Correction appended Dec. 17, 2012
Remember the food crisis of 2007 and 2008, when rapid and extreme increases in global food prices led to riots and civil unrest in 28 countries? While we have yet to see unrest on the same level since, the shadow of that crisis, and the debate as to what the systemic causes were, remains. At the end of November, the World Bank warned in its Food Price Watch report that high and volatile prices are the “new normal.” In a world where nearly 1 billion people live in hunger — an estimate that Jomo Sundaram, assistant director general of the U.N. Food and Agriculture Organization (FAO), describes as conservative — high food prices can be fatal.
The shift in prices affects consumers in rich countries, who will see their grocery bills rise at a time when wages in much of the world are stagnant. But the real impact is felt by the global poor, in places like Tajikistan, where individuals spend nearly 80% of their income on food. Price spikes in those places can be devastating, even deadly. Prices of agricultural commodities are now 7% higher than a year ago. Wheat and grain prices are especially high, with the former heavily impacted by crop failure in the U.S., Russia and other regions.
There are obvious factors at play here: poor weather, including drought in the U.S. Corn Belt, as well as the growing demand for grain from the biofuel industry and from consumers in places like India and China who are transitioning to a more meat-heavy diet. (It takes more than 15 lb. of grain to produce 1 lb. of beef.) For an increasing number of experts however, these factors do not go far enough in explaining what has caused food prices to spike since the 2000s, reversing what had been a four-decade-long trend of declining prices.
Instead, experts are pointing toward financial actors who have increasingly moved into the agricultural markets to bet on future prices of these commodities. Yaneer Bar-Yam and Greg Lindsay of the New England Complex Systems Institute argue that mathematical models show that only speculation — and not mere supply and demand — can explain these spikes. Bar-Yam’s group used these models to test the links between the possible reasons for the price spikes and found that when compared against actual prices between March 2011 and January 2012, the model pointed to speculation and ethanol conversion as the underlying cause.
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Not everyone agrees that it is that simple. Ann Berg, a former trader on the Chicago Mercantile Exchange and now an adviser to the FAO, says that while this trend has been noted, you “cannot prove causality” between the role of these speculators and the artificially high prices.
Traders have always speculated on the agricultural-commodities futures market, just as they do in other commodities like copper or oil. Those with an actual commercial interest — food producers and buyers — use this market to bet against price increases and decreases as a form of insurance against volatility. But after 1999 and 2000, when sections of the Glass-Steagall Act were repealed and President Bill Clinton signed the Commodity Futures Modernization Act into law, investment banks and other financial actors began to bet on commodities as speculation, not as insurance. “Where we used to see something like 12% of the market made up of financial players, since deregulation, this number has now jumped to over 60%,” says Heidi Chow of the World Development Movement, a U.K.-based campaigning organization.
The statistics are impressive: the German NGO Foodwatch points out that investment in food commodities has jumped from $65 billion to $126 billion in the past five years. Perhaps a more revealing statistic is that speculative investment in these commodities in 2011 amounted to 20 times more than the total spent on agricultural aid by all countries combined.
These facts alone do not necessarily implicate speculators as the boogiemen responsible for food price volatility, though the perception of financiers gambling and profiting as millions starve is a powerful one. Over the summer some European banks tentatively pulled out of these markets, either by withdrawing vehicles that allow investors to speculate on food commodities or by promising to not introduce new ones. Similarly, Rich Ricci, chief executive of Barclays’ investment arm, hinted before a U.K. government committee on Nov. 29 that his bank would consider ceasing to trade in agricultural products because “it does not sit socially well with a large constituent of our customers.” According to the World Development Movement, Barclays Capital made nearly $548 million from agricultural speculation in 2010.
Campaigners and regulators are nevertheless keen to introduce caps and limits on food speculation. As Brett Scott, a former London broker, explains, while it is difficult to pin the blame on speculation, which has always played a role in providing needed liquidity to markets, the volatility of these commodities has attracted a significant number of technical traders who “speculate on market patterns formed by the actions of other traders.” It’s their role that is key to understanding how the market has almost short-circuited, disconnecting from the realities of supply and demand and causing havoc, misery and high prices for both producers and consumers.
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For regulators, the difficulty is in establishing how much speculation is too much. Speaking before the FAO in Rome in October, Bart Chilton of the U.S. Commodity Futures Trading Commission (CFTC), who is pushing for regulatory caps through position limits, posed this very question to the audience: “By a show of hands, if one trader controlled 85% of a market, could they manipulate prices?” He received an almost blank response, according to Ann Berg. She points out that there is no working definition of what excessive speculation is, though there is a growing concern about the ability of these investment funds to “move markets,” as Chilton put it.
A possible solution to curbing these investors’ impact on real-world prices has been written into the Dodd-Frank legislation, authorizing the CFTC to set limits on percentages of specific commodity products that can be held by a single entity. Michael Dunn, a former CFTC commissioner, expressed doubts about these limits, describing them as “a cure for a disease that does not exist, or at worst, a placebo for one that does.” His pronouncement is yet to be tested; in October, Judge Robert Wilkins of the Washington, D.C., district court struck down this rule. For its part, the CFTC plans on appealing his decision. It may be the case that by the time regulation is in place, investors have lost their interest in commodity speculation, if only because of the poor optics for banks. For the world’s starving, however, this may be too little, too late.
An earlier version of this article incorrectly stated that President George W. Bush introduced the Commodity Futures Modernization Act. It was introduced during President Bill Clinton’s term.