The Food Bubble

Frederick Kaufman is interviewed on his Harper's article The Food Bubble: How Wall Street Starved Millions and Got Away With It. This Democracy Now interview, by Amy Goodman and Juan Gonzalez takes us through the market manipulation that brought on the 2008-2009 food crisis.

A Dangerous Way To Test A Theory

Don't think for a minute that I think the folks over at NECSI (The New England Complex Systems Institute, about whom I've written before) are tenting their fingers and cackling in a Mr. Burns-like way while they manipulate the world's food markets in order to test their theory of food price spikes and social unrest. Rather, it is the rest of us who have embarked on the testing program. The researchers at NECSI have been modelling food prices, ethanol production and the effect of speculative money on the international food system. In their model, once the FAO (Food and Agricultural Organization) food price index hits about 215 (or 190 adjusted for inflation), all hell breaks loose. Food prices have been advanced as the most reasonable explanation why, for instance, unrest in the Middle East went so quickly from regional to widespread, birthing what we now know as the Arab Spring. And the Arab Spring followed one of these price spikes. And it makes sense. Bread riots are a recurring theme throughout history. Hunger is a strong motivating force.

FAO Price Index at current prices (black curve) and corrected for inflation (blue curve) between January 2004 and May 2011. Red dashed lines signify the beginning dates of food riots and unrest in North Africa and the Middle East. Black and blue horizontal lines represent the current-price and inflation-adjusted food price thresholds for riots. Bar-Yam et al/arXiv

 
And the researchers at NECSI, following their noses, noted last year that world food prices were going up (driven by corn-to-fuel programs in the US, but even more so by speculative money), and the food price index looked like it would peak above the magic 215 again in 2012. And then climate change kicked in and drought spread across North America. Big money has already bid prices up, driving another speculative bubble in food. To quote from the NECSI press release:

The worst drought in the American Midwest and the highest temperatures in a half-century are poised to trigger an imminent global food crisis, scientists at the New England Complex Systems Institute said Monday. NECSI has warned for months that misguided food-to-ethanol conversion programs and rampant commodity speculation have created a food price bubble, leading to an inevitable spike in prices by 2013. Now it appears the "crop shock" will arrive even sooner due to drought, unless measures to curb ethanol production and rein in speculators are adopted immediately.

FPI over time From the NECSI website

 Canada and the US are probably going to be relatively insulated from the worst effects. We'll see a rise in food prices of, well, 4% or so is being bandied about. But if the markets actually do get crazy, this will probably rise significantly. Spending more on food is not the worst thing that could happen to us—North America has some of the lowest food prices ever in the history of civilization. But taking money out of discretionary spending and putting it toward food will push us closer to a full-on depression and the potential for major social unrest. It is interesting to me that in all the coverage that the current NA drought is getting, the risk to, and effect on, food prices from speculation has been pretty much ignored. Yet, as NECSI research has shown, “while the behavior [of the food price index] could not be explained by supply and demand economics, it could be parsimoniously and accurately described by a model which included both the conversion of corn into ethanol and speculator trend following.” Like the idea of serious banking reform after the appalling criminality of the past decade among the international banks (as I write this Standard Chartered is taking a hammering after the New York state regulator accused the U.K. bank of being involved in laundering money for Iran), reining in speculation in the international food market has been deemed “off the table” apparently. We are facing a bleak future in which billions of us will starve to death, not because there isn't enough to eat, but rather because of the imperative to maximize profit. We've seen this before: in Ireland during the Great Famine, there was always food in the markets, there just wasn't any money for the poor to buy it. And in many famines since the 1950s, food aid has been used as a way to dump excess production and often to destroy local food production and distribution networks to allow foreign companies into the market (this would be one of the major reasons behind the homogenization of world food culture). So once again we will see why forgoing food sovereignty for reliance in imported foodstuffs is historically a very bad idea. And the message will be delivered on the baked bread scent on the breath of the starving.

Not Looking Good

There is a lot of serious, high-level worry going on over the state of  our current and future world food supply these days. Such as the Planet Under Pressure conference that just wound up at the end of March. As the New York Times reported about a year ago:

A rising unease about the future of the world’s food supply came through during interviews this year with more than 50 agricultural experts working in nine countries.

These experts say that in coming decades, farmers need to withstand whatever climate shocks come their way while roughly doubling the amount of food they produce to meet rising demand. And they need to do it while reducing the considerable environmental damage caused by the business of agriculture.

Agronomists emphasize that the situation is far from hopeless. Examples are already available, from the deserts of Mexico to the rice paddies of India, to show that it may be possible to make agriculture more productive and more resilient in the face of climate change. Farmers have achieved huge gains in output in the past, and rising prices are a powerful incentive to do so again.

