Monday, January 16, 2012

Rising food prices accelerated by speculators

Cheap food—the ultimate bribe to 99% in USA.  It has been official government policy since I can remember.  I grew up hearing farmers curse cheap food policies.

But food isn't so cheap as it once was.  Could we ever see "first" world food riots? I have no idea but I do know, letting speculators in on this action is going to make things MUCH worse.

Jumps in food price trigger calls for derivative regulation

Price hikes for staple foods hit poor people in developing countries the hardest. Speculation is part of the reason why food prices are peaking again and leaving nearly a billion people without adequate access to food.

The Berlin-based group World Economy, Ecology and Development (Weed) along with other campaigners is lobbying for better rules against financial speculation on food. Deutsche Welle spoke with Weed's Markus Henn about the causes of recent food price hikes and how additional regulation could improve the situation.

Deutsche Welle: How high are food prices currently, and what does that mean for people in poor countries?

Markus Henn: Currently, prices are high again. There has been an increase again since the slump in 2008 and 2009. However, it is not uniform across all commodities. For example, rice has not peaked as was the case in 2008. But for wheat we hit a new record a few months ago. At the moment the prices are going down a little bit, but it is still, in general, the commodity with a price peak that is the highest on record.

You have campaigned against speculation in food commodities. Weed has started a petition to influence the proposed reform of finance instruments in the European Union. What is the goal of the petition? < The directive covers, amongst other things, the so-called commodity derivatives, which are contracts with which you can speculate on food prices and this directive is now dealing with commodity. At the moment, we think that these derivatives are not sufficiently regulated. We are trying to improve the regulation and influence the process. Would it help if the derivatives were more regulated?

It would help because if you regulate the commodities derivatives. For example, if you have rules that financial speculators cannot take as many contracts or as high of a position as they wish, you can prevent at least part of the bubble which is taking place in the commodity markets at the moment.

In 2008, for example, we of course had some price reasons which were fundamental - a weak harvest. It was not just speculation but the speculation increased difficulties more than if there had not been speculation. If you regulate these markets as derivative markets then speculators cannot exacerbate these price peaks.

How much resistance is there against regulating markets in the way that you propose?

There's a lot. It mainly comes from the financial industry, which makes a lot of money with commodity speculation. Partly by themselves so they speculate on their own account, but also by channeling a lot money from investors and ordinary people into a so-called commodity product. The banks advertise funds that allow people to invest in commodities. This means that the banks buy these commodity derivatives and drive up the prices or strengthen the volatility of the prices and so the main defendant of deregulation is the financial sector.

Why should there be special regulations in place for the food market? Should it have a special status?
I think the food market should definitely have special status. We have seen in the financial crisis what financial speculation and deliberalization of financial markets means and also what catastrophic consequences it could have and I think we should not allow the financial markets to determine our food prices and our food production.

Of course agriculture needs finance and investment. But this kind of speculation is not investment in agriculture. It just brings more money to people who already have money and is not useful to agriculture as a whole. That is why we should try to limit the influence of financial markets on the food markets.

Some economists say food speculation is not the only reason why prices are increasing again. There have also been a lot of natural disasters, climate change, weak harvests, biofuel production. What is the role of financial speculation in food prices in comparison to other factors?

It's very difficult to give an exact number or the percentage of the influence. Some economists have tried that and come to the conclusion that 15 percent is due to speculation others looked at oils and came to 25 percent, some say even it's responsible for the majority of the price increase.

It is more useful to say that speculation is a major reason which does not mean that there are no other reasons. In 2008, there were reasons regarding the harvest. Last year, even though there were some droughts, the markets were not as tight as in 2008. There was still a good harvest. I think especially the wheat price rise is not justified by the fundamentals.

