How to control global food commodity trading

Financial speculators invested in food futures even before the great crash of 2008, driving up food prices to dangerous levels. This can and must be stopped.

Brussels is unspeakably hypocritical... - photo by mouton-noir.net

The asphalt road was straight and monotonous. Baobab trees passed one after the other, and the earth was yellow and dusty, despite the early hour. The air in the old black Peugeot was stifling. I was travelling north, towards Senegal’s big plantations, with Adama Faye, an agronomist and overseas development adviser to the Swiss embassy, and his driver Ibrahima Sar. We wanted to assess the impact of financial speculation on food, and we had the latest statistics from the African Development Bank. But Faye knew that a different kind of evidence was waiting for us. In the village of Louga, 100km from Saint-Louis, the car stopped abruptly. “Come and see my little sister,” Faye said. “She doesn’t need your statistics to explain what’s going on.”

There were a few stalls at the side of the road, a meagre market: mounds of cow peas and cassava, a few chickens clucking in cages, peanuts, wrinkled tomatoes, potatoes, and Spanish oranges and clementines. No mangoes, although Senegal is famous for them. Behind a stall, a young woman in a yellow kaftan and headscarf chatted with her neighbours. She was Faye’s sister Aisha. She was keen to answer questions, and got angry as she talked. Before long a noisy crowd of children, young people and old women had gathered around us.

A 50kg sack of imported rice had gone up to 14,000 CFA francs ($27) (1), so the soup for the evening meal had become more watery, with only a few grains floating at the top. Women were now buying rice from the grocers by the cupful. In the last few years a small bottle of gas had gone up from 1,300 to 1,600 CFA francs, a kilo of carrots from 175 to 245 and a loaf of bread from 140 to 175, while a tray of 30 eggs had risen in a year from 1,600 to 2,500. It was the same story for fish. Aisha scolded her neighbours for being too timid in their accounts: “Tell the toubab [white man] what you pay for a kilo of rice! Tell him! Don’t be afraid. Prices are rising almost every day.”

That is how high finance slowly starves people, while they remain ignorant of the mechanisms of speculation.

You consume more than you sell

The trade in agricultural products is different from any other: it is a market where you consume more than you sell. Economist Olivier Pastré estimates that “the international trade in cereals represents barely more than 10% of production, taking into account all crops (7% for rice). The slightest rise or fall in global production could upset the whole market”. As demand has grown, supply (production) has proved not only fragmented, but extremely susceptible to the weather, drought, fires and floods.

That is why, at the beginning of the 20th century in Chicago, derivatives were invented. Their value is “derived” from the price of another “underlying” asset, such as stocks, bonds and other financial instruments. They were originally meant to allow farmers in the Midwest of the US to sell their crops at a fixed price prior to harvest, hence the term “futures contract”. If the stock price fell at the time of harvest, the farmer was protected; if the price rose, investors made a profit.

But in the 1990s these assets came to be used for speculative rather than prudential purposes. Heiner Flassbeck, chief economist at the UN conference on trade and development (Unctad), established that between 2003 and 2008, speculation in raw materials using index funds (2) rose by 2,300% (3). At the end of this period the sudden rise in the price of basic foods provoked food riots in 37 countries. Television showed images of Haitian women in the slums of Cité-Soleil making pancakes out of mud to feed their children. Urban unrest, looting and protests bringing hundreds of thousands of people out on the streets in Cairo, Dakar, Mumbai, Port-au-Prince and Tunis, demanding bread to survive, dominated front pages.

The UN Food and Agriculture Organisation (FAO) 2008 price index averaged 24% above the 2007 figure, and 57% higher than in 2006. The manufacture of bio-ethanol in the US — boosted by annual subsidies of $6bn to producers of “green gold” — considerably reduced the US supply of maize to the world market. Since maize is important as animal feed, scarcity, at a time when demand for meat was rising, also contributed to rising prices from 2006 on. “The other main food cereal, rice, followed more or less the same trend,” said economist Philippe Chalmin, “with prices in Bangkok rising from $250 to more than $1,000 a ton”. The world suddenly realised that in the 21st century, tens of millions of people were dying of hunger. But little was said or done.

Alarm in the US Senate

Speculation in food has increased following the financial crisis: turning their backs on the mess they had created, speculators — particularly hedge funds — moved into agricultural markets. To them, all the planet’s resources are fair game for speculation, including basic foods such as rice, maize and wheat, which together make up 75% of global food consumption (50% for rice). According to the FAO’s 2011 report, only 2% of futures contracts for raw materials end with the actual delivery of the product. The other 98% are traded by speculators before their expiry date.

The phenomenon reached such proportions that the US Senate became concerned, and in July 2009 denounced “excessive speculation” in wheat, criticising the fact that some traders held as many as 53,000 wheat futures contracts at any one time. The Senate also complained that six index funds were currently authorised to hold 130,000 contracts on wheat at a time, 20 times more than the authorised limit for standard financial operators (4).

The US Senate is not alone in its alarm. In January 2011 another institution described the rise in raw material prices, particularly of food, as one of the five biggest threats to the wellbeing of nations, on a par with cyber warfare and terrorists with weapons of mass destruction. That institution was the World Economic Forum (WEF) in Davos.

The criticism is surprising given this exclusive group’s method of recruitment. The WEF’s founder, Swiss economist Klaus Schwab, has not left membership of his 1,000-member club to chance. Only the heads of companies with a turnover of over $1bn are invited to join. Members pay a $10,000 fee, which gives them access to all meetings. They include many speculators.

The opening speeches in Davos in 2011 clearly outlined the problem. Delegates strongly condemned “irresponsible speculators” who, seeking only profit, destroyed food markets and increased global hunger. The issue was discussed at seminars, conferences, cocktail parties and private meetings in hotels. It seems odd that global hunger finds its most attentive audience in the fondue restaurants, bars and bistros of Davos.

Flassbeck came up with a radical solution to defeat the speculators, and protect agricultural raw materials from their repeated attacks: removing food from their grasp. He proposes that the UN give Unctad worldwide control over setting stock prices for agricultural raw materials. Only producers, traders and users of these materials would be able to intervene on the futures markets. Anyone who traded wheat, rice, or oil, would have to deliver the goods. It would also be advisable to impose a high minimum level of self-finance on traders. Anyone who did not make use of a traded good would be excluded from the stock exchange.

If the “Flassbeck method” were implemented, it would remove speculation from the basics of survival, and hinder the financialisation of food markets. A coalition of research and non-governmental organisations vigorously supports Flassbeck and Unctad’s proposal. But governments lack the will to implement it.