Famine Futures: Deregulated Markets and Food Insecurity

In a week when Hormel celebrates another surge in Spam sales, my preferred indicator of US food insecurity, it is appropriate to raise the market and regulatory failures that are driving global food insecurity.

Like so much that we have observed in the past eight years of the Bush administration, the origins of the current food crisis can be traced to the recycled policies of the Nixon White House. Henry Kissinger stated the premise succinctly in 1970: “Control oil and you control nations; control food and you control the people.”

With credit, oil and food markets spiralling out of reach of the poor and straining the middle-class, it is worth exploring whether similar policies underpin similar problems. In each industry, a small handful of global companies control supply and a massive increase in ill-transparent speculation acting on pricing in exchange markets forces prices up regardless of the fundamentals of supply and demand. The risks for famine and political instability are huge. One doesn’t need to be a conspiracy theorist invoking the Trilateral Commission to feel that something is very wrong with policies leading to simultaneous crises in credit, oil and food that threaten not just the wealth but the wellbeing of most of the world’s population.

Two or three generations ago, most of us would have been directly involved in food production as a hedge against food insecurity. My parents’ generation kept a garden in the back yard, putting to me to work each summer to raise corn, tomatoes, cucumbers and other fresh foods for the table, sending me to pick berries and fruits in season from our own and the neighbours’ bushes and trees. My grandparents’ generation kept chickens as well as a garden behind their house in the middle of a large industrial city. The garden and chickens helped my mother survive the Great Depression at a time when my father suffered stunted growth from rickets. My great-grandparents’ generation were almost entirely farmers working the land.

Today global agriculture is dominated by eight multi-national corporations. The policies promoted by successive governments and international institutions including the IMF, World Bank and WTO have aimed at undermining local production, distributed commercial networks, and diverse local markets in favour of mass production, streamlined supply chains and concentrated global market pricing.

As with other areas of our lives, the policies of “free market fundamentalism”, as George Soros styles it, have not diminished risks but increased them. My children are hostages to food insecurity, as are yours and billions of others. A disruption in global food supplies or surge in prices that puts food staples beyond the reach of many low income or middle-class families cannot be offset from the back garden. The exposure of food to pricing in markets open to manipulation and excess speculation puts the lives of millions at risk.

Mack Frankfurter at Seeking Alpha has written a compelling review of how we got where we are.

The Commodity Conundrum: Securitization and Systemic Concerns (Part I)

The Commodity Conundrum: Securitization and Systemic Concerns (Part II)

The Commodity Conundrum: Securitization and Systemic Concerns (Part III)

Mr Frankfurter reviews the history of “securitized commodity products” and the development of commodities as speculative investments, distinct from their role in production and consumption within the economy. He suggests that something “systemic and possibly more insidious” has altered the benign role of speculators as providers of market liquidity and ties this change to the ill transparency of OTC derivatives arising from The Enron Loophole. I recommend reading the whole series.

We begin to see a pattern emerging. Free market policies and liberalised regulatory regimes promoted rapid concentration of a sector into a global oligopoly which could control supply. Free market doctrines and trade liberalisation enabled predatory targeting of markets to undercut domestic production and smaller producers, reinforcing the concentration of the market and the pricing control of the oligarchs. Free market ideologies and innovative financial derivatives promoted domination of market pricing mechanisms by speculative investors able to accelerate steep price gains regardless of supply and demand fundamentals.

Whether it is credit, oil or food, we are all going to suffer from bad policies which promoted free markets as risk reducing rather than risk enhancing. In the US and the UK we may hope that our food insecurity does not worsen to the point of riots, looting, political instability and the starvation of children, but many parts of the world will not be so fortunate. If there is a backlash against free trade, against free market doctrines, against the domination of big banks, big oil and big food, perhaps it will not be unenlightened but enlightened. Perhaps it is overdue.

We can live without credit. We can live without oil. We cannot live without food.

Credit and oil prices are also feeding the food price bubble. The Kansas City Fed highlighted risks confronting the agricutural sector from higher credit costs for infrastructure, fuel and margin calls on hedged exposures in its report Survey of Tenth District Agricultural Credit Conditions.

