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Helping ease food insecurity and starvation requires governments to ban bankers speculating on food prices

I keep reading reports of the rising risk of food riots as food prices soar around the world and vulnerable nations and communities are faced with increased food insecurity, which is a technical term that international agencies use, that actually means risk of starvation. At the same time, governments allow hedge funds to take speculative positions on food as a traded commodity which has been shown to not only increase food prices but also divert supply into storage (long positions) while the ‘investors’ create artificial supply shortages and market instability – while people are being denied their staple food products (for example, corn speculation). There are many things that governments must do in this regard – including investing in sustainable agricultural systems to create local supply certainty, improving the quality of diets (banning high sugar and salt levels), and more. But one of the most significant things that governments could do to keep food prices down and increase food security for vulnerable nations is to cooperate on a global scale to outlaw any food speculation by hedge funds and the big investment banks. It is not only economically destructive to have large proportions of populations living with the constant threat of starvation. It is also unethical.

Last week (April 13, 2022), the World Trade Organisation published a joint press statement with the IMF, World Bank and United Nations World Food Program – World Bank, IMF, WFP and WTO call for urgent coordinated action on food security.

The fact that they thought it necessary to issue such a release tells me that the capitalist system is broken, if the aim is to enrich all.

It is, of course, highly successful, if the aim is to enrich a few at the expense of the rest of us.

The Press Statement referred to “growing threats to food security”, especially in “vulnerable countries”.

They implore governments to act by:

… providing emergency food supplies and deploying financial support to households and countries, facilitating unhindered trade, and investing in sustainable food production and nutrition security.

Of which, I agree wholeheartedly.

These organisations noted that:

The fallout of the war in Ukraine is adding to the ongoing COVID-19 pandemic that now enters its third year, while climate change and increased fragility and conflict pose persistent harm to people around the globe. Sharply higher prices for staples and supply shortages are increasing pressure on households worldwide and pushing millions more into poverty. The threat is highest for the poorest countries with a large share of consumption from food imports, but vulnerability is increasing rapidly in middle-income countries, which host the majority of the world’s poor. World Bank estimates warn that for each one percentage point increase in food prices, 10 million people are thrown into extreme poverty worldwide.

Energy and fertiliser inputs to farming are also rising in price, as a result of supply shortages.

They consider the crisis may lead to “social tensions” – aka food riots like we saw in 2007-08.

The world can produce enough food. It just cannot distribute it to where it is needed while gluts appear in rich nations (and gluttons get fat).

By any measure that is a major failure of the system.

Richer countries should make sure the poorer nations have sufficient capital (financial and physical) to produce sustainable food supplies.

The IMF obsession with turning subsistence agriculture into export cash crops is a failed strategy.

Instead, overseas aid should be focused on creating sustainable (both in supply and ecological terms) food producing sectors that provides security to local communities.

Countries should never be left without the capacity to purchase imported food where necessary.

That should be the role of the IMF and the World Bank, rather than the destructive role they now play in producing conditions conducive for foreign capital to extract massive surpluses from poor nations without commensurate capacity development.

You will also note that none of these organisations mentioned the role that financial markets play in driving up food prices and causing starvation.

I wrote about food speculation in these blog posts:

1. Food speculation should be (mostly) banned (January 18, 2012).

2. We should ban financial speculation on food prices (May 27, 2011).

3. Ending food price speculation – Part 1 (October 17, 2016).

4. Ending food price speculation – Part 2 (October 18, 2016).

The – Chicago Board of Trade (CBOT) – is one of the first “futures and options exchanges” in the world and in 2007 merged with the Chicago Mercantile Exchange (CME) to form the CME group, which comprises four derivative exchanges.

It is one of the largest exchanges for derivative trading.

CBOT traditionally allowed buyers and sellers of commodities to interact to fix future prices and quantities to take out the uncertainty of production and sales.

For food products, a farmer would use the exchange to hedge on the sale price as harvest approaches by selling ‘forward’ for future delivery at a fixed price.

This person would be considered risk-averse and in purchasing such a contract would achieve certainty in ultimate price, which helped them in their production planning and cost management.

On the other side of the futures contract, would be the risk-taking speculator, willing to guarantee the price to the farmer in the hope (bet) that the ‘spot’ price on the day of delivery would be higher.

If so, the speculator could offload the physical product at the higher price in the spot market and make a profit. They would incur losses if the spot price turned out to be lower than the agreed future price. So the risk is taken by the speculator.

Another type of speculative trade is when a flour mill wants to ensure they are not short of supply of wheat and they hedge by entering a futures contract to guarantee delivery of a certain volume at a fixed price.

