, you raise an interesting point. What I would find more curious would be to heard the attitudes of the 'hang 'em, flog 'em ' brigade that made itself known over at the Gary McKinnon thread. What would they say to the prosecution of those of greater wealth, greater power, and greater social status than them? Would they join in, or more likely, would they suddenly turn into a bunch of wet liberals and once more reveal themselves to be the sniveling, hypocritical, little bullies that we know them all to be.
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Share14 October 2012 7:24AM
So no coincidence that the human population is the highest ever and still increasing?
Too many humans too little planet
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