The role of market mechanisms and deregulation in fuelling the commodity price rises is coming under increasing scrutiny as the markets themselves now fail to meet their basic function of matching buyers and sellers of commodities.

Bloomberg News:

The divergence between CBOT futures and the underlying commodity is so great that some grain merchants have stopped bidding for new crops, said Niemeyer, a member of the National Corn Growers Association board. Others won’t guarantee a price for more than 60 days. ”We have a fundamental problem with the markets,” said Kevin McNew, president of researcher Cash Grain Bids Inc. in Bozeman, Mont., and a former Montana State University economist. ”It is very difficult to operate a grain business when the cash prices are below the futures” by such a wide margin, he said. The price gap should converge when futures contracts expire and deliveries are settled. Instead, the average premium for CBOT wheat has quadrupled in two years to 40 cents a bushel, compared with 10 cents the prior five years, McNew said. For James McReynolds, who farms 2,000 acres of wheat outside Woodston, Kan., futures aren’t worth the risk. ”The differential of what the market should be and what you can actually sell is so far out of line that you aren’t willing to do it,” McReynolds said. ”This is a tough situation. Agriculture is not as healthy as we’d like to think it is.”

One of the drivers of the Commodity Exchange Act of 1936 was a desire to have regulators responsible for ensuring that commodity markets serve the legitimate hedging needs of producers and consumers in the economy and not merely speculators. The Enron Loophole devastated regulation of commodity markets. Once again, legislators and regulators have failed to protect the public by discharging their mandate in favour of protecting the speculators who bid higher for influence.

UPDATE: I’ve fixed the links. Apologies, but the proprietary blogware at RGE doesn’t encode raw html when transposed from Word, so I have to manually fix all the links each time I post.

23 Responses to "Famine Futures: Deregulated Markets and Food Insecurity"

  1. Hellasious   May 30, 2008 at 8:00 am

    Also, take a look at how participation in the food stamp program has increased in the US recently.

  2. Hellasious   May 30, 2008 at 8:11 am

    The food stamp link reverts to RGE, so here is a tiny url to the linked page: http://tinyurl.com/44yzbu

  3. London Banker   May 30, 2008 at 8:47 am

    @ HellasiousMany thanks. Your post on the Bernanke Put was spot on, reinforcing the fears expressed here in Looting the Central Banks two weeks ago.http://suddendebt.blogspot.com/2008/05/bernanke-put-what-next.htmlI'm off for a romantic sojourn in the sodden countryside, taking wellies and waterproofs against the exigencies of Britain in spring. The 400 year old pub where we’re staying has wifi in the bar, so I will check in here when convenient.

  4. Kakine   May 30, 2008 at 8:51 am

    “When I first saw this product, my reaction was, `Goodness gracious, Moody’s has got a product that is basically publicizing where the market disagrees with Moody’s,”’ says David Munves, managing director for credit strategy research at Moody’s Analytics. The implied-ratings unit works in a corner of Moody’s new world headquarters in lower Manhattan, across the street from Ground Zero. “But these differences are out there,” Munves says. “We might as well capture and learn from it what we can.” “The only thing holding them at AAA is simply the model that the rating agencies claim they use to judge that capital and the fact they know that if they downgrade the companies, it’ll push them into default,” says Backshall, of Walnut Creek, California- based Credit Derivatives Research LLC. http://bloomberg.com/apps/news?pid=20601087&sid=a0tWb0sTTgu8&refer=homeA little off-topic. Nevertheless, when did "liar" become strongly attached to prudential lending, securitization? Liar loans, liar ratings, liar nation. Now we must be lied to daily in eco-indicators, futures, Libor, etc., etc. just to keep the system from an immediate unravel. And we’re all still participating as if this is so new kind of "normal" market behavior.

  5. Horatio   May 30, 2008 at 8:52 am

    I’ve heard British Pub food is so bad that famine might be welcomed in the countryside.

