Food roulette

As the debate over the Food Security Bill sharpens the focus on securing essential food grains for India’s poor at affordable prices, it makes sense to look at what has been happening elsewhere in the globe. After the sub-prime fiasco, the next act in the drama of glee and greed was the global food crisis, a result of the reckless speculation of global investors led by Wall Street’s casino bankers. To make their billions it mattered little to them if their machinations brought a billion people to the brink of starvation.
Commodities futures trading is just gambling aimed at booking profits between sell and buy orders and has little to do with the commodities being sold and bought. It could be petroleum crude or soyabean oil, it didn’t matter. Just as collateralised debt obligations (CDOs) combined all kinds of debts, in the case of food-based derivatives too complex multi-commodity indices were created. Even institutional investors like pension funds and banks started investing in these commodity index funds. This speculative investment had devastating effects. At least 30 countries around the world saw food riots and Haiti was a poignant example. Arab Spring’s origins too go back to the food riots in Tunisia.
Before we get to the food crisis of 2008 and the volatile and precarious world food price situation through 2010 and 2011, we need to look at some previous acts in this play of avarice.
Traditionally, in the developed world, in the wake of the last big depression in the 1930s, a limited amount of hedging or risk mitigation was permitted under a regulatory umbrella. This was because agriculture faced so many vagaries that spot prices, when the farmers’ produce reached the market, were always riddled with uncertainties. Thus future price agreements, which involved millers or traders or food processors and farmers, were entered into and risks were shared, resulting in some stability. This was confined to actors from the food sector.
However, in 1999, following aggressive lobbying by investment bankers, serious deregulation took place in the US Commodities Futures Trading Commission that opened the flood gates of speculative investments involving food and agricultural products. In 2000 the burst of the dotcom bubble brought several stocks crashing and investment bankers led their herds to the housing market till eventually that bubble burst, too. With avenues drying up, greedy hedge fund managers and Wall Street analysts turned to food and commodities. No longer satisfied with reasonable returns, the game was now to chase windfalls. So you had futures contracts that were bought and sold several times speculatively with little intention of taking delivery of the end agricultural products themselves. Studies indicate in the case of transactions that involved food/agricultural derivatives, only two per cent pertained to actual delivery whilst the rest were speculative. Food prices went upwards. An Unctad study points out that between 2005 and 2008, world maize prices tripled, wheat prices went up by 127 per cent and rice prices by 170 per cent.
In our globalised and liberalised world, everybody got caught in the chilling aftermath of this drama — people in the developed countries who spend 13-15 per cent of their income on food, and people in the poorer parts of the world who spend anywhere from 50 to 70 per cent of their income on food.
Some have argued that food prices have been going up on account of other reasons, such as global warming, drought, diversion of land to bio-fuels, increased consumption in populous countries where income levels have been rising etc.
Fredrick Kaufman, who wrote the article The Food Bubble: How Wall Street Starved Millions and Got Away With It in Harper’s, points out that price of hard red spring wheat that had been stable for a hundred years in America, trading between $3 and $6 per 60 pound bushel, suddenly started to rise. And on February 25, 2008, it rose to a ridiculous high of $25 per bushel. This is ironic, given that 2008 saw record wheat productions. Clearly, unbridled speculation was the cause here.
For all the controversy surrounding bio-fuels, they currently account for only six per cent of the total grain production.
And finally, coming to the story that food prices could be going up because Indians and Chinese were eating more because of a growing middle-class. A July 2011 report of the Food and Agriculture Organisation of the UN, titled “Price Volatility and Food Security,” sets the record straight. Olivier de Schutter, the UN special rapporteur on the right to food, cites FAO data and points to the fact that India and China are seeing falling per capita food grain consumption. Thus, there is a clear case for reining in this mindless speculation.
A number of recommendations have come from concerned quarters across the globe. Knowledge imbalance has to be corrected first. Some of these derivatives and transactions are so complex that regulatory bodies and law makers need to acquire the required expertise, only then can they regulate effectively. Currently, most of the knowledge resides with the financial business sector.
There is an urgent need to regulate over-the-counter trading (OTCs) which are bilateral agreements on derivatives executed, sold and transacted upon, away from the purview of established exchanges. That makes monitoring OTCs difficult. The need to have transparent information is essential as these will establish price visibility of essential food items. International co-operation on harmonising regulations is a must; otherwise speculators would flock to countries with lax regulations.
Even the setting up of an international fund has been recommended, that can intervene to stabilise prices of essential food items, along with national level buffer stocks.
Instead of fiscalising agriculture it needs to get localised, with farmers incentivised to produce for local populations.
As India’s planners continue to mull over allowing a larger presence for global giants in the retail sector, regulators need to do their homework first. Contracts involving food supply designed for facilitating supply should not end up in a speculative spiral. Further, as India negotiates more Free Trade Agreements (FTAs), which invariably involve liberalising the financial sector, these considerations assume special significance. Speculation in food and rising food prices is the last thing we should have to contend with, given our realities and inequalities.

The author is an IT consultant and freelance writer based in The Hague, Netherlands. He can be contacted at wildranga@yahoo.co.uk

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