Wednesday, 17 December 2008

Re-Post from 30/05/08: Famine Futures: Deregulated Markets and Food Insecurity

Originally published at RGE Monitor on 30 May 2008.

In a week when Hormel celebrates another surge in Spam sales, my preferred indicator of US food insecurity, it is appropriate to raise the market and regulatory failures that are driving global food insecurity.

Like so much that we have observed in the past eight years of the Bush administration, the origins of the current food crisis can be traced to the recycled policies of the Nixon White House. Henry Kissinger stated the premise succinctly in 1970: "Control oil and you control nations; control food and you control the people."

With credit, oil and food markets spiralling out of reach of the poor and straining the middle-class, it is worth exploring whether similar policies underpin similar problems. In each industry, a small handful of global companies control supply and a massive increase in ill-transparent speculation acting on pricing in exchange markets forces prices up regardless of the fundamentals of supply and demand. The risks for famine and political instability are huge. One doesn’t need to be a conspiracy theorist invoking the Trilateral Commission to feel that something is very wrong with policies leading to simultaneous crises in credit, oil and food that threaten not just the wealth but the wellbeing of most of the world’s population.

Two or three generations ago, most of us would have been directly involved in food production as a hedge against food insecurity. My parents’ generation kept a garden in the back yard, putting to me to work each summer to raise corn, tomatoes, cucumbers and other fresh foods for the table, sending me to pick berries and fruits in season from our own and the neighbours’ bushes and trees. My grandparents’ generation kept chickens as well as a garden behind their house in the middle of a large industrial city. The garden and chickens helped my mother survive the Great Depression at a time when my father suffered stunted growth from rickets. My great-grandparents’ generation were almost entirely farmers working the land.

Today global agriculture is dominated by eight multi-national corporations. The policies promoted by successive governments and international institutions including the IMF, World Bank and WTO have aimed at undermining local production, distributed commercial networks, and diverse local markets in favour of mass production, streamlined supply chains and concentrated global market pricing.

As with other areas of our lives, the policies of “free market fundamentalism”, as George Soros styles it, have not diminished risks but increased them. My children are hostages to food insecurity, as are yours and billions of others. A disruption in global food supplies or surge in prices that puts food staples beyond the reach of many low income or middle-class families cannot be offset from the back garden. The exposure of food to pricing in markets open to manipulation and excess speculation puts the lives of millions at risk.

Mack Frankfurter at Seeking Alpha has written a compelling review of how we got where we are.

The Commodity Conundrum: Securitization and Systemic Concerns (Part I)

The Commodity Conundrum: Securitization and Systemic Concerns (Part II)

The Commodity Conundrum: Securitization and Systemic Concerns (Part III)

Mr Frankfurter reviews the history of “securitized commodity products” and the development of commodities as speculative investments, distinct from their role in production and consumption within the economy. He suggests that something “systemic and possibly more insidious” has altered the benign role of speculators as providers of market liquidity and ties this change to the ill transparency of OTC derivatives arising from The Enron Loophole. I recommend reading the whole series.

We begin to see a pattern emerging. Free market policies and liberalised regulatory regimes promoted rapid concentration of a sector into a global oligopoly which could control supply. Free market doctrines and trade liberalisation enabled predatory targeting of markets to undercut domestic production and smaller producers, reinforcing the concentration of the market and the pricing control of the oligarchs. Free market ideologies and innovative financial derivatives promoted domination of market pricing mechanisms by speculative investors able to accelerate steep price gains regardless of supply and demand fundamentals.

Whether it is credit, oil or food, we are all going to suffer from bad policies which promoted free markets as risk reducing rather than risk enhancing. In the US and the UK we may hope that our food insecurity does not worsen to the point of riots, looting, political instability and the starvation of children, but many parts of the world will not be so fortunate. If there is a backlash against free trade, against free market doctrines, against the domination of big banks, big oil and big food, perhaps it will not be unenlightened but enlightened. Perhaps it is overdue.

We can live without credit. We can live without oil. We cannot live without food.

Credit and oil prices are also feeding the food price bubble. The Kansas City Fed highlighted risks confronting the agricutural sector from higher credit costs for infrastructure, fuel and margin calls on hedged exposures in its report Survey of Tenth District Agricultural Credit Conditions.

