by Ari LeVaux
September 23, 2011
Private investment firms are betting on
hunger, and their reasoning,
unfortunately, is sound.
Residential real estate may be slumping, but agricultural land is booming.
In Iowa, farmland prices have never been higher,
having increased a whopping 34 percent in the past year, according to The
Des Moines Register. The boom is driven in part by agribusiness
expansion, but also by a new player in the agriculture game: private
investment firms. Both are bidding up land values for the same reason: the
price of food.
They're betting on hunger, and their reasoning, unfortunately, is sound.
This is bad news for would-be small farmers who can't afford land, and much
worse news for the world's hungriest people, who already spend 80 percent
of their income on food.
Thanks to the world's growing population of eaters and the fixed amount of
land suitable for growing food to feed them, supply and demand tilts the
long term forecast toward higher prices. More immediate concerns - like
increasing demand for grain-intensive meat and the rise of the corn-hungry
ethanol industry - have fanned the flames of a speculative run-up in
agricultural commodities like corn, wheat, and soy.
Add cheap money to the mix in the form of low
interest rates, along with an army of traders chasing the next bubble, and
you've got a bidding war waiting to happen.
Commodity Futures Modernization Act of 2000
allowed the bidding to begin by allowing the trade of food commodities
without limits, disclosure requirements, or regulatory oversight.
The Act also permitted derivatives contracts
whereby neither party was hedging against a pre-existing risk; i.e. where
both buyer and seller were speculating on paper, and neither party had any
intention of ever physically acquiring the commodity in question.
Agricultural commodities markets were created so that traders of food could
hedge their positions against big swings in prices.
If you're sitting on a warehouse full of corn,
it's worth making a significant bet that the price will go down, just in
case it does, and makes your corn worthless. That way at least you make
money on the bet. Derivatives can add leverage to your bet, so you don't
need to bet the entire value of your corn in order to protect it.
Derivatives, it turns out, are also really cool if you want to make a ton of
money by betting just a little. And if you can bet a lot, even better, as
long as you keep winning. The golden years of commodities trading lasted
from 2002 to 2008, when prices moved steadily, but not manically, upward.
Then they crashed. And then they rose even higher than before.
This is the kind of volatility, except worse,
that commodities trading was created to prevent.
UN Special Rapporteur on the Right to
Olivier De Schutter recently released a
"Briefing Note" titled, "Food
Commodities Speculation and Food Price Crises."
As he sees it,
"Beginning at the end of 2001, food
commodities derivatives markets, and commodities indexes in particular
began to see an influx of non-traditional investors, such as pension
funds, hedge funds, sovereign wealth funds, and large banks.
The reason for this was simply because other
markets dried up one by one: the dotcoms vanished at the end of 2001,
the stock market soon after, and the U.S. housing market in August 2007.
As each bubble burst, these large
institutional investors moved into other markets, each traditionally
considered more stable than the last."
In those years, the market value of agriculture
commodities derivatives grew from three quarters of a trillion in 2002 to
more than $7.5 trillion in 2007, while the percentage of speculators among
agriculture commodities traders grew from 15 to 60 percent.
The total number of commodities derivatives
traded globally increased more than five-fold between 2002 and 2008.
The rush of speculators into agricultural commodities created something like
a virtual food grab. While a traditional speculator might drive up the price
of a commodity by physically hoarding it, now speculators, fund managers,
sovereign nations, and anyone else with the money can do the same by
hoarding futures contracts for food commodities, but with no expectation
that they will have to physically deal with actual commodities.
No messing with deliveries, maintaining
warehouses, trapping mice, or other reality-based headache unless they
happen to truly want the commodity.
Americans may not be starving, but we are feeling the pinch, paying upwards
of a dollar for an ear of sweet corn at farmers markets, while in the
southwest, dried corn chicos, a local delicacy, have doubled in price.
In D.C., a group of livestock producers addressed the House Agriculture
Committee last week, seeking the elimination of federal mandates for ethanol
use in gasoline. The meat makers blame high corn prices on the biofuels
If this was just about corn, I would say let the cows and cars fight over
it. They can have it.
After all, whatever corn doesn't get converted
to chicken feed and gasoline probably isn't going to be made into chicos
anyway. It's going to be made into corn syrup for the young and the obese.
But the commodities markets of the world are connected, running together in
a herd, which makes this about a lot more than corn. It is likely that
increased demand for meat and the rise of ethanol were indeed a trigger in
rising corn prices, De Schutter says, dragging the rest of the grain markets
into the bubble. But it was deregulation that opened the doors to betting on
A logical place to start calming food prices would be to un-deregulate them.
And there's hope of that happening.
The United States, by far the biggest player on
the commodities stage, just made a step in that direction with the passage
of the recent
Dodd-Frank Wall Street Reform and Consumer Protection
The Act puts size limits on individual holdings,
including agriculture commodities and derivatives.
Unfortunately, given the global nature of capital, even if the U.S. were to
completely shut down speculation, it would just move offshore. International
regulation is what's needed, and since the U.S. opened this Pandora's box of
speculative horrors with deregulation, we have the moral responsibility, not
to mention the political firepower, to shut it.
With financial regulators underfunded and
understandably distracted, a strong show of public support could help get
their attention. But if our biggest inconvenience is higher prices for meat
and sweet corn, that public display might be hard to come by.
Especially if our retirement portfolio, wisely
diversified with commodity index funds and agricultural land holdings from
Iowa to Ethiopia, is growing.