These examples of speculation are consider beneficial to real producers because it gives them certainty.

But increasingly, this type of productive speculation has become a minute proportion of the total speculative transactions in financial markets.

In the 1990s, as financial markets were deregulated in the interests of the large investment banks, commodities future trading in the US was freed up and so-called institutional investors (aka large gamblers) were able to flood the derivatives trading markets.

The proportion of commercial traders entering futures contracts has decreased relative to the speculative traders running bets against each other.

So for a particular commodity, like wheat or corn, in any one season the value of the speculative transactions will exceed the actual value of the harvest by many multiples.

In particular, trading in so-called ‘commodity indexes’ (which are calculated using the future contract prices for the various commodities that comprise the index) boomed after deregulation.

Derivative financial products, devised by investment banks that are linked to the commodity index but do not require the ‘investor’ to actually purchase any physical commodities, have also proliferated since the turn of the century.

A US Senate Committee Report (published June 24, 2009) into – Excessive Speculation in the Wheat Market – found that:

The total value of the speculative investments in commodity indexes has increased an estimated tenfold in five years, from an estimated $15 billion in 2003, to around $200 billion by mid-2008.

Before this rapid rise in speculative activity, future prices tended to track the spot (cash) price for the commodities.

There was normally a convergence between the future price as the date of the contract delivery approached and the price in the cash market.

But impact of this rapid increase in speculative trading in wheat (and all agricultural commodities) before the GFC had the effect of driving future prices higher and ultimately undermining the ability of the farmers etc to hedge against uncertainty.

The investment banks generate massive profits from these bets in largely unregulated derivatives markets.

Not only has this speculation creating instability for producers (the opposite of the original purpose of the futures exchanges) but it has also pushed up world food prices, which then impacts on those with little income.

In some instances, the speculative activity leads to prices tumbling, which then undermines the farm income, at a time when the IMF has been pushing governments in poorer nations to transform their subsistence agricultural sectors (which generated food security mostly) into export cash crops dependent on world markets.

We have seen a vicious cycle of rising foreign debt to achieve the transformation, prices falling in world markets, and then more IMF/World Bank debt to cover the inability to pay the original debt.

These two reference reports from Global Justice UK, which emerged after the last major food crisis in 2007-08, are worth consulting if you are interested in more detail:

1. Broken markets – How financial market regulation can help prevent another global food crisis

2. The Great Hunger Lottery – How banking speculation causes food crises

At present, it is clearly rising food prices that are causing havoc.

The latest report from the FAO – The State of Food Security and Nutrition in the World 2021 (released July 12, 2021) – reported that there was:

… a dramatic worsening of world hunger in 2020 … around a tenth of the global population – up to 811 million people – were undernourished last year …

Already in the mid-2010s, hunger had started creeping upwards, dashing hopes of irreversible decline. Disturbingly, in 2020 hunger shot up in both absolute and proportional terms, outpacing population growth: some 9.9 percent of all people are estimated to have been undernourished last year, up from 8.4 percent in 2019 …

Overall, more than 2.3 billion people (or 30 percent of the global population) lacked year-round access to adequate food: this indicator – known as the prevalence of moderate or severe food insecurity – leapt in one year as much in as the preceding five combined.

In Australia, it is estimated that “between 4% and 13% of the general population are food insecure” and “22% to 32% of the Indigenous population, depending on location.” (Source).

Australia is one of the richest nations in the world yet it cannot even feed a significant proportion of its population properly.

The FAO recommends governments:

1. Introduce social protections to “prevent families from selling meagre assets in exchange for food.”

2. “Scale up climate resilience across food systems” – which should include ramping up permaculture investments in all nations.

3. Ensure the most vulnerable have access to cash transfers and work if they are able.

4. “Intervene along supply chains to lower the cost of nutritious foods” – helping growers get to markets etc. While the FAO is silent on this, governments should make speculative trading in food (other than the forward contracts directly made with producers) illegal.

Simple legislative act would end the ability of investment banks to make huge profits through starvation.

5. Reduce poverty – the first thing that should be done is create full employment and then provide adequate cash transfers to ensure income security is enjoyed by all.

6. Change consumer behaviour – outlaw trans fats, reduce sugar and salt content etc.

None of that will happen unless we demand our governments to act.

At present they are captive to the big food speculators and big farm corporations.

Conclusion

This list would be easily implemented by governments and would improve nutritional levels, food supply and increase productivity.

But it should include the banning of food speculation – one of the more indecent ways in which the top-end-of-town seek to profit.

