Frederick Kaufman’s book Bet the Farm: How Food Stopped Being Food highlights the peculiar irony of our modern food system: While we produce more food than ever before, nearly one in seven people goes to bed hungry each night, and the hungriest people in the world are farmers. But, as Kaufman points out, this paradox didn’t happen naturally; it was aided by financial brokers and food manufacturers who view food as a commodity—a financial instrument to be purchased low and sold high. In the 1990s the regulation controlling agriculture futures was abolished, thanks to the lobbying efforts of Goldman Sachs (GS) and others. Those futures were turned into derivatives to be bought and sold among traders, and a market in food speculations emerged, which happened to coincide with some of the biggest spikes in food prices around the world.
Danielle Nierenberg, co-Founder of Food Tank: The Food Think Tank, sat down with Kaufman to discuss how food is being bought and sold by people who have never picked up a hoe.
Why does the buying and selling of food derivatives present not only legal and economic problems, but also social concerns?
The social issues drive the political and economic agenda here. When the price of food becomes volatile, when the price of food becomes an element of every investor’s portfolio of “asset allocation,” when the price of food becomes dependent on the financial derivative—and not the other way around—the result is “food insecurity,” which is a euphemism for hundreds of millions of people on the brink of a middle-class livelihood being thrust back into the ranks of the hungry.
Civilization begins around 10,000 years ago, with the birth of agriculture. And since then, one of the major roles of government has been to keep a stable price for an inherently unstable food. When the price of food booms and busts, farmers and consumers lose. Today, in our interconnected, global world, the price of wheat in Chicago has a direct effect on political unrest in the great grain-importing regions of the Middle East.
Look at Egypt, where regime change occurred simultaneously to 40 percent inflation in the food sector. The price of the world’s food has effectively doubled in the last decade and shows no signs of going down to previous levels. The Arab Spring will look like a pep rally if the price doubles again. This kind of unrest will come back to haunt us. But that’s what the smart money is betting on.
What is the role Goldman Sachs, the biggest brokerage firm of food commodities, in food price speculation?
Goldman brought in just under half a billion dollars from commodity trading last year [not just food]. Goldman may have sold their commodity index to S&P (MHP), but they are still deep into the food sector. Here’s a basic question: Why should Goldman and JPMorgan (JPM) and Barclays (BARC) and Deutsche Bank (DBK) have unlimited access to markets in global food? Are they bona fide hedgers in grain or livestock? Many questions remain for Goldman in particular, such as why the firm was granted their now-infamous “position limit exemptions”? Does it make any sense at all that their bona fide position in trading global currencies should translate into betting on the global price of grain?
Who are the biggest players in food derivatives, other than Goldman?
JPMorgan. Deutsche Bank. They have all bombarded the exchange-traded fund market. And of course, Barclays, which brings me to the recent announcement from Barclays that they will stop wagering on global food because of “reputational reasons.” In other words, they admit no guilt or wrongdoing whatsoever regarding the exploding price of global food commodities over the last decade, but for the sake of headline risk, are going to pull out.
Of course, what remained unsaid amid the ballyhoo was that Barclays will remain a food-betting bookie for any hedge fund client who wants to take positions in the world’s most basic foodstuffs. In other words, Barclay’s great humanitarian act is just short of a farce.
Who are the bad guys in all this? Wall Street? Corporate greed? Ineffective government regulations?
Food justice advocates have made bad guys out of the food industrialists—the McDonald’s (MCD) and Coca-Cola (KO) of this world. I am arguing that along with industrialization, there is another force in global food, a hidden force, and that is the securitization of the enterprise, the “financialization” of food. In fact, the great food industrialists are at odds with this new force. Who wants the price of their ingredients to shoot up and melt down for reasons beyond supply and demand? The big food industrialists have met in Davos to ruminate over what they can do to adapt to the new volatility—other than hire Ph.D.s from MIT to handle their hedging desks.
The commodity markets have been fabulous tools for price discovery and risk management. They worked for more than a century, but now they need a rethink. These markets, created in the 19th century, were not made for momentum trading, programmed arbitrage, and massive influxes of speculative money.
The villains are those who perceive everything in the world as tradable, the mentality typified by Goldman since its acquisition of the commodity firm J. Aron & Co. in the 1980s. Of course, the Commodity Futures Trading Commission did not help matters when it granted “position limit” exemptions to the largest of our banks, which effectively opened the casino. The villains are those who do not respect markets, but perceive them as opportunities for sabotage, subterfuge, and subversion.
Originally published on Businessweek.