Betting on Hunger: Is Financial Speculation to Blame for High Food Prices?

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 the UN Food and Agriculture Organization (FAO) Assistant Director-General Jomo Sundaram describes as conservative—high food prices can be fatal.

The shift in prices affects consumers in rich countries, who will see their grocery bills at a time when wages in much of the world are still stagnant. But the real impact is felt by the global poor, in places such as 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.

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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 lbs. 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 towards 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 advisor to the UN 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 towards the end of the 1990s, when President George W. Bush introduced the Commodities Futures Modernization Act and sections of the Glass-Steagall Act were repealed, 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.