Who Benefits From High Food Prices?
Forget subprime. The next price bubble to watch is food speculation.
Commodity analysts are quick to pinpoint reasons: Midwest flooding affecting food, livestock feed overdrive provoked by the Chinese, biofuel-related demand, and a weak dollar. These reasons all have some merit, but I'd argue it's speculation that's skyrocketed prices higher faster, not supply vs. demand.
At the financial leaders G8 summit that wrapped up over the weekend, food and oil speculation were front and center.And G8 leaders aren't the only ones expressing concern over traders profiting from the world's pain.
Major hedge-fund stars like George Soros and Michael Masters are also screaming moral foul on commodity speculation—a clear signal there's more fire than smoke on the horizon.
As Masters told a Senate committee last month, "Institutional investors have purchased over 2 billion bushels of corn futures in the last five years. [They] have stockpiled enough corn futures to potentially fuel the entire United States ethanol industry at full capacity for a year."
Indeed, the current agricultural price bubble has produced record highs in soybeans and wheat as well. Against this backdrop, a clueless Congress passed US farmer and food-stamp aid within the recent farm bill, without addressing the possibility that speculation could be to blame, or that curtailing speculation could help alleviate the domestic and global food crisis. They should have looked toWall Street's lead.
The latest grain and oilseed trading report from the Chicago Mercantile Exchange cited first quarter of 2008 trading volume up 32 percent over the last quarter of 2007. That's extra money coming in from speculators, not corn or wheat farmers hedging their crop prices in case of bad weather.
Additionally, the hot new favorite among traders is betting on packages of energy and agricultural futures. Called CCO's (collateralized commodity obligations), they are like their subprime cousins, CDO's (collateralized debt obligations). Their performance is linked to rising commodity prices; the higher the prices, the more profit to the CCO.
There's another group, besides the standard speculator crew, literally reaping extreme profits from the price squeezes—the crop equivalents of Exxon, multinational agricultural biotechnology corporations. Monsanto, which recently told the 12th Annual Goldman Sachs Agricultural Biotech Forum that its profits would double by 2012, is buzzing (PDF); the firm's stock price doubled during the past year. ADM, the nation's second-largest ethanol producer, saw its annual revenues increase by 64 percent. Even agriculture conglomerate Cargill's third-quarter profits rose 86 percent.
Last week, a group of senators led by Carl Levin (D-Mich.) introduced the Close the London Loophole Act, which would curtail a situation that allows speculators to bypass all Commodity Futures Trading Commission regulations by trading on foreign exchanges.
But without strong regulation of electronic exchanges and the derivatives products that enable speculators to move huge proportions of the futures markets underlying commodities, putting a bit of regulation into the London-based exchanges will not alleviate anything. Unless that's addressed, this bubble is going to take more than homes with it. It's going to take lives.
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Mirror, mirror on the wall, who is the gravest threat to the people? The Fascists or AQ?
I speculate that I'll go out into my back yard and look into my garden and think of truly how rich I am.
You cannot let the 'market' control key 'commodities' like oil and corn.
Time for a planned economy.
Another writer that shows their lack of knowledge of the subject.
How about world food shortage?
Drought in Australia caused a plant that processes enough rice to feed over 20,000,000 to close - the largest cattle ranch in the world to shut down etc.
I guess it's only in the US that food is produced huh???
it would make sense to prohibit the use of corn for ethanol but the politicians that took campaign contributions from Cargil and ADM would be in hot water and God forbid, don't upset them.
I will quote the Cambridge educated Mr. Robert Newman here: "The dissolution of the corporation is the 'sine qua non' of democracy." Keep buying the Wall Street propaganda of sacred symbolism that Wall Street equals freedom and democracy (wave your little flags here)... anything for the public good like health care reform or mortgage and speculation fraud reform, are satanic, socialist and evil. Keep buying it you Amerikan fools.
LouisM
Dude, I agree with you. I just so happened to pick up Friedmans Capitalism and Freedom at a conference a few weeks ago. Here is a quote from page 8.
"The citizen of the United States who is compelled by law to devote something like 10 percent of his income to the purchase of a particular kind of retirement contract, administered by the government, is being deprived of a corresponding part of his personal freedom."
Exactly, because everyone, and I mean EVERYONE, who slaves their lives away creating the massive amount of wealth for a handful of people have economic freedom when they're 75 and can't exhange labor for wages. WTF?!?!?!
As a side note, this jagoff won the nobel prize in economics. If anything spectacular hasn't happened, they ought to just give the money to aids research or the people who risk life and limb clearing landmines from the 3rd world and Lebanon.
