Why does it seem like wherever there is human suffering, some giant
bank is making money off it? According to a new report from the
World Development Movement, Goldman Sachs made about 400 million dollars betting on food prices last year. Overall, 2012 was quite a banner year for Goldman Sachs. As I reported in a previous article, revenues for Goldman increased by about 30 percent in 2012 and the price of Goldman stock has risen by more than 40 percent
over the past 12 months. It is estimated that the average banker at
Goldman brought in a pay and bonus package of approximately $396,500
for 2012. So without a doubt, Goldman Sachs is swimming in money right
now. But what is the price for all of this "success"? Many claim that
the rampant speculation on food prices by the big banks has
dramatically increased the global price of food and has caused the
suffering of hundreds of millions of poor families around the planet to
become much worse. At this point, global food prices are more than twice as high
as they were back in 2003. Approximately 2 billion people on the
planet spend at least half of their incomes on food, and close to a
billion people regularly do not have enough food to eat. Is it moral
for Goldman Sachs and other big banks such as Barclays and Morgan
Stanley to make hundreds of millions of dollars betting on the price of
food if that is going to drive up global food prices and make it harder
for poor families all over the world to feed themselves?
|Starving child in Ethiopia, photo by Cate Turton, Department for International Development.|
This is another reason why the derivatives bubble
is so bad for the world economy. Goldman Sachs and other big banks are
treating the global food supply as if it was some kind of a casino
game. This kind of reckless activity was greatly condemned by the World Development Movement report...
"Goldman Sachs is the global leader in a trade that is
driving food prices up while nearly a billion people are hungry. The
bank lobbied for the financial deregulation that made it possible to
pour billions into the commodity derivative markets, created the
necessary financial instruments, and is now raking in the profits.
Speculation is fuelling volatility and food price spikes, hurting people
who struggle to afford food across the world."
So shouldn't there be a law against this kind of a thing?
Well, in the United States there actually is, but the law has been
blocked by the big Wall Street banks and their very highly paid
lawyers. The following is another excerpt from the report...
"The US has passed legislation to limit speculation, but
the controls have not been implemented due to a legal challenge from
Wall Street spearheaded by the International Swaps and Derivatives
Association, of which Goldman Sachs is a leading member. Similar
legislation is on the table at the EU, but the UK government has so far
opposed effective controls. Goldman Sachs has lobbied against controls
in both the US and the EU."
Posted below is a chart that shows what this kind of activity has
done to commodity prices over the past couple of decades. You will
notice that commodity prices were fairly stable in the 1990s, but since
the year 2000 they have been extremely volatile...
The reason for all of this volatility was explained in an excellent article by Frederick Kaufman...
The money tells the story. Since the bursting of the tech bubble in 2000, there has been a 50-fold
increase in dollars invested in commodity index funds. To put the
phenomenon in real terms: In 2003, the commodities futures market still
totaled a sleepy $13 billion. But when the global financial crisis sent
investors running scared in early 2008, and as dollars, pounds, and
euros evaded investor confidence, commodities -- including food --
seemed like the last, best place for hedge, pension, and sovereign
wealth funds to park their cash. "You had people who had no clue what
commodities were all about suddenly buying commodities," an analyst from
the United States Department of Agriculture told me. In the first 55
days of 2008, speculators poured $55 billion into commodity markets, and
by July, $318 billion was roiling the markets. Food inflation has
remained steady since.
The money flowed, and the bankers were ready with a sparkling new
casino of food derivatives. Spearheaded by oil and gas prices (the
dominant commodities of the index funds) the new investment products
ignited the markets of all the other indexed commodities, which led to a
problem familiar to those versed in the history of tulips, dot-coms,
and cheap real estate: a food bubble. Hard red spring wheat, which
usually trades in the $4 to $6 dollar range per 60-pound bushel, broke
all previous records as the futures contract climbed into the teens and
kept on going until it topped $25. And so, from 2005 to 2008, the
worldwide price of food rose 80 percent --and has kept rising.
Are you angry yet?
You should be.
Poor families all over the planet are suffering so that Wall Street bankers can make bigger profits.
