by David Moberg
March 24, 2011
from
InTheseTimes Website
|
David Moberg, a senior editor
of In These Times, has been on the staff of the magazine since it
began publishing in 1976.
Before joining In These Times,
he completed his work for a Ph.D. in anthropology at the University
of Chicago and worked for Newsweek.
He has received fellowships
from the John D. and Catherine T. MacArthur Foundation and the
Nation Institute for research on the new global economy. He can be
reached at davidmoberg@inthesetimes.com.
Less than three years after the last
food crisis peaked, prices - along with hunger and malnutrition -
are up again.
Don’t (only) blame nature.
Speculators are back, seeking to exploit - and
in the process drive up - prices. New global investments in agriculture
derivatives reached $2.6 billion in December, double the level a year
earlier. |
Indian customers line up to
buy onions sold by the Agriculture Department
under a price-controlled
scheme in a market in Hyderabad, on January 12, 2011.
With food inflation climbing
above 18 percent and unseasonal rains in southern India
threatening crop
production, India's Prime Minister Manmohan Singh
called in his top cabinet
ministers to discuss the problem.
(NOAH SEELAM/AFP/Getty
Images)
Just a few years after one
major global food crisis, a new worldwide spike
in agricultural commodity and food prices is generating both predictable and
extraordinary fallout.
The search for causes once again leads to a
conjuncture of flawed policies - in trade, environment, finance and
agriculture - that is likely to produce more dangerous volatility in years
to come.
Over the past year, food prices around the world shot sharply upward,
surpassing the previous price surge in 2007-2008 to set a new record, as
measured by UN’s Food and Agricultural Organization (FAO).
In February, the UN’s food price index rose for
the eighth consecutive month, to the highest level since at least 1990.
As a result, since 2010 began, roughly another 44 million people have
quietly crossed the threshold into malnutrition, joining 925 million already
suffering from lack of food. If prices continue to rise, this food crisis
will push the ranks of the hungry toward a billion people, with another two
billion suffering from “hidden malnutrition” of inadequate diets, nearly all
in the developing countries of Africa, Asia and Latin America.
That deprivation will shorten lives and stunt young minds, hitting the most
vulnerable populations, such as the urban poor of food importing countries -
in cities like Cairo, Tunis and Dhaka - hardest.
The poor spend more of their budgets on food -
50 to 80 percent of household income in some developing countries, compared
to less than 10 percent of household income on average in the U.S. and
Europe. So the food price hike cuts deeply into their spending on other
needs, and into already strapped budgets of poor countries trying to provide
food aid to their citizens.
Some of those urban poor have not been quiet since prices began rising
again. They waved loaves of bread as they joined in protests in Tunis, Cairo
and other cities in recent months.
Their immediate, concrete grievance added a
spark to long smoldering discontent with authoritarian regimes, producing
the beginnings of democratic revolutions, not just the usual, unsettling
“food riots.”
Bad weather, worse
policies
But beyond those movements for democracy, the world will also need to adopt
a new model for food and agriculture policy to prevent future food crises,
which seem highly likely if current conditions continue.
The core cause of the current crisis, like the
one three years ago, is failed policies, not bad harvests and disastrous
weather. (And it’s worth noting that part of the intensity and unusual
patterns of that weather results from flawed environmental and energy
policies.)
Nightmarish weather during the last year - from floods in Sri Lanka, Pakistan
and Australia to droughts stretching from Russia and the Ukraine to
Argentina and now China - set off the hike in grain and food prices. But
even if natural phenomena like La Nińa in the Pacific played a role in
weather that depressed crop yields, global warming has intensified weather
extremes and disrupted regional weather patterns.
No one event can be blamed on
climate change,
says University of California at Berkeley visiting scholar Raj Patel, author
of Stuffed and Starved, but,
“we can certainly say climate change is
responsible for exacerbating and causing more severe weather problems.”
In October, the FAO Committee on World Food
Security concluded that climate change will ultimately affect,
“the livelihoods, food security, and way of
life of billions of people.”
In recent decades, “hydrological disasters” have
increased an average of 7.4 percent each year, and even faster over the past
few years.
The FAO study projects that the number of people
affected, the loss of arable land, the incidence of harmful pests, and the
risk of hunger as a result of climate change will rise rapidly in the next
few decades, and crop and animal productivity will “suffer.”
The FAO committee concludes that,
“climate change multiplies existing threats
and… increases the vulnerability… to food insecurity,” especially for
women and children.