You are the one who shows a complete lack of knowledge on the subject. The speculation that Phil Gramm unleashed will be the downfall of the world's economy. It is all driven by greed and self interest. You must be profiting from it.
FISA BILL ! To many in the House are covering there collective asses and not enough are showing political courage. Shameful politics are the norm for most Repulicans but for so many Democrats to surrender to the Bush/Cheney and the phone companies complicity is not only an outright assault on the Forth Amendment it is a violation of all official oaths to protect the Constitution. History will out all. Treason is rampant. I cannot describe my disapointment in one I thought was better; namely the speaker of the House. Pelosi voted for this bill. My first disapointment came when she took impeachment off the table, but this vote to allow domestic spying is unforgivable. Political courage is lacking just when our country and the world need it the most. 36 counts of High Treason and counting. True, Kevin David DiRito
Obviously, we need to cut the legs out from under these big corporations. What we need to do is buy local produce and grow our own. It's time to show these corporations that the power is with the people.
http://www.eatwellguide.org/i.php?id=Home
http://www.localharvest.org/
http://www.sustainabletable.org/
http://tinyurl.com/5x5mqe
http://www.localflavourplus.ca/index.htm
http://bigbarn.co.uk/
http://greenfinder.co.uk/home/
http://www.foodloversbritain.com/
http://www.organicfooddirectory.com.au/
http://www.theorganicsdirectory.com.au/
http://organicfoodexpress.com.au:808...ml?id=gcVwLsd6
http://www.certifiedhumane.org/
http://100milediet.org/getting-started-guide/
Why can't this, the "real news" be broadast to the masses in bulk? Why is Congress allowed to "Act dumb" as if they don't know this?
A Bloomberg News article on April 28, 2008 pointed out that in November 2007, speculators controlled $25 billion in Chicago Board of Trade futures contracts in corn, wheat, and soybeans. By the end of April 2008, these "funds" owned $65 billion in contracts, roughly half the value of the growing 2008 US corn, wheat, and soybean crops.
I have been telling students and friends for months that speculation by people/entities that will never take possession of a bushel of these crops is driving the price increases.
The US government needs to follow India's lead in banning speculation in basic food commodities. In the 19th century (see William Cronon's excellent book "Nature's Metropolis: Chicago and the Great West"), the Illinois legislature tried to make speculation in grain illegal. The effort failed, and we have the speculation driven market that we see today.
ADM and Cargill (and other major players) are positioned to take over the corn grain ethanol industry. (They also "helped" write farm bills starting in the 1970s when Earl Butz was secretary of agriculture.) Government policy (directed by lobbyists from agribusiness) kept the price of commodities below the cost of the production through most of the 1980s, 1990s, until 2005 (a notable exception being 1995-1996) and subsidized farmers to meet the cost of production. Cargill, ADM, and Bunge bought raw products (#2 yellow corn, soybeans, wheat, etc.) at low cost.
In the early 1980s, the Broin family in Minnesota looked for a way to add value to their corn crop (at a time when many farmers were going bankrupt). Broin, now Poet, developed a model in which local farmer investment in local corn grain ethanol plants added value to the corn crop and created jobs in economically depressed communities.
The problems with corn grain ethanol have been well documented; however, an understanding of this history and the real excitement (and economic upturn) that locally owned ethanol plants brought to small rural communities in the Midwest should not be overlooked.
The testimony by Michael Masters is very interesting. Of course in typical Mother Jones fashion the real story is left hidden (unless you follow that link) and the article leads you to believe that there are greedy speculators targeting agricultural markets trying to manipulate prices for profit. As the Masters testimony makes clear, the "speculators" that he refers to are simply pension funds, and endowments who have in the past several years decided that commodities are a good place to have a portion of their investment portfolio. And they simply buy commodity indexes, thus taking positions in everything at whatever the prevailing prices are, and the banks who sell the indexes then must go into the market and buy the futures contracts. It's actually a very passive long term investment decision, but the increasing amount of capital being allocated to this type of strategy is, in Master's opinion, moving prices of the underlying commodities higher than is warranted by fundamental supply and demand for the commodities. If Masters is right about the effect that these commodity indexers are having, it's an accidental speculative bubble, something he himself says in his testimony. The Master's testimony is fascinating and it's a story that the mainstream press would miss, so why not just report it accurately. If Mother Jones wants to be a voice for the truth, it's important not to fall into the trap of stretching the thesis in order to always be able to blame a cabal of greedy capitalists deliberately manipulating markets for profit at the expense of the little guy. The real world on the whole is just not that simple. And yet the truth is even more interesting than the tired capitalist conspiracies.