Source: NYT.com

Of course, if we really wanted to increase productivity, we'd do something about the size of our farms. Most of the world has small farms that are highly productive--weather permitting. But particularly here in North America and in Europe, farm sizes are large, which means high productivity per worker, but a lower calorie yield per acre. This is known as the Inverse Size Yield Relationship, and coupled with traditional farming techniques, means a higher sustainable yield from small farms over large ones. Here in Victoria, the founding farmers of Saanich Organics, a farmer-run local food distributor, have published All The Dirt: Reflections on organic farming. None of them runs more than a couple of acres, choosing to farm intesively and sustainably, rather than even try to take on a small Canadian farm of a couple of hundred acres. And they're making it pay.
But the combination of biofuel production in the US and commodities speculation following the 2008 crash, mean that food prices are headed back up again this year. Same reasons, just another speculation-driven price bubble.But, in order to ensure that speculators make their nut, a few hundred million more people will drop into food insecurity, and those already hungry will die.

We're facing a perfect storm: population pressures, unregulated capitalism, an international monopsony/monopoly market in foodstuffs, climate change seriously messing up weather patterns, the list goes on. As a society, we won't stop--Canadian rime Minister Stephen Harper has announced that the environment will not inhibit Canadian resource (read: petrochemical and mining) extraction and export. On the climate front, this winter Canada has seen records going back 150 fall regularly; one "warmest day" record was smashed by 20°C.

But this boat's too big to turn.Too many people are making far too much money with things the way they are now. As Yvo de Boer, former head of the UN Intergovernmental Panel on Climate Change and now Special Global Advisor to KPMG, notes [pdf], “if companies had to pay for the full environmental costs of their activities, they would have lost 41 cents out of every (US) $1 earned in 2010. The external environmental costs of 11 key industry sectors rose by almost 50 percent between 2002 and 2010, from $566 billion to $854 billion.”And if you own the governments, are you going to allow a sudden tax increase of 41%? Even if it means saving the planet for your children? No, and not just because you are legally constrained from doing so, but because destruction of the world just means you better get yours now. But you don't want to believe it might well be the end of civilization (Hell, I don't want to believe it). Just like Pol Pot didn't see himself as a genocidal monster, we don't want to see ourselves as environmental criminals. But it doesn't change the fact that we are.
Over at Climate Change Agriculture and Food Security, they're worried about feeding the world in 2050. Using the following video as a teaching tool, they're showing us what a small target we're currently trying to hit. They also point out how we might make the target a bit bigger. So they, at least, are trying to remain optomistic.



Over at the Council on Foreign Relations, Laurie Garrett is interviewed about how the stumbling value of the US dollar and rising international food prices mean that donor pledges are worth less (although not yet worthless). $300 million just doesn't buy what it used to. So what does that mean for the starving? To say nothing of how food aid is used by governments to destroy local food markets and buy access for "their" multinational industrial food corporations. (If you dump free food onto a market you change the price local farmers can get for their crops to zero, and everyone knows, you can't compete with free. This destroys local farming communities and infrastructure, leaving the field clear for the Monsanto's and ConAgra's to come in preaching the "Green Revolution" doctrine of big farms and monocropping with high input costs). This would be an example of the law of unintended consequences, except that it was intentional.
And, in Thailand, there's a new delicacy on the menu:

NECSI Update

The New England Complex Systems Institute and their President, Professor Yaneer Bar-Yam who's study I quoted when writing about debt and food prices, have issued an update to the landmark study done on the relationship between corn ethanol production, food commodity speculation and food prices. And Professor Bar-Yam is pretty convinced we're not done with the madness yet.
The Institute's web site hosts three very interesting short videos (regretfully, not embeddable) about the relationship of corn ethanol production, food commodity speculation, and food prices. The first shows how food prices between 1980 and 2000 fluctuated moderately around a consistent value, where prices neither spiked nor collapsed. Then food prices begin a dramatic upward climb peaking in 2008 and 2011. These two spikes are rather dramatic, and Professor Bar-Yam draws a direct link between the price spikes and social unrest. This is shown in the second video which links social unrest (like the Arab Spring) with food prices between 2004 and 2011.
The third video graphs actual food prices with increases in demand from ethanol production and speculation. To quote the update:

Our analysis shows that dominant causes of price increases are investor speculation and corn to ethanol conversion. Models that just treat supply and demand are not consistent with the actual price dynamics. The two sharp peaks in 2007/2008 and 2010/2011 are specifically due to investor speculation, while an underlying upward trend is due to increasing demand from ethanol conversion.

 Models that just treat supply and demand are not consistent with the actual price dynamics. I thought that bore repeating with emphasis. There is a consistent firm upward pressure on food prices from the increased demand from ethanol conversion programs, but the big driver of food prices is "specifically due to investor speculation."