Many big financial institutions just seem to love to make money on the backs of the poor. I have previously reported
on how JP Morgan makes billions of dollars issuing food stamp cards in
the United States. When the number of Americans on food stamps goes up,
so does the amount of money that JP Morgan makes. You can read much
more about all of this right here: "Making Money On Poverty: JP Morgan Makes Bigger Profits When The Number Of Americans On Food Stamps Goes Up".
Sadly, the global food supply is getting tighter with each passing
day, and things are looking rather ominous for the years ahead.
According to the United Nations, global food reserves have reached their lowest level in nearly 40 years. Global food reserves have not been this low since 1974,
but the population of the world has greatly increased since then. If
2013 is another year of drought and bad harvests, things could spiral
out of control rather quickly...
World grain reserves are so dangerously low that severe
weather in the United States or other food-exporting countries could
trigger a major hunger crisis next year, the United Nations has warned.
Failing harvests in the US, Ukraine and other countries this year
have eroded reserves to their lowest level since 1974. The US, which has
experienced record heatwaves and droughts in 2012, now holds in reserve
a historically low 6.5% of the maize that it expects to consume in the
next year, says the UN.
"We've not been producing as much as we are consuming. That is why
stocks are being run down. Supplies are now very tight across the world
and reserves are at a very low level, leaving no room for unexpected
events next year," said Abdolreza Abbassian, a senior economist with the
UN Food and Agriculture Organisation (FAO).
The world has barely been able to feed itself for some time now. In fact, we have consumed more food than we have produced for 6 of the last 11 years...
Evan Fraser, author of Empires of Food and a geography
lecturer at Guelph University in Ontario, Canada, says: "For six of the
last 11 years the world has consumed more food than it has grown. We do
not have any buffer and are running down reserves. Our stocks are very
low and if we have a dry winter and a poor rice harvest we could see a
major food crisis across the board."
"Even if things do not boil over this year, by next summer we'll have
used up this buffer and consumers in the poorer parts of the world will
once again be exposed to the effects of anything that hurts
We desperately need a good growing season next summer, and all eyes
are on the United States. The U.S. exports more food than anyone else
does, and last summer the United States experienced the worst drought
that it had seen in about 50 years. That drought left deep scars all
over the country. The following is from a recent Rolling Stone article...
In 2012, more than 9 million acres went up in flames in
this country. Only dredging and some eleventh-hour rain kept the mighty
Mississippi River from being shut down to navigation due to low water
levels; continuing drought conditions make "long-term stabilization" of
river levels unlikely in the near future.
Several of the Great Lakes are soon expected to hit their lowest levels
in history. In Nebraska last summer, a 100-mile stretch of the Platte
River simply dried up. Drought led the USDA to declare federal disaster
areas in 2,245 counties in 39 states last year, and the federal
government will likely
have to pay tens of billions for crop insurance and lost crops. As
ranchers became increasingly desperate to feed their livestock, "hay rustling" and other agricultural crimes rose.
Ranchers were hit particularly hard. Because they couldn't feed
their herds, many ranchers slaughtered a tremendous number of animals.
As a result, the U.S. cattle herd is now sitting at a 60 year low.
What do you think that is going to do to meat prices over the next few years?
Meanwhile, the drought continues. According to the U.S. Drought Monitor, this is one of the worst winter droughts the U.S. has ever seen. At this point, more than 60 percent of the entire nation is currently experiencing drought.
If things don't turn around dramatically, 2013 could be an absolutely
nightmarish year for crops in the United States. If 2013 does turn out
to be another bad year, food prices would soar both in the U.S. and on
the global level. The following is from a recent CNBC article...
The severe drought that swept through much of the U.S.
last year is continuing into 2013, threatening to cripple economic
growth while forcing consumers to pay higher food prices.
"The drought will have a significant impact on prices, especially
beef, pork and chicken," said Ernie Gross, an economic professor at
Creighton University and who studies farming issues.
So let us hope for the best, but let us also prepare for the worst.
It looks like higher food prices are on the way, and millions of poor
families all over the planet will be hard-pressed to feed their
Meanwhile, Goldman Sachs will be laughing all the way to the bank.
|A global food crisis is coming. Are you ready? Photo by Oxfam, East Africa|