  6. Anonymous   May 30, 2008 at 8:56 am

    This is a very good and a bold essay, given London Banker’s role in the heart of ‘capitalism’. – To recognise that here indeed we have tragedy unfolding, not because of sudden natural event or happenstance, but because of serious flaws and moral failures in the system as it stands.The great virtue of the post-war European way of life, has been to enact an ideal which balances the productive power of market economics, alongside structural protections for the weakest and most vulnerable.Rather like in some of the old Native American tribes, where the major job of the tribal chief was to see that, at the end of the day, no one in the tribe was hungry.Here in Brussels, Belgium, I am often near the house where Karl Marx lived when he wrote the Communist Manifesto –Photos of Karl Marx house, BrusselsThe old boy Marx did have a few useful things to say, and the Marxian school of thought on the evils of monopoly and oligopoly are, at points, quite in sync with what London Banker is writing here.It has struck me that the more thoughtful socialists, and the more thoughtful capitalists, actually often come to somewhat parallel realisations of the truth. There is, ultimately, the question of what works and what is needed, of ensuring that all creatures of the world are not unfairly deprived a decent minimum.Such are the times and the morals. Now is when we need a little more social-minded revolution, a little less ugliness by domineering schemers.Euro-Guest

  7. Anonymous   May 30, 2008 at 9:03 am

    When I posted the note above, didn’t realise the RGE blog system re-writes any direct link back to the RGE blog itself, ha!Here is the link to the pictures of Karl Marx house in Brussels – http://tinyurl.com/3m9srb- Written by Euro-Guest

  8. London Banker   May 30, 2008 at 9:07 am

    @ HoratioYou are sadly out of date. Britain now boasts 122 establishments with Michelin Stars, and our gastropubs put most of the continent to shame in quality and diversity of menu.@ Euro-GuestI am not quite sure how to accept your accolade regarding Marx, but I have observed how the concentration of political and economic elites, whether under Communism, Capitalism or Fascism, tends to the same oppression of the masses politically and economically. It may be that democratising economic power is as important a protection as democratising political power.I observed to a companion in Belgium last November that in Belgium no one is allowed to be rich, but everyone is permitted to live well. It is a very good place to live from all I’ve seen.

  9. TA   May 30, 2008 at 10:05 am

    LB,Best wishes on your new endeavor as guest blogger. Your perspective and insightfulness are a welcome addition to RGE, and a primary motivator for my continued readership of the Professor’s blog (I’m sure many others echo the same sentiment).However, when addressing topics such as famine and financial catastrophe, please “take off the gloves” and get to it. Well mannered discourse has its place, but IMHO, not when millions of lives hang in the balance. You have the podium, prose and intellect to hold the guilty accountable – do it. Unfortunately, most who will benefit do not have access to this medium and therefore cannot thank you, for those of us who do and can – a heartfelt thanks, yours is a needed and powerful voice.

  10. Guest   May 30, 2008 at 10:06 am

    London BankerIndeed, what;’s happening with food and oil does pose a significant risk to political stability in the world. I say these words as someone who occasionally goes to remote villages in Africa to try to help people. These increased food costs will cause an enormous problem in underdeveloped countries and could very well cause political turmoil. I doubt that the results of that turmoil will be favorable in any way.In an earlier response on the main RGE blog, I posed the question: What if food and grains were dropped from trading from the futures markets?Clearly, that kind of suggestion was tongue-in-cheek (although the country of India is implementing this step in their own markets). Can anyone really imagine the Chicago futures market without "what" or "corn". Hardly. Yet it is clear that the needs of the West to stimulate their economies through financial leverage (incl. with food and commosities) are running in direct contradiction to the needs of underdeveloped countries who desperately want to stabilize food prices at the lowest level possible. What we are seeing, in my opinion, is the beginnings of a major rift developing between the "have’s" and the have not’s" in the global economy. It will get a lot uglier. I suspect that the current trend will have a short-term end. There probably will be a trend reversal in food and oil in the short term. But I also think that the markets are looking ahead – to a major problem developing in the next decade. Food and energy becoming much more unaffordable for many people. PeteCA

  11. Capone   May 30, 2008 at 1:30 pm

    every system is limited to the people who rule and govern within it. i sincerely hope those who play the game well and profit enormously understand their obligation to for example, feed the starving people who share the planet with them during all of our short stays here… BTW, that is absolutely great whoever those are who are so fortunate to profit from all of this. Congratulations ! Well Done ! The rules are in place. They played well and bravo. Keep in mind: to whom much is given much is expected. If you want peaceful change, reach the students and wives of the powerful. They are not blinded by the insatiable desire for power and greed possessed by grown men.

