I’ve been reading reports about the rising risk of food riots as food prices soar around the world and vulnerable countries and communities face growing food insecurity, a technical term used by international agencies that literally means the risk of starvation . At the same time, the government allowed hedge funds to take speculative positions on food as a tradable commodity, which has been shown not only to raise food prices but also to move supplies into storage (long positions), while “investors” artificially created Supply shortages and market instability – people are deprived of their staple food products (eg, corn speculation). In this regard, governments must do a lot – including investing in sustainable farming systems to create certainty of local supplies, improving the quality of diets (banning high sugar and salt), and more. But one of the most important things governments can do to keep food prices down and improve food security in vulnerable countries is to work together globally to clamp down on any food speculation by hedge funds and big investment banks. Having a large portion of the population live under the constant threat of hunger is not only economically damaging. It is also immoral.
Last week (13 April 2022), the World Trade Organization issued a joint press statement with the International Monetary Fund, the World Bank and the United Nations World Food Programme – World Bank, IMF, WFP and WTO call for urgent and coordinated action on food security.
The fact that they feel the need to release such a version tells me that the capitalist system has been broken, if the goal is to make everyone rich.
Of course, if the goal is to enrich a few at the expense of the rest of us, that is of course very successful.
The press statement mentioned “growing threats to food security”, especially in “fragile countries”.
They implored the government to take the following actions:
…provide emergency food supplies and financial support to households and countries, facilitate unimpeded trade, and invest in sustainable food production and nutritional security.
Of these, I totally agree.
These organizations noted:
The consequences of the war in Ukraine are exacerbating the ongoing COVID-19 pandemic, now in its third year, while climate change and rising fragility and conflict continue to hurt people across the globe. Rising prices and shortages of staple foods are adding to the pressure on households around the world and pushing millions into poverty. The threat is greatest for the poorest countries, which consume a large share of food imports, but vulnerabilities are rapidly increasing in middle-income countries, which house most of the world’s poor. World Bank estimates warn that every percentage point increase in food prices pushes 10 million people globally into extreme poverty.
Prices of energy and fertilizer inputs for agriculture are also rising due to shortages.
They believe the crisis could lead to “social tensions” – the food riots we saw in 2007-08.
The world can produce enough food. It just can’t distribute it where it’s needed, and rich countries have a surplus (and gluttons get fat).
Any measure is a major failure of the system.
Richer countries should ensure that poorer countries have sufficient capital (financial and physical) to produce sustainable food supplies.
The IMF’s obsession with turning subsistence farming into an export cash crop is a failed strategy.
Instead, overseas aid should focus on creating a sustainable (supply and ecologically) food production sector that provides security for local communities.
Countries should never be left without the ability to buy imported food when necessary.
That should be the role of the IMF and the World Bank, not the destructive role they now play in creating the conditions that allow foreign capital to grab huge surpluses from poor countries without corresponding capacity development.
You’ll also notice that none of these organizations mention the role that financial markets play in driving up food prices and causing hunger.
I write 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 (27 May 2011).
3. Ending Food Price Speculation – Part 1 (October 17, 2016).
4. Ending Food Price Speculation – Part 2 (October 18, 2016).
this – Chicago Board of Trade (CBOT) – is one of the world’s first “futures and options exchanges” and merged with the Chicago Mercantile Exchange (CME) in 2007 to form the CME Group, which consists of four derivatives exchanges.
It is one of the largest derivatives trading exchanges.
CBOTs have traditionally allowed buyers and sellers of goods to interact to fix future prices and quantities to remove uncertainty about production and sales.
For food, farmers will use exchanges to hedge the sale price by selling “forwards” at a fixed price for future delivery as harvest approaches.
This person will be seen as risk averse and the final price will be set when purchasing such contracts, which helps them with production planning and cost management.
On the other side of futures contracts are risky speculators who are willing to guarantee prices to farmers in the hope that the “spot” price on the delivery day will be higher.
If so, speculators can sell the physical at a higher price in the spot market and make a profit. If the spot price falls below the agreed future price, they will lose money. Therefore, the risk is borne by the speculators.
Another speculative trade is when a flour mill wants to make sure they don’t run out of wheat, they hedge by entering into a futures contract that guarantees delivery of a certain amount of wheat at a fixed price.
These speculative examples are considered beneficial to real producers because it gives them certainty.