"The food price bubble of 2011 caused widespread hunger and helped trigger the Arab spring. In 2013 we expect prices to be even higher and may lead to major social disruptions." said Professor Bar-Yam President of NECSI, who has just returned from Davos where he presented his findings on speculation in global commodity markets. His paper "The Food Crises: A Quantitative Model of Food Prices Including Speculators and Ethanol Conversion" was called by Wired magazine one of the top 10 discoveries in science of 2011.
In 2008 and 2011 increases in global food prices triggered hunger, food riots and social unrest in North Africa, the Middle East, and elsewhere, at a cost to global stability which policy makers can no longer ignore. Over the past decade, world unrest has sharply increased at time of peak food prices; now the long-term price trend is getting close to what used to be episodic peaks.
According to the new study, the next food price peak will take place in about a year. The results will be dramatically higher prices than we have encountered thus far. The study warns that should ethanol production continue to grow according to multiyear trends, even the underlying trend will reach social-crisis levels in just one year.

from the update

So get a garden in, build a chicken coop in you backyard, and plan to do a lot less of everything, because you're going to need your $$ for food. Our refusal to find a way to put the brakes on global capitalism means that we're in for a rough few years. A lot more people are going to fall from "working poor" into "destitute poor" and none of it needs to happen. I don't want to go off on a rant here, but really people:

 
 Is it really going to have to take a revolution to get the comfortable to pay attention?

Debt and Food: A Common Cause

Eric Reguly, in the weekend Globe and Mail, tries to compare and contrast two different crisis which originated in 2008: the European debt crisis, and the international food crisis. The two crisis were linked, mostly by nervous money fleeing the world's debt markets for commodities (and both were precipitated by the criminal activity engaged in by various investment banks like Goldman Sachs and Bear Stearns prior to the housing bubble popping). The role of speculative money in causing the worldwide food price inflation of 2008 through 2011 is pretty common knowledge. Starbucks president Howard Shultz, as reported in the The Telegraph, has said:

... the current spike in the cost of commodities such as coffee and other foodstuffs is "not based on supply and demand" but based on market speculation. He said that the farmers who actually produce the commodities are receiving a "de minimus" proportion of the price rises. "Right now we are experiencing a very strange and almost inexplicable phenomenon in the commodities market. Without any real supply or demand issues we are witness to the fact that most agricultural food commodities are at record highs at once, and coffee is at a 34-year high." 

Frederick Kaufmann, in The Guardian, follows up with a brief interview with Professor Yaneer Bar-Yam, of the New England Complex Systems Institute (Necsi):

"Prices have been way out of equilibrium in 2011," Bar-Yam told me. "The bubble has not burst yet." According to Bar-Yam, the international thirst for biofuels has put a strain on arable land previously reserved for food production. At the same time as the rise of the biofuel mandate, the rise of investable commodity indexes and other electronically traded funds has offered investors of all stripes a chance to sink their cash in a sparkling new casino of derivative products. As a result, an ever-flowing spring of speculative capital sustains the status quo. But just as food is no ordinary widget, speculation in commodity markets is not simply a matter of financial predation. "The high prices of food have resulted in accumulations of inventories at the same time as people can't afford food," said Bar-Yam, who noted that the Arab spring was triggered by the food-price bubble. In fact, Necsi's quantitative model of speculation predicted the uprisings in Tunisia, Libya and Egypt, and warned that if food prices remain inflated, riots and revolutions will go global sometime between July 2012 and August 2013. "We are at a critical point," said Bar-Yam. "We don't have a stay-the-course option right now." 

Notice that quote: "The high prices of food have resulted in accumulations of inventories at the same time as people can't afford food." That makes it very clear that this is about speculation, not supply and demand.

The Rice Shortage

A few years back--about 2008--there was rice rationing in the US and a great fear of rice shortages around the world. This lead to a certain amount of panic, particularly in Asia where citizens have traditionally consumed 70-80% of their calories in rice. The story of what actually happened is a combination of non-transparent markets, panic, reasonable actions on the part of governments, corrupt actions on the part of governments and their officials, reasonable actions on the part of consumers, screwy international trade activity, and just a general mess.
NPR ran a great story on the "crisis" and thankfully it's available in a podcast of the show Planet Money.

There's also a short interview with economist Peter Timmer on their website. But what is interesting are the lessons learned from the crisis. If you listen to the whole story, you hear that the lesson that the WTO and  Western economists take away from the "crisis" is exactly the opposite of the lesson learned by the governments involved. The interesting thing is, both sides appear to be right; open markets and transparency are good, but food security is a necessity. The problem is, neither side can see that maybe both lessons need to be learned.

