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The real hunger games: How banks gamble on food prices - and the poor lose out
In the last decade, financiers have speculated billions of pounds in food, helping to make prices dearer and more volatile
Grace Livingstone
Sunday 01 April 2012
Speculation by large investment banks is driving up food prices for
the world's poorest people, tipping millions into hunger and
poverty. Investment in food commodities by banks and hedge funds has
risen from $65bn to $126bn (£41bn to £79bn) in the past five
years, helping to push prices to 30-year highs and causing sharp price
fluctuations that have little to do with the actual supply of food,
says the United Nations' leading expert on food.
Hedge funds, pension funds and investment banks such as Goldman Sachs,
Morgan Stanley and Barclays Capital now dominate the food commodities
markets, dwarfing the amount traded by actual food producers and
buyers. Purely financial players, for example, account for 61 per cent
of investment on the wheat futures market, according to the World
Development Movement report Broken Markets.
Speculative investment in agricultural commodities in 2011 was 20
times the amount spent by all countries on agricultural aid. Goldman
Sachs, the largest player in the agricultural commodities market,
earned £600m from food speculation in 2009, and Barclays Capital,
the world's third-largest player and largest British bank in this
market, earned up to £340m in 2010, according to the
report. Goldman Sachs and Barclays Capital declined to comment.
Before it was deregulated in the year 2000, the agricultural
commodities futures market was used mainly by farmers and food buyers
seeking to insure themselves against changes in the prices of products
such as wheat, maize and sugar. When George W Bush passed the
Commodities Futures Modernization Act 12 years ago, there was an
influx, led by Goldman Sachs, of purely financial players who had no
interest in ever buying food, but who sought solely to profit from
changes in food prices, says Olivier De Schutter, the UN special
rapporteur on the right to food.
He added: "What we are seeing now is that these financial markets have
developed massively with the arrival of these new financial investors,
who are purely interested in the short-term monetary gain and are not
really interested in the physical thing - they never actually buy the
ton of wheat or maize; they only buy a promise to buy or to sell. The
result of this financialisation of the commodities market is that the
prices of the products respond increasingly to a purely speculative
logic. This explains why in very short periods of time we see prices
spiking or bubbles exploding, because prices are less and less
determined by the real match between supply and demand."
Food prices reached a 30-year high in 2008, sparking food riots from
Mexico to Bangladesh. Prices rose even higher in September 2010 and,
although they have dipped since, they remain above the 2008 crisis
level. This has resulted in a "silent tsunami of hunger", according to
the UN World Food Programme. High prices for basic foodstuffs,
combined with the global economic slump, have pushed 115 million more
people into hunger and poverty since 2008, bringing the total number
of hungry people in the world today to 925 million.
High prices are "an absolute catastrophe" for poor consumers, says De
Schutter, because they typically spend more than 60 per cent of their
household budget on food.
It is not just the places normally associated with food crises that
are feeling the effect of the speculators. According to Oxfam, in
Armenia, between September 2010 and September 2011, the prices of
basic foodstuffs rose as follows: sugar 46 per cent; eggs 49 per cent;
cheese 38 per cent; pork 34 per cent; milk powder 30 per cent; and
butter 26 per cent. The result was that all income groups in Armenia
reduced food consumption: the poor by 14 per cent, and even
middle-income groups by 5 per cent.
Karen Badishyan, from Gyumri, is an economist with a doctorate, and is
married with two children. He said: "Seventy per cent of our household
budget is spent on food and so we need to save more and more and we
really lack money. We've borrowed a lot of money and we have no idea
how we will pay it back. In Armenia, even if you have a job and work
hard, your salary is too low to give your family a decent standard of
living."
Violet Waithira is a Kenyan, unemployed, single mother looking after
her eight-year-old daughter and 83-year-old father. When prices rose
sharply in Kenya recently, the family were forced to drastically cut
back: "We stopped eating lunch, and saved the little we had to eat for
supper. We drank tea without sugar and sometimes we also missed
breakfast. I had to travel so much to wash clothes to get money for
food, but sometimes I was so weak I fell down. For supper, we had one
or two cups of flour mixed with water and salt. Our life was so hard."
There have been many reasons for high food prices in Kenya, including
post-election violence and drought, says Njoki Njoroge Njehu of the
Daughters of Mumbi Global Resource Centre, but there were also global
factors: "Corporations were speculating on food and made a lot of
money. But it was done at the expense of ordinary people in Kenya, in
Mexico, in Argentina and other places where there were food riots."
