Food-backed securities are the new darlings of Wall Street.
The financial services industry has cornered the market on food commodities. Their own financial markets collapsed and the housing bubble burst, so all that money had to go somewhere. It landed in agricultural commodities— wheat, corn, rice, dairy, and beef— where hedge funds and investment banks now dominate world markets.
No small potatoes
Back in 2003, before the banking crisis, about $3 billion of capital was invested in commodities; it stands now at nearly $150 billion, representing 85% of all global food commodity trading. The top players generate huge profits. Last year, Goldman Sachs, JP Morgan Chase, Barclays Capital, and Deutsche Bank each reported to have raked in upwards of $500 million from commodities market trades.
Before the speculators moved in, commodity trading was a place for stakeholders with a bona fide interest in the goods. On one side were the sellers of physical goods; the farmers, the millers, and the warehousers. The buyers on the other side were users of those commodities; they were agencies, governments, and food processors—the Nestlés, Krafts, and McDonald’s of the world. There was some investment of the traditional buy-low-sell-high type; just enough to keep the market liquid and give the stakeholders a chance to pre-sell some future contracts as a hedge against price fluctuations.
Speculators, who buy up positions on both sides while claiming a stake in neither, have perverted the centuries-old symmetry of the exchange. They’ve transformed a marketplace for farmers into a playground for investors. Food prices are now subject to the same market pressures as any other financial instrument, and the same volatility. Once-stable commodity prices can now see a month’s-worth of fluctuations in a single trading hour. Instead of supply and demand, spring freezes and summer droughts, food prices are now tied to fluctuations in exchange-traded commodity funds and food index-linked notes. It’s an amalgam of complex securities that is looking an awful lot like the trumped-up world of mortgage-backed derivatives before that market melted down.
Balanced diets, not balance sheets
The volume of speculation has overwhelmed the market, with a devastating, destabilizing effect on global food prices. Over the past 10 years, prices for basic commodities like meat, grains, sugar, cooking oil, and dairy products have increased by an average of more than 125%, far outstripping overall inflation in almost every country. In poorer, developing countries, it’s not uncommon for an individual to spend 60-75% of their income on food; there’s no wiggle room for changing prices in a budget like that. But in just the past five years, when we saw financial companies doubling-down on their investments, the commodities market was rocked by two annual price surges of more than 50% each. It’s no surprise that during the same five-year period, the United Nations World Food Program reported 115 million new cases of starvation and malnutrition.
I’d like to give the benefit of the doubt to the market speculators.
I’d like to think that their financial instruments are at such a remove from the stakeholders that to the investors it just seems like so many monetized widgets.
I’d like to believe that they too would be revolted by the knowledge that their financial gain comes at the price of human suffering.
The alternative is too monstrous to comprehend.