Quinoa and Food Faddism

Photo from Wikipedia

    Over at The Independent (22 March 2011) they're talking about "the "lost crop" of the Incas, a health-giving seed found in the Andes which is increasingly providing the garnish on fashionable Western dinner plates." The crop is quinoa, a high protein seed with a balance of amino acids long used by people needing a gluten-free grain alternative. It's not particularly "long-lost" either, being a staple of health food shops since at least the seventies.
      What has changed is the demand. The price of quinoa has trebled over the last couple of years, and the article in The Independent makes the unsupported claim that some of this price increase has trickled down to "agricultural workers" in the growing regions. While market prices may have risen over the last five years, it is doubtful that peasant farmers have seen all that much of an increase in their personal income as the majority of profit is always taken by the purchasing desk.

Supply, Demand, and Speculation

     Two articles in the Monday 14 March 2011 Globe and Mail business section caught my attention. One, a column by Brian Milner called Taking Stock (B1) talks about the recent rises in the commodities and futures market. The other, by Jeremy Torobin, The seed for food inflation (B3) is about the rise in food prices now underway. Reading them back to back is instructive. Torobin points out that the current value of the Canadian dollar is helping keep a lid on import prices--particularly those used in food processing. But with George Weston Ltd. announcing an average 5 percent price rise starting April first, and other major producers set to follow, it is expected that the average increase in a Canadian family food bill will be about 7 percent by the end of the year.
     The reasons for this food price inflation are the usual suspects; higher fuel prices (the disruption of Libya's 1.5 percent of global production is cited), growing population and rising incomes in the developing world (particularly China), and "diminishing supply". This last is interesting, because two pages earlier Brian Milner is quoting the U.S. Department of Agriculture as calling for bigger harvests and higher global stockpiles than previously expected. Also, other oil producing nations have announced that they will be able to pick up the slack in oil production, and China is busy buying farmland around the world (particularly in Africa) and getting into industrial food production in a big way (trying to avoid contagion from Egypt and Tunisia, among others).
     So what is driving food price inflation? The same thing that drove house price inflation--hedge funds and "other speculators who have shoved hundreds of millions into agricultural futures and swaps" (Milner, B4). Commodities have been one of the plays of choice for speculative money since the meltdown of 2008. Milner interviews Ron Lawson, co-founder of Logic Advisors, who spends a lot of time and energy following agricultural commodity markets for his clients. And Lawson is pretty blunt in his analysis:

     Supply and demand establish the balance sheet. But when participants come in with amounts of money that are multiples of the available commodity, that's speculation. We always say that the specs got more money than the trade has cotton.
     If you're a big money manager, your round lot, your loaf of bread, is $100-million. Well, with $100-million you can buy the entire open interest of a commodity contract. So when these guys come into the market, they're not doing it on a demand-supply basis. They're looking for somewhere to place money. they're looking for an investment that gives them alpha, some kind of yield that can improve their returns. They're the whale that jumps into the pond.

     The whale that jumps into the pond, indeed. And they're entering a system that is not designed to feed people, but rather to maximize profit. And a 7 percent return looks a lot better on the year end report than the battering speculative money took in the housing collapse.
     So speculative money drives up the price of agricultural (or "soft") commodities, the processors jack their prices, and we all pay for it because food is one of those weird things--a necessity that is not a right, but a commodity. Unlike, say, air.
     But what happens with all this frothing of the futures market? Right. the same thing that happened in housing; a speculative bubble. Let's give the last word back to Mr. Lawson:

I've only been doing this 30 years. There are guys who have been around longer. But one of the things I learned a long time ago is that speculating in futures is God's way of telling you you've got too much money.

Short-sighted cuts at NSERC

     The Globe and Mail (12 January, 2011, p. A8) reports that the Natural Sciences and Engineering Research Council (NSERC) has removed food-related research from its target funding areas this year. This means that research into new plant breeds and better farming techniques will continue to be slowed. Of course, this comes just as several organizations, including the United Nations, are warning that we are entering a period of global food crisis.

In the first half of this century, as the world’s population grows to around 9 billion, global demand for food, feed and fibre will nearly double while, increasingly, crops may also be used for bioenergy and other industrial purposes. New and traditional demand for agricultural produce will thus put growing pressure on already scarce agricultural resources. And while agriculture will be forced to compete for land and water with sprawling urban settlements, it will also be required to serve on other major fronts: adapting to and contributing to the mitigation of climate change, helping preserve natural habitats, protecting endangered species and maintaining a high level of biodiversity. As though this were not challenging enough, in most regions fewer people will be living in rural areas and even fewer will be farmers. They will need new technologies to grow more from less land, with fewer hands.

     NSERC insists, in a statement, that "food-related research, despite not being listed as a target area, continues to be a priority for NSERC funding." NSERC funding has been commonly in the areas of traditional plant breeding--like canola, which was developed by Canadian scientists in the 1960s with government funding, and led to increased oil yields per acre.