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Hedging Against Hunger: Our Best Bet to Avoid a Global Food Bubble

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In 2008, and again in 2010, global food prices soared through the roof, plunging millions worldwide into poverty. Riots occurred in 48 countries, according to the World Food Programme (WFP) and millions of people joined the ranks of the hungry. In developing countries, where many people spend 60 percent or more of their income on food alone, higher food prices led to widespread malnutrition and civil unrest.

And it could happen again. Like the dotcom burst and the subprime mortgage crash, Wall Street speculators are driving a food commodities bubble to its breaking point. If it bursts, high food prices could become the new norm, impacting wallets and bellies everywhere.

According to recent articles in Time Magazine and The Atlantic and a report from the Institute for Agriculture and Trade Policy, financial speculation has broken the commodities market by undermining its ability to act as a stabilizing force for farmers, buyers and consumers. Food prices once again reached 2008 record levels in 2012 according to the FAO, and Oxfam warned that prices of staples such as wheat and rice may double in the next 20 years. These prices are no longer driven by just simple supply and demand, but instead by the sentiments of financial speculators.

Food expert and author Frederick Kaufman explains in Harper's Magazine that, historically, markets served as insurance against price fluctuations and crop failures. But the deregulation policies of the late 1990s changed the game completely, allowing for the entry of large, powerful institutional investors such as hedge funds, pension funds, and investment banks to speculate on food -- people generally without a direct connection to or understanding of the commodities they trade. The financial products designed by these institutions, called derivatives, are divorced from the commodities themselves; no actual wheat or corn is traded. In the past, commodity prices were determined by real-life factors such as quality, and supply and demand. Now, it is largely perception of the market that determines the price of a commodity. In 2008, for example, investors' trepidations about the drought in Australia impacted pricing of all wheat, even different varieties grown elsewhere in the world. These fears turned out to be unfounded -- in fact, it was an excellent year for wheat. Data from the U.S. Department of Agriculture found that 657 million bushels of wheat remained in silos after the buying season.

The speculation over commodity derivatives has a real and lasting effect on the prices of actual wheat, corn and rice. Kaufman explains,

The index funds may never have held a single bushel of wheat, but they were hoarding staggering quantities of wheat futures, billions of promises to buy, not one of them ever to be fulfilled. The dreaded market corner had emerged not from a shortage in the wheat supply but from a much rarer economic occurrence, a shock inspired by the ceaseless call of index funds for wheat that did not exist and would never need to exist: a demand shock.

In fact, even farmers have no idea what their crops are worth and misleading price notes have unintended consequences. The market price of corn may be high, for example, leading a farmer to plant a big crop only to find the price has fallen drastically by the time she or he goes to market.

Sophia Murphy and Timothy Wise from the Institute for Agriculture and Trade Policy found that responsible regulation can tackle excessive financial speculation and prevent it from driving food prices higher, such as those introduced in the 2012 Commodity Exchange Act. But the success of these regulations depends largely on international cooperation, and whether lobbyists will be successful in their bid to deprive the legislation of real teeth. They claim other factors are to blame for the price fluctuations.

Professor Oliver de Schutter, the United Nations Rapporteur for the Right to Food, says the reasons usually cited for high food prices -- demand for biofuels, China's increased appetite for meat, and the growing world population -- are minor catalysts. "In fact, while the food price crisis may have been sparked off the abovementioned developments affecting demand and supply, its effects were exacerbated by excessive and insufficiently regulated speculation in commodity derivatives." Mathematical models support his assertion.

Financial speculators now dominate the market, holding a hefty 60 percent of some market shares compared to the modest 12 percent they held 15 years ago. They have plenty of incentives to continue business as usual, as Brett Scott, a writer for the Ecologist points out: "Goldman Sachs [is] estimated to have made more than $1 billion in 2009 alone and Barclays as much as £340 million a year from trading food commodities." Commodities now account for more than $126 billion in investments.

Nearly a billion people worldwide are hungry and at the mercy of fluctuating food prices. If the commodities markets continue to drive food prices, millions more will suffer. As Hazel Healy warns in her 2011 article "The Food Rush" in the New Internationalist Magazine, "Famine helps bring the activities of speculative capital into sharp relief. Our food system fails to feed the hungry at the best of times, without entrusting it to the same gamblers whose risky finance already brought about a global financial crisis."

Danielle Nierenberg is the co-Founder of Food Tank: The Food Think Tank (www.foodtank.org); April Galarza is a graduate student at Green Mountain College.


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