  12. Guest   May 30, 2008 at 1:52 pm

    HoratioI can only speak for a handful of visits to British pubs – but the food has certainly been very good whenever I’ve visited them. In addition, London’s pubs have a very cordial atmosphere and generally they are some of the most colorful buildings in the neighborhood. There seems to be some sort of tradition that the pub owners hang very colorful baskets of flowers in the front of their establishments. It certainly brightens things up! I always try to swing by the pubs in the rare times when I go through London.What’s most noticeable to Americans is the very high cost of eating out in Europe. For us – it’s getting prohibitively expensive at the dollar sags in value. I dare say that if things keep up this way – Americans will be packing bread and salami in their luggage before they travel overseas!!!PeteCA

  13. Capone   May 30, 2008 at 4:53 pm

    off or on topic ?in light of a defining victory for the Chicago Cubs today 10-9 after losing 9-0…Panic of 1907 preceded the Chicago Cubs winning the World Series in 1908. October 1929, Chicago Cubs are in the world series lose in five games series ends 10/14/1929, 2 weeks later the Great Crash of 1929It has been 100 years since the Cubs have won the World Series and they currently have the best record in baseball. Go Cubbies !

  14. Free Tibet   May 30, 2008 at 5:59 pm

    LB “…our gastropubs put most of the continent to shame in quality and diversity of menu.”Now I’ve heard it all. And I had believed everything you told me. Sorry, you’ll have to prove that to me.More seriously, I’m disappointed that you didn’t mention the very detrimental effects of US & EC farm subsidies. Those are much more malignant than market misalignments due to speculation which are normally quite quickly rectified. And speaking of monopoly: the real monopoly to fear is the monopoly the developed world has on capital. When the developing world is required to hold developed world assets as reserves they are used to produce goods the developed world wants – think real estate – and not those things the developing world needs (food). Will read Mack Frankfurter (though I’m not so sure I want to know what a Frankfurter thinks about food). Thanks for the link.@ PeteCA…the beginnings of a major rift developing between the "have’s" and the have not’s" in the global economy.”You have put into words the thing that is really scaring the hell out of me. Africa notwithstanding, we in the developed world no longer have that monopoly on capital that we did have. China has broken that mold. The developing world no longer has to accumulate the foreign reserves they have in the past. They can end it any time. When they do…

  15. Detlef Guertler   May 31, 2008 at 2:09 am

    @ LB: You say (more or less): Free food markets kill babies. But if so, what will be the next step? Will governments stand aside and watch: Okay, go on, just do your killing, as it’s so important to have free markets? I don’t think so. So: If free food markets kill babies, the food markets simply won’t be free anymore, and we’ll see the first step of de-globalization. I think it’s worth while researching, how you have to design regions that they are self sufficient in food and energy. Europe can be, if you include Russia. North America could be, if you use the whole desert of Nevada for solar power generation. I don’t know enough about Asia, so I can’t say where the frontiers of self-sufficient regions could be, but I’m sure they’ll find a way. The regions that don’t fit are Arabia and Africa. But in a de-globalized world, who cares?

  16. Guest   May 31, 2008 at 4:02 pm

    @LBI have posted for sometime on the dangers of the Enron loophole and the fact cash prices are out of whack with the futures. The whole deregulation of electricity and other commodities has been a monumental fraud. It has taken not famine, but high gasoline prices for the CFTC to finally appear to be doing something.Repeal the Enron electronic exchange nonsense, stop index futures without delivery and then let’s see what happens. I am glad to see many are recognizing that this man made disaster can kill people. Directly (food to dear) or in-directly (no money to go to the doctor after expenses).If I hear one more time that ‘this couldn’t be prevented’, ‘we don’t know why there is a spike in electricity at X hours’, ‘only supply and demand’ I think I’ll be sick.The answer is it is market manipulation, sheepish ETF investors and down right fraud.Send Marc Rich and some others to jail and we’ll see what happens. The only thing that’s happened this time is we have industry in cahoots – they like using manipulated futures prices to their benefit. ‘Its the market’….Remember folks, this has happened under both Democratic and Republican administrations! VOTER BEWARE!

