Rampant Speculation Inflated Food Price Bubble

  •  uxbridge, canada
  • Inter Press Service

Wall Street investment firms and banks, along with their kin in London and Europe, were responsible for the technology dot-com bubble, the stock market bubble, and the recent U.S. and UK housing bubbles. They extracted enormous profits and their bonuses before the inevitable collapse of each.

Now they've turned to basic commodities. The result? At a time when there has been no significant change in the global food supply or in food demand, the average cost of buying food shot up 32 percent from June to December 2010, according to the U.N. Food and Agriculture Organisation (FAO).

Nothing but price speculation can explain wheat prices jumping 70 percent from June to December last year when global wheat stocks were stable, experts say. 'There is no food shortage in the world. Food is simply priced out of the reach of the world's poorest people,' said Robert Fox of Oxfam Canada in reference to the estimated one billion people who go hungry.

'Hunger is not a food production problem. It is an income problem,' Fox told IPS. The conditions that created the 2007-08 price hike and food riots have not changed, he said. It is no surprise to see record-high food prices and riots again in Egypt, Algeria, Jordan and elsewhere.

Weather used to be the big determinant of food prices, but not anymore. Trillions of dollars have been pumped into food commodities markets in the last few years thanks to deregulation of commodities trading in the U.S., reports Olivier De Schutter, the United Nations Special Rapporteur on the Right to Food.

In an analysis of the food price crisis of 2007-08, De Schutter documents how the U.S. government passed legislation in 2000 deregulating the food commodity markets and for the first time permitted speculation on speculation.

Here's how it used to work. In January, Farmer Brown would sign a contract to sell his 2011 future crop to a grain trader like industry giant Cargill for 100 dollars a tonne. In the fall, Cargill would then sell Farmer Brown's grain at whatever price they could get to a bakery or feedlot company for cattle. These 'futures' contracts insulated both the farmer and the grain trader from wild price fluctuations.

Now, after the passage of the U.S. Commodity Futures Modernisation Act in 2000, Cargill could sell Farmer's Brown 'futures' contract to an investment bank on Wall Street for 120 dollars a tonne, who could in turn sell it to a European investment company for 150 dollars a tonne and then sell it to a U.S. public pension fund for 175 dollars a tonne and so on. Add in some complex financial instruments like 'derivatives', 'index funds', 'hedges', and 'swaps', and food become part of yet another highly-profitable speculative bubble. A deeply-flawed global financial system was largely responsible for the 2007-08 food crisis, concluded De Schutter in a September 2010 briefing note.

© Inter Press Service (2011) — All Rights ReservedOriginal source: Inter Press Service