But this productive speculation is increasingly a small fraction of the total speculative trading volume in financial markets.
In the 1990s, as financial markets were deregulated for the benefit of large investment banks, commodity futures trading in the United States was unleashed, and so-called institutional investors (aka big gamblers) were able to flood the derivatives market.
The proportion of commercial traders entering futures contracts has declined relative to the proportion of speculative traders betting against each other.
Thus, for a particular commodity, such as wheat or corn, the value of speculative trades in any given season will exceed the actual value of the harvest by several times.
In particular, trading in so-called “commodity indices” (calculated using future contract prices for the various commodities that make up the index) has flourished after deregulation.
Derivative financial products designed by investment banks that are linked to commodity indices but do not require “investors” to actually buy any physical commodity have also proliferated since the turn of the century.
US Senate Committee Report (published June 24, 2009) Excessive speculation in the wheat market – Find:
The total value of speculative investment in commodity indices increased tenfold in five years, from an estimated $15 billion in 2003 to about $200 billion in mid-2008.
Future prices tend to follow the spot (cash) price of a commodity until speculation rises rapidly.
As the delivery date of the contract approaches, there is usually a convergence between future prices and spot market prices.
But the fallout from the rapid growth in speculative trade in wheat (and all agricultural commodities) before the global financial crisis pushed up future prices and ultimately diminished the ability of farmers and others to hedge against uncertainty.
Investment banks reap huge profits from these bets in the largely unregulated derivatives market.
This speculation not only creates instability for producers (contrary to the original purpose of futures exchanges), but it also drives up world food prices, which in turn affects those with meager incomes.
In some cases, speculation has caused prices to plummet, thereby eroding agricultural incomes at a time when the IMF has been pushing governments in poorer countries to transform their subsistence agricultural sectors, which generate mainly food security, into export-dependent economies Crops on the world market.
We saw a vicious cycle of rising external debt to enable transformation, falling world market prices, and then more IMF/World Bank debt to cover the original debt that could not be repaid.
These two reference reports from Global Justice UK came after the last major food crisis in 2007-08 and are worth checking out if you’re interested in more details:
1. Broken Markets – How Financial Market Regulation Can Help Prevent Another Global Food Crisis
2. The Big Hunger Lottery – How Bank Speculation Caused a Food Crisis
Right now, it’s clearly rising food prices that are wreaking havoc.
The latest FAO report – The State of Food Security and Nutrition in the World 2021 (Published July 12, 2021) – The report includes:
…World hunger has worsened sharply in 2020… Last year about one in 10 of the world’s population – as many as 811 million people – was malnourished…
Hunger began to spread as early as the mid-2010s, dashing hopes of an irreversible decline. Disturbingly, in 2020, hunger has risen sharply in both absolute value and proportion, outpacing population growth: an estimated 9.9% of people were undernourished last year, up from 8.4% in 2019…
Overall, more than 2.3 billion people (or 30 percent of the global population) do not have access to adequate food throughout the year: this indicator – known as the incidence of moderate or severe food insecurity – jumps in one year As many as the previous five years combined.
In Australia, it is estimated that “4% to 13% of the general population is food insecure” and “22% to 32% of the Aboriginal population, depending on location”. (source).
Australia is one of the richest countries in the world, yet it cannot even properly feed a sizable percentage of the population.
FAO recommends that governments:
1. Introduce social protection “to prevent families from selling their meager assets for food”.
2. “Increasing the climate resilience of the entire food system” – which should include increased investment in sustainable agriculture in all countries.
3. Ensure that the most vulnerable have access to cash transfers and jobs, if they can.
4. “Intervention in the supply chain to reduce the cost of nutritious food” – helping growers access markets, etc. While the FAO remains silent on this, governments should outlaw food speculation (except for direct forward contracts with producers).
A simple act of legislation would end the ability of investment banks to make huge profits through starvation.
5. Poverty reduction – The first thing to do is to create full employment and then provide sufficient cash transfers to ensure income security for all.
6. Change consumer behavior – ban trans fats, reduce sugar and salt, etc.
None of this will happen unless we demand action from our government.
Currently, they are being held captive by large food speculators and large agricultural companies.
in conclusion
The list is easily implemented by the government and will improve nutritional levels, food availability and productivity.
But it should include a ban on food speculation – one of the most indecent ways towns seek profit.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