World population jumping from 6 billon in 1999 to 7 billion in 2012 is the major problem for the world we all live on. Population growth must be brought under control.
After reading Masters testimony the problem isn't drought in Australia (although in the long run climate change may make futures trading irrellevant).
I have a question about the CFTC, am I correct in assuming that the significant change in the rules occurred in the last 8 yrs? specifically 2003. What public interest did the rule change purportedly serve. I can understand the interest of speculators (gamblers)whose only motivation is rolling winners, but what concern for the public welfare is served by commodities futures trading. does it lead to greater production of goods and services?; more jobs for those outside commodity trading? It only seems to be another rigging job by those who deregulate to transfer wealth from the folks to the riggers and their supporters. Another bubble ready to burst! Would Ray, Carolyn Asbaugh or some other enlightened reader please help me understand.
Italians mostly, they seem to have alot of ties with the food industry.
Wake up America! See what Ron Paul is all about and you will find the truth about whats really going on!
The purpose that commodity futures markets really serve is to allow users and producers of these commodities to hedge their exposure so they can worry about running their businesses instead of worrying about big changes in the price of the commodity. A farmer who is making financial decisions for next year and spending money today based on what he thinks he'll be able to sell this year's crop for in three months can actually sell his crop today even though he hasn't harvested it yet, buy selling the futures. A manufacturer who uses large amounts of copper in their product can lock in the price they will pay for copper over the next year by buying futures, and thus can manage their other production costs and pricing of orders accordingly because they will not be subject to a surprise price spike in copper. Of course these "hedgers" actually need the "speculators", somebody who doesn't produce or consume the commodity but simply bets on the direction of the commodity price, in order to find a deep liquid market for them to execute their hedges. A farmer can't sell corn futures unless there is someone willing to buy those corn futures. That's the rub. Lots of speculators make it easy for the hedgers to hedge, which is definitely beneficial to the economy because it smooths things out for those businesses. Also, you have to be careful when someone quotes you numbers about percentage of contracts outstanding. There are two sides to every contract. Often the true speculators completely even each other out, but simply provide great liquidity to the market. In other words for every speculator betting prices will go up their could be a speculator betting prices will go down. So speculators could control a large percentage of contracts outstanding and yet literally have zero effect on prices. The fasinating thing about Master's thesis is that these are not traditional speculators that he's talking about, some buying, some selling, all trading for the short term. He's talking about a new phenomenon of large institutional funds deciding that say 5% of their portfolio will be invested in passive long only investments in commodities indefinitely. If you get enough investors following that thinking, buying only, not trading, but buying and holding commodities as part of their overall asset allocation, that could theoretically skew prices in the short term. Of course over the longer term the fundamental supply and demand from actual producers and consumers of the commodity will ultimately determine the price. And if Masters is right, that food prices have been pushed artificially high by this new type of investor, foolishly buying commodities because of past performance and low correlation to stocks and bonds, as opposed to a belief that food prices are just fundamentally too low, then that just means that at some point food prices are going to drop dramatically back to their fundamental price level.
The Rockefeller's are heavily into the
following: Food, Oil, Medicine,Finance,
Intelligence, Mining, Education....
i think we get the picture.
All of the aforementioned will be
used on the US to replace the original
constitution with the constitution of
the north american union.
THE HIGHEST ACT OF TREASON POSSIBLE!!!
NAFTA, Public laws 89-719 and 94-564,
APEC,HAARP (Kissenger needs to keep his
finger off that button),Federal Reserve
(did we know that himler served on the
board of Schroder Banks of Germany,
who, during the war, owned a chunk
of the Fed?)
Making ethenol from corn is just plan dumb. It takes too much petroleum to grow and process the corn into fuel. Ethenol can be made from nonfood plants which can be cultivated with fewer petroleum based products. And, who, besides, Monsanto, thinks that farmers all over the world should only plant Monsanto modified seeds that are incapable of producing new seeds and only sprout with the application of Monsanto made chemicals? The three companies in this article control the world's food supply.
Thank you Jay. Your response is very informative and I understand now that futures trading may have some utility, but like the speculation on mortgages, without strict regulation the market is too easily manipulated by some investors. At the moment, it doesn't appear there are many betting against the come, partly since food prices have artificially under priced. Added to this price insensitive investors with large portfolios and you get sticker shock for the consumer and probable economic instability. if commodity prices are now inflated and fall precipitously as you suggest could happen, not only has my house lost value, but now my pension is in jeopardy. Can we find a better way to spread risk or control risk for the farmer or the commodity dependent industries. Like mandated health insurance for me, mandated risk insurance for commodity producers and buyers? Or, some other creative mechanism. As I understand it, futures trading is almost prehistoric;it seems we need some 21 Century thinking here!