Experts disagree on whether speculation actually causes price rises or
simply aggravates other factors such as climate shocks, the rise in
world demand for food and the growth of biofuels. Jayati Ghosh,
professor of economics at Jawaharlal Nehru University in New Delhi,
was one of 450 economists who last year called on the G20 to regulate
the commodities market. She says that, although factors such as
biofuels are important, speculation is now another "driving force"
behind price hikes. She cites the example of world wheat prices
doubling between June and December 2010, even though there was no fall
in the global supply of wheat.
David Hallam of the UN's Food and Agriculture Organization says that
while he does not believe speculation is the cause of price rises, it
does exacerbate swings in prices and should be regulated. "If you have
something which is amplifying price movements, then that is a terribly
important issue that needs to be addressed."
The Obama administration introduced regulation of commodity trading as
part of the Dodd-Frank Act, passed in 2010. However, legal challenges
by Wall Street mean the regulations have not yet come into force. The
G20 summit last June made a commitment to introduce so-called
"position limits" which cap the number of agricultural commodities
contracts any one investor can buy, but as yet no country, apart from
the United States, has adopted these. The one measure taken by the G20
is the creation of the Agricultural Markets Information System, which
pools data about crop levels or bad harvests from around the world to
try to prevent misinformation or rumours sparking panics on the
markets.
The European Union is currently discussing regulation of the
commodities market. Christine Haigh, a campaigner from the World
Development Movement, says the EU's proposals "need more teeth", but
there is "still all to play for". The WDM is particularly concerned
that Britain is advocating a weaker form of regulation known as
"position management", rather than strict caps. "The food-price spikes
we have seen over the past few years have had a devastating impact on
the world's poorest people and it is morally abhorrent that banks and
other financial institutions are contributing to that. It is vital
that we get proper regulation of these markets," she says.
Making the market more transparent is also essential, says the UN's
food rapporteur. At present, 82 per cent of trading in the European
commodities market is "over-the-counter" - private deals made between
two parties that are not registered on any exchange. This makes it
impossible to see what's driving the price changes.
The real hunger games: How banks gamble on food prices - and the poor lose out
In the last decade, financiers have speculated billions of pounds in food, helping to make prices dearer and more volatile
Grace Livingstone
Sunday 01 April 2012
Speculation by large investment banks is driving up food prices for
the world's poorest people, tipping millions into hunger and
poverty. Investment in food commodities by banks and hedge funds has
risen from $65bn to $126bn (£41bn to £79bn) in the past five
years, helping to push prices to 30-year highs and causing sharp price
fluctuations that have little to do with the actual supply of food,
says the United Nations' leading expert on food.
Hedge funds, pension funds and investment banks such as Goldman Sachs,
Morgan Stanley and Barclays Capital now dominate the food commodities
markets, dwarfing the amount traded by actual food producers and
buyers. Purely financial players, for example, account for 61 per cent
of investment on the wheat futures market, according to the World
Development Movement report Broken Markets.
Speculative investment in agricultural commodities in 2011 was 20
times the amount spent by all countries on agricultural aid. Goldman
Sachs, the largest player in the agricultural commodities market,
earned £600m from food speculation in 2009, and Barclays Capital,
the world's third-largest player and largest British bank in this
market, earned up to £340m in 2010, according to the
report. Goldman Sachs and Barclays Capital declined to comment.
Before it was deregulated in the year 2000, the agricultural
commodities futures market was used mainly by farmers and food buyers
seeking to insure themselves against changes in the prices of products
such as wheat, maize and sugar. When George W Bush passed the
Commodities Futures Modernization Act 12 years ago, there was an
influx, led by Goldman Sachs, of purely financial players who had no
interest in ever buying food, but who sought solely to profit from
changes in food prices, says Olivier De Schutter, the UN special
rapporteur on the right to food.
He added: "What we are seeing now is that these financial markets have
developed massively with the arrival of these new financial investors,
who are purely interested in the short-term monetary gain and are not
really interested in the physical thing - they never actually buy the
ton of wheat or maize; they only buy a promise to buy or to sell. The
result of this financialisation of the commodities market is that the
prices of the products respond increasingly to a purely speculative
logic. This explains why in very short periods of time we see prices
spiking or bubbles exploding, because prices are less and less
determined by the real match between supply and demand."