  17. Pecos Banker   May 31, 2008 at 11:31 pm

    And speaking about the third world populations that are suffering from food inflation, what about the babyboomers who will be retiring, the majority on low and fixed incomes. See, the rich are always one step ahead in their thinking!

  18. flipper   June 1, 2008 at 1:07 am

    All links in the article are not working. They are leading to some part of password-protected RGE site.

  19. Free Tibet   June 1, 2008 at 7:43 am

    LB, thanks for the links to the Frankfurter comments. I’m sure I had underappreciated the effects of "the enron loophole".

  20. London Banker   June 1, 2008 at 10:53 am

    @ flipperThanks for the heads up on the links. They are fixed now, although my best efforts to get them to open in a new tab or window are being frustrated by the RGE gremlins.@ Pecos BankerI’m quite worried that the combination of deflating stocks, housing and other assets being relied on for boomer retirement, combined with sharp inflation in food and other commodities, is going to exacerbate problems in the US. One of the major contributing factors to middle class squeeze has been the longer period of children’s dependency and parents’ dependency. That’s going to get worse, not better, in my opinion, possibly leading to a resurgence in multi-generational households.@ Free Tibet, Guest and DetlefThe Enron Loophole is another in a long list of deregulatory innovations which degraded the transparent, centralised price discovery function of the securities and commodities markets. We need to revisit from first principles what we want markets to achieve in society, and what protections and regulations are critical to ensuring they perform that function properly, free of manipulation and market failure.

  21. Guest   June 1, 2008 at 7:05 pm

    Couldn’t help but answer the question: Mack Frankfurter is partial to a dry-aged New York steak with a glass of Stags Leap cabernet… and is worried about the price of corn impacting feeder cattle.Other writings are located:http://ssrn.com/abstract=1029243 (The Search for the Beta of Commodity Futures)http://www.ma-research.com/hard_intelligence.htmlhttp://www.marketoracle.co.uk/Article4526.htmlhttp://www.safehaven.com/archive-305.htmhttp://www.safehaven.com/archive-343.htmNote: Commodity Exchange Act is dated 1936. Not to be confused with the Securities Act of 1933 drafted by Justice Felix Frankfurter and team. Add into the dinner mix Nouriel Roubini and Lloyd F. Collette Professor Emeritus George M. Frankfurter (http://introduction.behaviouralfinance.net/FrMc.pdf), followed by Highland Park 18 year and a Colorado Maduro, and that would be an interesting evening of conversation.

  22. Hellasious   June 2, 2008 at 6:11 am

    Back after a weekend at the beach, where I met a gentleman who is head of sales for a large steel fabricator (they make beams, pipes, wire, etc. from scrap). He reports steel prices are up 60-70% since the beginning of the year (we know this already), but here’s the twist:He says almost three-quarters of the incremental demand he saw and which was responsible for the sharp price spikes came not from end-users, but wholesale merchants who stockpiled steel in anticipation of further price rises. Speculation, in other words.He is concerned that if "real" demand does not materialize soon, prices will quickly plunge.

  23. London Banker   June 2, 2008 at 12:12 pm

    @ GuestMany thanks on the CEA date. I’ll edit. Indeed you propose an interesting dinner party!@ HellasiousI was speaking to my sister-in-law about the doubling of rice prices today and we discussed a similar point. Both us had bought twice as much rice the last time we shopped for it because the price has doubled over the past year. I explained that commodities are the last car on the roller coaster. They continue up even as bonds and equities start to turn down. Eventually, however, if liquidity continues to contract (and it probably will, despite central bank efforts), even commodities will start to come down in price.