Ironically, industrial agricultural practices,
including,
-
pesticides and fertilizers
-
clearing new land for crops
-
global
agricultural trade,
...all contribute to climate change.
While harvests have suffered, demand for food grains globally only increased
1.2 percent last year, according to Jawaharlal Nehru University economist
Jayati Ghosh, even taking into account a growing population, higher incomes
and changing tastes in food in countries like China. The diversion of 40
percent of U.S. corn into biofuel annually, an unsustainable long-term
strategy for a variety of reasons, may have pushed prices up some.
But the biggest factor in the current crisis is not increasing demand but
lower production.
At the same time, hunger is currently a result
of poverty and inequality, not lack of food.
Food commodity fetishism
Ultimately, the food price crisis stems only in part from an imbalance of
supply and demand.
More importantly, it grows out of decades of bad
policy that subordinates food as a commodity to global markets that are
dominated by large multinationals and distorted by speculators.
Yet the
dominant multilateral elite - mainly U.S. and European officials from
governments, corporations and international financial institutions - still
prescribes more trade and less encumbered markets as the solution.
By contrast, many countries, civil society groups, environmentalists,
advocates for the poor, and representatives of peasants and small farmers
say that food should be treated as a human right.
And countries should strive for food security
and as much self-sufficiency as can be reasonably achieved, as Karen
Lehman, former senior fellow at the Minneapolis-based Institute for
Agriculture and Trade Policy, argues.
In one recent dispute, free traders criticized Russia for halting wheat
exports last year after drought and fires reduced wheat crops so drastically
that the country might have faced shortages. The ban undoubtedly created
anxieties that pushed up wheat futures prices. But food security advocates
note that people rightfully expect their governments to protect their food
supply.
Food policy must permit them to do so (as global
trading rules still do to some extent).
Over several decades, the global grain trade, especially the dumping of
subsidized crops from the United States and Europe, depressed peasant
incomes in developing countries and accelerated their leaving the land for
life - and usually a different kind of poverty - in the city:
The result:
less self-sufficiency, less security and
grain prices that were often lower but much more volatile than they
would have been with more of a managed trade system.
Free trade and domestic deregulation have meant,
“that changes in world prices are, for the
most part, being transmitted more rapidly and more fully to domestic
markets,” the FAO committee reported in October.
Global availability of cheap food may help a
country relieve problems of a moderately bad domestic harvest, but
disruption in a major exporter also transmits a big jump in prices around
the world.
The increased volatility,
“threatens farm viability (low prices), food
security (high prices), undermines investment decisions, and threatens
domestic security and political stability,” the committee says.
One group of economic actors loves that
volatility: traders in futures markets, both in open exchanges like the
Chicago Board of Trade and private over-the-counter contracts.
“Traders make money out of price volatility
and now help to exacerbate it,” Patel says.
But
futures markets, when closely regulated,
also enable both buyers and sellers to hedge against uncertainty of future
prices, locking in delivery of a product at prices that are acceptable or at
least known.
Speculative traders provide liquidity for the
markets, making transactions simpler and faster. The futures markets also
help “discover” prices.
But futures markets are not the only way to bring predictability to
agricultural markets. Historically they have worked best when combined with
government policies to manage supply and thus prices of commodities within a
certain range, partly by maintaining reserves of key food products. Since
the rise of the first urban states, governments have maintained reserves of
grain as protection against bad harvest.
But contemporary versions of such policies,
dating in the United States from the New Deal, lost force over the past four
decades, and were virtually abandoned in the 1996 “freedom to farm”
legislation, signed by President
Bill Clinton.
Today, China is one of the few countries that does maintain large reserves,
though their size is secret. Going into this crisis, known world stocks of
commodities were low, especially for corn, says Gerald Bange, chair
of the U.S. Department of Agriculture’s World Agriculture Outlook Board.
Private firms held much of the world’s reserves.
“The big picture about rising food prices is
that one of the things that globalization has done is to increasingly
put food reserves in private hands,” says Tim Wise, policy research
director for Tufts University’s Global Development and Environment
Institute.
“You get speculation and hoarding if people feel there’s a
shortage of supply.”
The speculators return
After the federal government deregulated markets in the late ’90s, futures
and other financial derivative products became even more important as
speculative investments among global high rollers.
Big financials firms entered the food commodity
markets.