That is enough for today!

(c) Copyright 2022 William Mitchell. All Rights Reserved.

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    This Post Has 7 Comments
    1. Dear Bill,

      Not entirely off topic, considering their benighted food-related circumstances, but do you, or any of the regular posters, have any thoughts on the current crisis in Sri Lanka, and what could be done by its govt to recover from it? A brief outline, or cautionary tale perhaps, and any potential fiscal steps to improve the situation? Clearly, things have gone seriously wrong there.

      Sri Lankans are now facing starvation, with food production this year in catastrophic decline thanks to a misapplied move last year to ban chemical fertilisers almost overnight, and now with depleted foreign reserves to purchase food imports, even without further Ukraine-related world food shortages being considered.

      Loss of tourism due to the pandemic obviously a factor, but this applied globally too. Sri Lanka creates its own currency, and was previously a successful food producer.

      What could/should it have done better, or not done? Is there any fiscal intervention that could help now, and if so, what might it be?

      (I suppose the same questions could also be asked about Lebanon, or indeed any other poorer country facing imminent economic collapse.)

      Best wishes, Mr S.

    2. I have no comment except to concur that this is a massively important economic subject, and no surprise that it is so little considered by the mainstream. The BBC has been covering the Sri Lanka disaster in the last few days, but zero analysis of underlying causes, except loss of tourism dollars.

    3. @PatrickB,

      While good to hear that the BBC has been covering Sri Lanka lately, it is entirely unsurprising that *context* is so limited; it’s normally omitted entirely in favour of the eternal present of context-free reporting’, often delivered in bizarrely over-emotional and faux-poetic syntax, rather than any actual journalism.

      (Personally, I find BBC News – and sadly now C4 News too – effectively unwatchable, and have done for some years. Ironically, the weather forecast, which is often largely guesswork and seldom entirely reliable, is the only item I come anywhere near trusting to be truthful!)

      Every nation in the world suffered economic loss from the absence of international, and even at times domestic, tourism. Sri Lanka is not alone in that regard. There must be other factors, such as failures in governance, knowledge, and policy-making, that are also responsible. A ‘cautionary tale’ of what *not* to do might help other countries, or indeed Sri Lanka itself, in future.

      But I’m not an economist, so am struggling to understand all the factors that led to what looks like imminent collapse, and more importantly, how to improve the situation, given where things stand now.

    4. Dear Mr Shigemitsu. re: ‘I’m not an economist’, I’d like to comment that you appear to study relevant literature every day and make comments that indicate far more understanding than many paid economists/economic journalists. Agreed on what a disappointment the BBC is. Sri Lanka appears to have made the fundamental error of borrowing in a foreign currency. Not just from ‘the west’: my understanding is that it is involved in China’s Belt and Road Initiative/imperialism. Doesn’t seem to be helping it much.

    5. Dear Mr S,
      Becoming so dependent on oil for agriculture has been a recipe for disaster that was unnecessary for much of the world. More than enough energy to meet our agricultural needs globally is available from the sun, and grass grazing animals provide a continuous supply of natural fertilizer, which is also beneficial to the soil biologically; a symbiotic relationship between plant and animal.

      Metabolically we humans are geared best to preferentially handle animal fat as our most efficient energy source. The ability to process sugars and starch (the energy storage medium of plants) is really an emergency backup system for when animal fat is scarce .
      There is now a pandemic of obesity and type 2 diabetes in humans relying on too many simple carbohydrates to meet their energy and essential nutrient intake requirements.
      This is the result of an actual addiction to carbohydrates rather than gluttony as suggested above. Tobacco is not the only addictive and damaging product large corporations are trying to keep us in the dark about!

      Putting these pieces together seems to offer a path forward to solve many problems. There are people in the world with the necessary knowledge and skill set to help with the sort of problem Sri Lanka is facing with this. The problem is too few people know how to farm without chemicals these days and the environment is so out of balance it’s going to take a few years to bring it back.
      As with so many things the fiscal policy has to be to make an investment in educating people, and providing other forms of assistance to farmers as needed to improve the local food supply in the interim.

      Animals that efficiently acquire and store

    6. Mr Shigemitsu asks:
      “Is there any fiscal intervention that could help now, and if so, what might it be?”

      Given we are told part of Sri Lanka’s current problems are due to “lack of foreign exchange”, an obvious immediate solution is cancellation of SL’s overseas debt, and payment of creditors, by the IMF…..since money can be created ex nihilo by a currency-issuer.

      But i keep forgetting the ‘Instant Misery Fund’ is itself part of the problem….

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