Betting On Food Prices May Sell The Hungry Short

Oct 16, 2011
Originally published on October 19, 2011 11:33 am

Speculators in the agricultural commodities markets are forcing grocery prices to rise too quickly and erratically, according to some top economists marking World Food Day on Sunday.

"Excessive financial speculation is contributing to increasing volatility and record food prices, exacerbating global hunger and poverty," wrote 461 economists, from more than 40 countries, in an open letter.

They called upon the U.S. Commodity Futures Trading Commission to crack down on speculators who have been buying large amounts of corn, wheat, soy and other commodities, hoping to make a profit. The economists argue that increased trading is a significant part of the reason grocery prices are higher this year.

And grocery prices are indeed up this year. For example, in August, the average price of bread in U.S. cities was up 17.4 percent over last year, while milk was up 12.4 percent, according to the latest report from the Bureau of Labor Statistics.

Brandon Kliethermes, an agriculture economist with the forecasting firm IHS Global Insight, agrees that speculators do increase volatility — exaggerating price moves up and down.

"These markets have been bouncing around quite a bit for the past year now," Kliethermes said.

But not everyone agrees price speculation is the root of the problem. Economists have yet to find clear evidence that financial speculation can change food prices over time. Searching data for any meaningful price manipulation is very hard to quantify, Kliethermes said.

"You can't really point a finger at speculators," he said.

The Commodity Futures Trading Commission is expected to soon issue new rules about commodity speculation, as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

And next month in France, the subject will be in the spotlight at a summit involving top leaders of the G20 — a group of the world's biggest economies. The host, French president Nicolas Sarkozy is pushing for tighter controls to stop speculators from betting on crop prices.

The issue centers on whether commodity exchanges are now hurting food prices when, in theory, they should be helping hold down grocery prices. Here's how it's supposed to work:

Say a company needs corn to make corn flakes. It could go to a commodities exchange and agree to buy corn at a particular price, spelled out in a contract. Having a known price would allow the cereal maker to go forward with plans to produce and sell corn flakes.

The company might get a lower price if it waits longer to buy corn, so locking in a price involves some risk. But on balance, the deal makes good business sense: the cereal maker gets certainty about the price of corn, and the farmer gets certainty about the price he'll get for his crop. And consumers win because such transactions smooth out risks. That reduction in risk encourages people to become farmers and companies to make corn flakes — everyone wins.

But speculators have been pouring into the commodities market, hoping to make more money there than in the stock market. A UN report shows that money invested in food commodities shot from $13 billion in 2003 to $260 billion just five years later.

These financial speculators buy and sell contracts, but never grow corn or make corn flakes, according to Alan Bjerga, author of a just-released book, Endless Appetites — How the Commodities Casino Creates Hunger and Unrest.

Among the speculators, "no one ever takes delivery of the grains," Bjerga said. It's just paper being passed back and forth among investors betting on price moves.

Critics say food should not be traded like gold or stocks, purely for financial gain. Their demands for change are being made on World Food Day, an annual event marking the 1945 launch of the Food and Agriculture Organization of the United Nations (FAO).

The U.N. agency tracks — and tries to end — hunger around the world. Many fast-developing countries, especially in Asia, have made dramatic progress in recent years. Still, hunger remains the world's No. 1 health risk, killing more people than diseases such as HIV/AIDS, malaria and tuberculosis.

FAO reports that about 925 million people do not have enough to eat, with the worst problems being concentrated in South Asia and sub-Saharan Africa.

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Today is World Food Day. It's an annual event that marks the 1945 launch of the United Nations' effort to track global hunger. Progress has been made in fighting hunger over the past decade, but still, nearly a billion people don't have enough to eat, mostly in South Asia and Africa. And some economists say financial speculation in food commodities is part of the reason. Here to discuss the debate is NPR senior business editor Marilyn Geewax. Marilyn, welcome.


CORNISH: So, how does trading in commodities, this sort of thing happening off on Wall Street, affect our prices at the grocery store?

GEEWAX: Well, at least in theory, commodities markets should help make food cheaper for all of us. And here's how it's supposed to work. Say a company needs corn to make Corn Flakes. You can go to a commodities exchange and agree to buy the corn at a particular price and it's all spelled out in a contract. And you can go forward with your plans to make your Corn Flakes. You took a risk. Maybe if you're waited a little longer, the prices would have gone down but really on balance, the deal made sense.

CORNISH: So, what's the problem?

GEEWAX: The concern now is that there are just too many big investors that are betting on food solely to make a profit. They don't grow corn, they don't make Corn Flakes, they really never even want to take possession of any of these grains. They're looking for a profit. Now, critics say that these financial investors are the same people that, you know, back in the 1990s drove up tech stocks and we got a tech bubble out of that. And then 10 years ago, they started in on residential real estate. In both cases, we ended up with a tech bubble, a housing bubble, and it hurt the economy. So, critics are saying these same kinds of investors are now creating commodities bubbles that could burst and hurt us as well.

CORNISH: Now, how much of the increase in food prices is actually tied into this kind of speculation? I mean, I read reports about things like the cost of peanut butter going up. But, you know, with there, that deals with crops and the weather, so how do we know it's speculation?

GEEWAX: Right. I mean, peanut butter is a good example. That's pretty much just a weather story, for the most part. There was a terrible Southern drought and that hurt the peanut crop. Some critics say that there's other things like ethanol policy that encourages farmers to turn too much of their corn into fuel, and that helps drive up food prices. And most of all there's just this simple law of supply and demand. There are a lot of people in China and other parts of the world. They're making more money now, so they're hungry. They want to buy food. And that means demand has been outstripping the supplies. So, we've got a lot of factors that contribute to rising food prices. But this speculation issue, people say that's exacerbating all the underlying issues. There's a U.N. report that just came out that said that money that was invested in food commodities shot from $13 billion in 2003 up to $260 billion in 2008.

CORNISH: So, Marilyn, is anyone actually trying to curb speculation?

GEEWAX: This past week, a group of about 500 economists from 40 different countries signed a letter urging U.S. commodity regulators to try to tamp down on this speculation. And there are new rules that are being considered right now under that Dodd-Frank Wall Street Reform Act. They haven't been finalized yet but they're working on it. And next month, the leaders of the G-20 - that's the group of the 20 biggest economies - they're going to take up this issue when they meet. But, you know, some people say that markets should be left alone, that speculators' money doesn't really hurt consumers, that in the long run prices are set by supply and demand. So, if farmers plant more corn than people want to eat, the prices are going to go down and that's really what we've seen in recent trading.

CORNISH: NPR senior business editor Marilyn Geewax. Marilyn, thank you so much.

GEEWAX: Oh, you're welcome. Transcript provided by NPR, Copyright NPR.