The role of market mechanisms and deregulation in fuelling the commodity price rises is coming under increasing scrutiny as the markets themselves now fail to meet their basic function of matching buyers and sellers of commodities.

Bloomberg News:

The divergence between CBOT futures and the underlying commodity is so great that some grain merchants have stopped bidding for new crops, said Niemeyer, a member of the National Corn Growers Association board. Others won't guarantee a price for more than 60 days. ''We have a fundamental problem with the markets,'' said Kevin McNew, president of researcher Cash Grain Bids Inc. in Bozeman, Mont., and a former Montana State University economist. ''It is very difficult to operate a grain business when the cash prices are below the futures'' by such a wide margin, he said. The price gap should converge when futures contracts expire and deliveries are settled. Instead, the average premium for CBOT wheat has quadrupled in two years to 40 cents a bushel, compared with 10 cents the prior five years, McNew said. For James McReynolds, who farms 2,000 acres of wheat outside Woodston, Kan., futures aren't worth the risk. ''The differential of what the market should be and what you can actually sell is so far out of line that you aren't willing to do it,'' McReynolds said. ''This is a tough situation. Agriculture is not as healthy as we'd like to think it is.''

One of the drivers of the Commodity Exchange Act of 1936 was a desire to have regulators responsible for ensuring that commodity markets serve the legitimate hedging needs of producers and consumers in the economy and not merely speculators. The Enron Loophole devastated regulation of commodity markets. Once again, legislators and regulators have failed to protect the public by discharging their mandate in favour of protecting the speculators who bid higher for influence.


Anonymous said...

One of the more interesting studies of Famine was done by Amartya Sen, in which he came to the conclusion that no functioning multi-party democracy had suffered a widespread famine.

His work on poverty and measurement of capabilities is very interesting and worth a read.

MogwaiHunter said...

USA is preparing to starve its own people...

See the total collapse of reserves over the past 6 years...

Compare May 2002

With present

Roger Godby said...

Interesting, but Soros' "freak market fundamentalism" is bogus; just look at all the regulations governing everything.

For food, consider US subsidies (sorry, "free market fundamentalism") to family farmers, who are increasingly folding or selling out to (also subsidized) corporate farming. Throw in the price-hiking ethanol scam (sorry, "free market fundamentalism") for the eco-freakos, which private investors largely shunned, unlike Uncle Sap. Then there's the PIC program paying farmers not to farm; Japan has a PIC-type program, which might explain in part why my rice costs allegedly 6 times the world average.

My imported Australian oatmeal is cheap and plentiful; cheap raisins from who-knows-where make a great breakfast with milk. It might not be a breakfast a former Lehman Bros. financier would approve of, but it's cheap, tasty, easy, and reasonably nutritious.

The sky is currently falling, but so are prices.

I wonder how long the media hype can keep going. Long enough to get people to move out of NYC and LA for small towns in Iowa so they can have the gardens (and then some) that you reminisce about? Organic even! If you're on welfare or telecommuting, your money will go much farther and you'll be much safer and freer.

If you're going to go hardcore, take a page from the Mormons: airtight bags of Kansas red wheat and loads of doesn't-spoil honey.

Anonymous said...

I was going to post something similar to what MogwaiHunter said. I read online last year that most of our grain reserves were sold. The U.S. government does not have the wherewithal to feed its own people in the event of a famine or other major catastrophe.


Anonymous said...

This is absurd - with the mechanization of agriculture there is a massive global OVERSUPPLY of food.

Many countries pay farmers to produce LESS food in order to keep food prices artificially high.

Stop using cheap tricks to scare people - there is no shortage of food whatsoever.

Anonymous said...

There is no distinction between food & fuel. A man throwing a few seeds in a field can feed himself & maybe a few neighbors, but not the other 6.5 billion people on this planet. If you took oil off of this planet for 2 years, you would produce enough food so that about 1 billion people would be all that remain. Oil is non renewable & soon coming to the point of being unable to manipulate, except for short periods.

Anonymous said...

ネットショップ 構築

Denarius said...

The correct / updated link to the original article on the RGE Monitor website is :

Finance & Markets Monitor
Famine Futures: Deregulated Markets and Food Insecurity
London Banker | May 30, 2008