Food Speculation: ‘People Die from Hunger While Banks Make a Killing on Food’

By John Vidal

January 24 2011 “The Guardian”

A new theory is emerging among traders and economists. The same banks hedge funds and financiers whose speculation on the global money markets caused the sub-prime mortgage crisis are thought to be causing food prices to yo-yo and inflate. The charge against them is that by taking advantage of the deregulation of global commodity markets they are making billions from speculating on food and causing misery around the world.

As food prices soar again to beyond 2008 levels it becomes clear that everyone is now being affected. Food prices are now rising by up to 10% a year in Britain and Europe. What is more says the UN prices can be expected to rise at least 40% in the next decade.

When the process of “hedging” was tightly regulated it worked well enough. The price of real food on the real world market was still set by the real forces of supply and demand.

But all that changed in the mid-1990s. Then following heavy lobbying by banks hedge funds and free market politicians in the US and Britain the regulations on commodity markets were steadily abolished. Contracts to buy and sell foods were turned into “derivatives” that could be bought and sold among traders who had nothing to do with agriculture. In effect a new unreal market in “food speculation” was born. Cocoa fruit juices sugar staples meat and coffee are all now global commodities along with oil gold and metals. Then in 2006 came the US sub-prime disaster and banks and traders stampeded to move billions of dollars in pension funds and equities into safe commodities and especially foods.

“We first became aware of this [food speculation] in 2006. It didn’t seem like a big factor then. But in 2007/8 it really spiked up” said Mike Masters fund manager at Masters Capital Management who testified to the US Senate in 2008 that speculation was driving up global food prices. “When you looked at the flows there was strong evidence. I know a lot of traders and they confirmed what was happening. Most of the business is now speculation – I would say 70-80%.”

The speculative food market is truly vast agrees Hilda Ochoa-Brillembourg president of the Strategic Investment Group in New York. She estimates speculative demand for commodity futures has increased since 2008 by 40-80% in agricultural futures.

“There is no way of knowing exactly [what is happening]. We had the housing bubble and the credit default. The commodities market is another lucrative playing field [where] traders take a fee. It’s a sensitive issue. [Some] countries buy direct from the markets. As a friend of mine says: ‘What for a poor man is a crust for a rich man is a securitised asset class.’