We think that the index investment speculation which is the main money from speculation is a key reason for the price spike and there are other academic studies from the last one to two years that also support this argument. more
Of course, there are real reasons for food shortages.  Here's an example we find especially interesting here in Minnesota.
Heat, Humidity and Crop Yields 
At the ASSA meetings next month I'm going to present some new research wherein we (Wolfram Schlenker, Jon Eyer and myself), incorporate vapor pressure deficit (VPD) into earlier regressions linking crop yields to weather. Vapor pressure deficit, a close cousin to relative humidity, has a linear relationship with evaporation, and is a key input in many crop models. For this meeting we're only presenting evidence on Illinois, which has been our testing ground for fine-scale data development. 
If you haven't been following, I've written a lot about the strong and robust association between extreme heat and crop yields. This puzzles some crop scientists who focus on soil moisture and precipitation as the key impediments to higher yields. But in comparison to any precipitation or soil moisture variable we've constructed, extreme heat, measured as degree days above 29C, is a far better predictor of yield. And the underlying relationship is similar across widely varying climates and whether identified over the cross section (comparing average yields with average climates over locations) or the time series (comparing yields over time in a fixed location with different weather outcomes). Such a robust and pervasive pattern in observational data is extremely rare. more
And one more tale of the movement to tax speculation.  Hey, we once hanged speculators—passing a small tax to limit the damage they can do seems so much more civilized.  But something must be done about the pirates.
Taking on the Speculators
What Would a European Tobin Tax Really Mean?
By Stefan Kaiser

Angela Merkel and Nicolas Sarkozy are pressing forward with plans to introduce a financial transaction tax in the EU -- if necessary without Britain, home to Europe's largest financial center. Critics believe it will cause an exodus of the industry from the euro zone. But a closer look at the proposal suggests the worst wouldn't necessarily come true.

The idea is age-old, but its time may soon be coming. A tax on financial transactions could help to stem short-term speculation on the markets. French President Nicolas Sarkozy wants to push the tax through in Europe -- if necessary even without Britian, which has doggedly resisted such measures. Sarkozy picked up a new ally for the plan this week as well: German Chancellor Angela Merkel is also willing to venture going it alone to implement the tax exclusively within the 17 members of the euro zone. It would not directly apply to London, Europe's most important financial center.

Ironically, it was a Briton who first came up with the idea for such a tax. In 1936, economist John Maynard Keynes suggested using the tax in order to curb speculation. In the 1970s, American economist James Tobin's work on the issue brought the proposed tax to the attention of the left and critics of globalization. The so-called "Tobin tax" was a founding demand of the Paris-based, globalization-critical network Attac, whose acronym stands in French for "Association for the Taxation of Financial Transactions and for Citizens' Action."

In the meantime, the idea has also picked up some prominent advocates, including the American Nobel Prize-winning economist Joseph Stiglitz. Last year, Stiglitz told theFrankfurter Allgemeine Sonntagszeitung newspaper: "I am convinced that if Germany, France, Spain and Italy were to implement the financial transaction tax together, it would work." more


  1. Without cheap food, the oligarchs will have to rule by (more) force.

    That should be interesting.

  2. It is going to get very interesting because the real costs of food are being driven upward by population pressures, rising fuel costs, reductions in arable land, and worsening growing conditions due to changing climate. The oligarchs have little control over these matters so beyond lining their pockets by speculation, force is their only option. OTOH, food riots won't increase the food supplies or lower their prices either.

  3. @ Jonathan Larson: I would not deny these pressures. However, the population has increased for decades, and still, the prices declined till the begin of the new millenium. And biofuels have increased while the prices plummeted in 20008/09. It is also acknowledged by most observers that for the most important grains, emerging countries such as China and India are still self-sufficient.

  4. Welcome aboard Herr Henn. I hope your organization prospers!

    I cannot match your titles but I know a little about growing grain in the North American corn belt. When I was about 15, I recall farmers bragging about getting 40 bushel of corn per acre. Recently, a farmer told me he had gotten in excess of 240 bushels per acre. So in about 45 years, corn growers have multiplied their yields by six times. But those peak (Minnesota) yields are now four years behind us—crazy weather accounts for most of the falloff. So not only are we unlikely to see yields increase by six times in the next 45 years, I would argue we will be damn lucky to ever again approach the output of just a few years ago. We may have seen "peak food."

    But while (I think) we disagree about trends in crop output, I have no disagreement that speculators are making a bad situation 100 times worse.