For example,
Goldman Sachs and
American International Group,
leaders in the marketing of mortgage-backed securities whose collapse
brought on the Great Recession, began selling commodity index securities,
whose value was supposedly based on a basket of commodities including food
and almost always oil and other non-agricultural goods.
In the run-up to the previous food price crisis, a study last January from
the Federal Reserve Bank of St. Louis reports, large investors - from hedge
funds to pension funds - saw these “investments” as a way to earn higher
profits than on less risky options.
Many also saw commodity indexes as a balance or
alternative to stocks and other securities. They also thought they could use
other derivatives to manage those risks.
Rather than buy, as a farmer or grain miller might, to guarantee delivery at
a fixed price, the new speculators - from hedge to pension funds -
disproportionately made and renewed their investments on an expectation of
rising prices, creating a bubble that burst as part of the financial crisis.
They believed that the long-term trend in commodity prices was up.
And given the weight of oil in the index, oil
price increases drove agricultural prices up, not only because of increased
costs of agricultural production (fertilizer, machinery operation,
transport) but also because of the packaging of these derivatives.
The Fed study found,
“the massive increase in trading in
commodity derivatives over the past decade… far outstrips the growth in
commodity production and the need for derivatives to hedge risk by
commercial producers and users of commodities… The gross market value of
commodity derivatives rose by a factor of 25 between June 2003 and June
2008 - reaching $2.13 trillion.”
The financial investors rose to dominance partly
because the Commodity Futures Trading Commission rules do not limit
the size of investment, or position, they can make, unlike the traditional
commercial users of futures who face position limits.
Now speculators are back, seeking to exploit - and in the process drive
up-prices. Barclays Capital reports that new global investments in
agriculture derivatives reached $2.6 billion in December, double the level a
year earlier.
And such investments have likely increased
dramatically since then with news of further price increases.
“Once again, it is likely that a combination
of panic buying and speculative financial activity is playing a role in
driving world food prices up well beyond anything that is warranted by
real quantity movements,” Nehru University economist Ghosh writes on
“the triple crisis” website.
And that means everyone in the market for real
agricultural products is receiving distorted signals about prices, as
speculators enrich themselves on another bubble.
The root of the problem lies in the growing and
still inadequately regulated power of financial capital. The owners of that
capital - big Wall Street firms like Goldman Sachs - are unwilling to make
the long-term investments in useful production that society needs, and are
intent on stripping revenue from those productive enterprises for the
benefit of the financial elite.
The details differ this time on precisely which weather events tightened
supplies of what commodities, setting off speculative frenzy. And the
political consequences in countries like Egypt are more dramatic.
But the dynamics of the crisis and its roots in
failed policies are the same.
In many countries, Patel argues,
“what’s different in 2011 is that
governments are fighting inflation or budget deficits, not recession.”
And politicians often see safety nets for the
poor or unemployed, including direct food and nutrition aid, as targets for
cuts.
Stopping the needless tragedy
Looking ahead, the world needs a new model for farming and food
to avoid repeated worsening food crises.
The bottom line is that much more needs to be
done to protect the poor. Regulators should immediately limit positions of
financial speculators in commodity future index derivatives.
In the longer term, such derivatives should simply be banned, agricultural
derivatives contained to exchanges (as last year’s financial reform law
permitted the Commodity Futures Trading Commission to do), and agriculture
futures markets returned to their original use under tight supervision.
Individual countries, regions and global institutions should return to
maintenance of commodity reserves and, as a corollary, policies to stabilize
prices. The campaign to deregulate and expand global agriculture “free
trade” should give way to guaranteeing more domestic policy freedom aimed at
a reasonable degree of domestic self-sufficiency.
Instead of a push toward export-oriented production, there needs to be
action by the guilty countries to stop dumping of subsidized products, as
well as pressure in international forums (like the WTO) for the countries’
right to protect indigenous agriculture through trade barriers.
Investment should be encouraged in more
ecologically and socially sustainable agriculture, as well as infrastructure
to raise productivity of traditional peasants and small farmers. It
shouldn’t be directed toward the unrealized hype of bio-engineered crops -
or the exploitative speculation on food and other farm products.
Broader policies to halt and reverse global warming, which include changes
in agricultural production and different sources for biofuels, are also
critical to avoid price volatility.
Without substantial change, the modest progress
toward reducing hunger after World War II will shift into reverse - despite
the great, needless tragedy of more than 1 billion people starving
in a world capable of producing food enough for all.
