Big Banks Face Criticism For Speculative Role In Global Food Crisis
Today, rising food prices are wreaking havoc in the developing world. While some blame overpopulation, and others ethanol, another culprit has emerged of late: banks and the role of speculative commodity indexes.
The primary danger of the indexes, according to a new article by Frederick Kaufman in Foreign Policy, is that they fundamentally alter the food market by transforming key stapes into a financial asset that performs more or less like a stock. So while billions worldwide scramble to find money pay for food, food prices are often subject to intensified distortions of supply and demand from speculative markets.
Since 1999, when the government first deregulated the commodities market, Kaufmann explains, investors have flocked to investing in food. The basis for that excitement is a Goldman Sachs-developed innovation known as the commodity index. Today, Kaufmann says, it's a tool that has been replicated throughout the banking industry.
The excitement over commodities trading has only picked up in the years since the financial crisis first brought the world economy -- and the U.S. housing bubble -- to its knees. That, Kaufmann says, was when this really kicked off:
"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... 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."
Criticism of this speculation has heated up in recent weeks, with the Asian Development Bank releasing a report critical of the trend and recommending the elimination of policies "that create hurdles in transferring food from surplus to deficit regions." Last September, the United Nations Special Rapporteur On The Right To Food wrote that "a significant portion" of rising food prices was due to the role of speculation.
And then last week, Barclays Capital, the United Kingdom's biggest commodity trader according to World Development Movement, became the target of protests by anti-poverty groups. "First, it was sub-prime mortgages, now it's food commodities," Deborah Doane, director of the World Development Movement, said, according to the Guardian. "The lack of transparency in these markets bears worrying resemblance to the behaviour that led to the 2008 financial crash."
Regardless of the reason, there is no denying that rising food prices have had a tangible affect around the globe. In mid-April, the World Bank reported that with food prices rising 36 percent from last year, at least 44 million people worldwide have been pushed into poverty since last June. With 1.2 billion people living on less than $1.25 per day, even small food price shocks can be devastating.
Read the full Foreign Policy piece here.