Food prices reached a 30-year high in 2008, sparking food riots from
Mexico to Bangladesh. Prices rose even higher in September 2010 and,
although they have dipped since, they remain above the 2008 crisis
level. This has resulted in a "silent tsunami of hunger", according to
the UN World Food Programme. High prices for basic foodstuffs,
combined with the global economic slump, have pushed 115 million more
people into hunger and poverty since 2008, bringing the total number
of hungry people in the world today to 925 million.
High prices are "an absolute catastrophe" for poor consumers, says De
Schutter, because they typically spend more than 60 per cent of their
household budget on food.
It is not just the places normally associated with food crises that
are feeling the effect of the speculators. According to Oxfam, in
Armenia, between September 2010 and September 2011, the prices of
basic foodstuffs rose as follows: sugar 46 per cent; eggs 49 per cent;
cheese 38 per cent; pork 34 per cent; milk powder 30 per cent; and
butter 26 per cent. The result was that all income groups in Armenia
reduced food consumption: the poor by 14 per cent, and even
middle-income groups by 5 per cent.
Karen Badishyan, from Gyumri, is an economist with a doctorate, and is
married with two children. He said: "Seventy per cent of our household
budget is spent on food and so we need to save more and more and we
really lack money. We've borrowed a lot of money and we have no idea
how we will pay it back. In Armenia, even if you have a job and work
hard, your salary is too low to give your family a decent standard of
living."
Violet Waithira is a Kenyan, unemployed, single mother looking after
her eight-year-old daughter and 83-year-old father. When prices rose
sharply in Kenya recently, the family were forced to drastically cut
back: "We stopped eating lunch, and saved the little we had to eat for
supper. We drank tea without sugar and sometimes we also missed
breakfast. I had to travel so much to wash clothes to get money for
food, but sometimes I was so weak I fell down. For supper, we had one
or two cups of flour mixed with water and salt. Our life was so hard."
There have been many reasons for high food prices in Kenya, including
post-election violence and drought, says Njoki Njoroge Njehu of the
Daughters of Mumbi Global Resource Centre, but there were also global
factors: "Corporations were speculating on food and made a lot of
money. But it was done at the expense of ordinary people in Kenya, in
Mexico, in Argentina and other places where there were food riots."
Experts disagree on whether speculation actually causes price rises or
simply aggravates other factors such as climate shocks, the rise in
world demand for food and the growth of biofuels. Jayati Ghosh,
professor of economics at Jawaharlal Nehru University in New Delhi,
was one of 450 economists who last year called on the G20 to regulate
the commodities market. She says that, although factors such as
biofuels are important, speculation is now another "driving force"
behind price hikes. She cites the example of world wheat prices
doubling between June and December 2010, even though there was no fall
in the global supply of wheat.
David Hallam of the UN's Food and Agriculture Organization says that
while he does not believe speculation is the cause of price rises, it
does exacerbate swings in prices and should be regulated. "If you have
something which is amplifying price movements, then that is a terribly
important issue that needs to be addressed."
The Obama administration introduced regulation of commodity trading as
part of the Dodd-Frank Act, passed in 2010. However, legal challenges
by Wall Street mean the regulations have not yet come into force. The
G20 summit last June made a commitment to introduce so-called
"position limits" which cap the number of agricultural commodities
contracts any one investor can buy, but as yet no country, apart from
the United States, has adopted these. The one measure taken by the G20
is the creation of the Agricultural Markets Information System, which
pools data about crop levels or bad harvests from around the world to
try to prevent misinformation or rumours sparking panics on the
markets.
The European Union is currently discussing regulation of the
commodities market. Christine Haigh, a campaigner from the World
Development Movement, says the EU's proposals "need more teeth", but
there is "still all to play for". The WDM is particularly concerned
that Britain is advocating a weaker form of regulation known as
"position management", rather than strict caps. "The food-price spikes
we have seen over the past few years have had a devastating impact on
the world's poorest people and it is morally abhorrent that banks and
other financial institutions are contributing to that. It is vital
that we get proper regulation of these markets," she says.
Making the market more transparent is also essential, says the UN's
food rapporteur. At present, 82 per cent of trading in the European
commodities market is "over-the-counter" - private deals made between
two parties that are not registered on any exchange. This makes it
impossible to see what's driving the price changes.