Bankers
recognized a good system when they saw it, and dozens of speculative
non-physical hedgers followed Goldman's lead and joined the commodities index
game, including Barclays, Deutsche Bank, Pimco, JP Morgan Chase, AIG, Bear
Stearns, and Lehman Brothers, to name but a few purveyors of commodity index
funds. The scene had been set for food inflation that would eventually catch
unawares some of the largest milling, processing, and retailing corporations in
the United States, and send shockwaves throughout the world.
The
money tells the story. Since the bursting of the tech bubble in 2000, there has
been a 50-fold increase in dollars
invested in commodity index funds. To put the phenomenon in real terms: In
2003, the commodities futures market still totaled a sleepy $13 billion. But
when the global financial crisis sent investors running scared in early 2008,
and as dollars, pounds, and euros evaded investor confidence, commodities -- including food -- seemed like the last, best place for hedge, pension, and
sovereign wealth funds to park their cash. "You had people who had no clue what
commodities were all about suddenly buying commodities," an analyst from the
United States Department of Agriculture told me. In the first 55 days of 2008,
speculators poured $55 billion into commodity markets, and by July, $318
billion was roiling the markets. Food inflation has remained steady since.
The
money flowed, and the bankers were ready with a sparkling new casino of food
derivatives. Spearheaded by oil and gas prices (the dominant commodities of the
index funds) the new investment products ignited the markets of all the other
indexed commodities, which led to a problem familiar to those versed in the
history of tulips, dot-coms, and
cheap real estate: a food bubble. Hard red spring wheat, which usually trades
in the $4 to $6 dollar range per 60-pound
bushel, broke all previous records as the futures contract climbed into the
teens and kept on going until it topped $25. And so, from 2005 to 2008, the
worldwide price of food rose 80 percent --
and has kept rising. "It's unprecedented how much investment capital we've
seen in commodity markets," Kendell Keith, president of the National Grain and
Feed Association, told me. "There's no question there's been speculation." In a
recently published briefing note, Olivier De Schutter, the U.N.
Special Rapporteur on the Right to Food, concluded that in 2008 "a significant
portion of the price spike was due to the emergence of a speculative bubble."
What
was happening to the grain markets was not the result of "speculation" in the
traditional sense of buying low and selling high. Today, along with the
cumulative index, the Standard & Poors GSCI provides 219 distinct index
"tickers," so investors can boot up their Bloomberg system and bet on
everything from palladium to soybean oil, biofuels to feeder cattle. But the
boom in new speculative opportunities in global grain, edible oil, and
livestock markets has created a vicious cycle. The more the price of food
commodities increases, the more money pours into the sector, and the higher
prices rise. Indeed, from 2003 to 2008, the volume of index fund speculation
increased by 1,900 percent. "What we are experiencing is a demand shock coming
from a new category of participant in the commodities futures markets," hedge
fund Michael Masters testified before Congress in the midst of the 2008 food
crisis.
The
result of Wall Street's venture into grain and feed and livestock has been a
shock to the global food production and delivery system. Not only does the
world's food supply have to contend with constricted supply and increased
demand for real grain, but investment bankers have engineered an artificial
upward pull on the price of grain futures. The result: Imaginary wheat
dominates the price of real wheat, as speculators (traditionally one-fifth of
the market) now outnumber bona-fide
hedgers four-to-one.
Today,
bankers and traders sit at the top of the food chain -- the carnivores of the system, devouring everyone and everything
below. Near the bottom toils the farmer. For him, the rising price of grain
should have been a windfall, but speculation has also created spikes in
everything the farmer must buy to grow his grain -- from seed to fertilizer to diesel fuel. At the very bottom lies
the consumer. The average American, who spends roughly 8 to 12 percent of her
weekly paycheck on food, did not immediately feel the crunch of rising costs.
But for the roughly 2-billion
people across the world who spend more than 50 percent of their income on food,
the effects have been staggering: 250 million people joined the ranks of the
hungry in 2008, bringing the total of the world's "food insecure" to a peak of
1 billion -- a number never seen
before.
What's
the solution? The last time I visited the Minneapolis Grain Exchange, I asked a
handful of wheat brokers what would happen if the U.S. government simply
outlawed long-only trading in food
commodities for investment banks. Their reaction: laughter. One phone call to a
bona-fide hedger like Cargill or Archer
Daniels Midland and one secret swap of assets, and a bank's stake in the
futures market is indistinguishable from that of an international wheat buyer.
What if the government outlawed all long-only
derivative products, I asked? Once again, laughter. Problem solved with another
phone call, this time to a trading office in London or Hong Kong; the new food
derivative markets have reached supranational proportions, beyond the reach of
sovereign law.
Volatility in the food markets has also trashed what
might have been a great opportunity for global cooperation. The higher the cost
of corn, soy, rice, and wheat, the more the grain producing-nations of the world should cooperate in order to ensure that
panicked (and generally poorer) grain-importing nations do not spark ever more
dramatic contagions of food inflation and political upheaval. Instead, nervous countries
have responded instead with me-first
policies, from export bans to grain hoarding to neo-mercantilist land grabs in Africa. And efforts by concerned
activists or international agencies to curb grain speculation have gone
nowhere. All the while, the index funds continue to prosper, the bankers pocket
the profits, and the world's poor teeter on the brink of starvation.
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