ghostcommander...the fascists. this is capitalism gone rampant. very good journalism, Nomi Prins. for a couple months now, I've been very upset over speculation and the trading of commodities. governments need to reign this matter in. water, food, fuel...these are fundamental to survival...even shelter skirts fuel in importance. and then we have wealthy people, the upper class, holding on to their wealth and virtually impoverishing and enslaving the masses by their selfish activities. i am almost inclined to call for violent revolution against the wealthy elite like revolutionary France. you can only push the poor so far, selfish fascist curs.
i do agree that there are perhaps more people than what is sustainable among humans, but i feel the need to point out that modern economies are based on the concept of increasing population to increased growth, but how can both increase when there is a finite supply? is there no economic theory that looks at this dilemma or is the answer more simple: revolution, war, famine, pestilence, death, cycle begins again...
Since the fall of the USSR, unrestrained Capital rampages like a toxic Godzilla. The world ecomomy must have an element of grassroots democracy or this is what we will suffer: Godzilla disasters and pirates mopping up after.
Oil and commodities are home to at least $250 billion of excess liquidity in the market that the Fed keeps creating to prop up the banks. The reason that the Fed isn't raising rates, the reason that they are actually contributing to inflation, is because the US financial system is at -$130 billion in terms of non-borrowed reserves, a $110 billion increase since January of this year. The Fed needs to keep lending money to the banks in order to keep them afloat, because "non-borrowed reserves" means their actual day-to-day business. So the banks are operating on borrowed money... they aren't even making enough from normal business, given their tremendous losses. 2008 marked the first year that non-borrowed reserves were negative since they began collecting this information in the 50s. It is an extremely worrying sign.
The EU is in an equally bad or possibly even worse situation, but they just raised rates today. This disparity between the Fed's policy of purposeful inflation and the European Central Bank's actions is what Merrill Lynch is characterizing as a possible financial "catastrophic event". As a clarification, neither the Fed nor the ECB are government entities. They are private banks that control the flow of money to nations.
The money is also going into oil and commodities because the bond market has been destabilized due to the Fed taking on worthless collateral for these above-mentioned loans, and thus the bond market and even the banks themselves are no longer a safe place to store money.
The numbers above are from the Fed themselves. More info is available at http://ptohoi.wordpress.com
Since Australia has 80% of the world's biodynamic farming, and this farming has proved successful in bringing back to use lands that were deemed hopeless, why don't we look at the current fodd crisis in hte following way: crisis+ danger-opportunity. Let's move farming beyond organic, and straight into biodynamic. Any takers? Some Australian farmers would never go back to Monsanto's type of farming, and will stick to "flaky" biodynamic farming. Flaky for now; another adjective will come up in the future...
It's misleading to compare non-borrowed reserves to past values. The newly created term auction facility and primary dealer credit facility change the Fed's accounting. The negative number in non-borrowed reserves simply reflects the extent to which banks are taking advantage of these new repo facilities provided by the fed in place of normal repo markets which became unreliable and too expensive in the wake of extremly high inter-bank nervousness. But to argue that these new Fed lending facilities which have filled a gap in regular repo markets (extremely safe short term investments in normal times) have precipitated the flow of that money out of repos and into commodity futures as a safe haven from uncertain money markets seems like a massive stretch. I doubt if that particular flow of funds has occured in any meaningful way.
And for re-clarification, the Fed is not a private bank. This idea is an urban myth. The Fed is very much an arm of the government. In the same way that we are forced to pay into social security, the banks are forced to contribute capital to fund the Federal Reserve System. The banks own the Fed just as much as we own the social security system, which is to say that they are legally obligated to pay into it, and in return the government pays them a modest return on that contributed capital. But they don't own the Federal Reserve banks. Any profits the Federal Reserve System generates beyond its expenses goes to the U.S. Treasury.
It's a wonder that no one is taking a look at Brazil. They make ethanol from sugar cane and apparently, their food prices haven't been skyrocketing. Funny how man has a habit of making things so much more difficult than they have to be.
Bebe. I agree that we should look to Brazil. Cuba grows a lot of sugar cane. If we restored relations with Cuba, we might be able to enter into trade deals for the sugar cane. Also, if we had relations with Chavez in Venezuela, maybe we could get some better oil deals. Latin America in general is being ignored by the US. We keep looking to the Middle East. The solutions to our energy problems are in our own hemisphere.
The Middle East has oil and little else. We have farming. That is the simple reality as to why are government is playing this game. If oil prices are high, some believe high food prices are a way for retaliation, the poor be dammed. Sick, but true.
there's a good reason to:
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