Deadly Greed: The Role of Speculators in the Global Food Crisis

By Beat Balzli and Frank Hornig

Part 2: The History of Futures

The Chicago Board of Trade is the nerve center for global futures contracts.
AP

The Chicago Board of Trade is the nerve center for global futures contracts.

Commodity speculation spread long ago from standard products like oil and gold to anything edible and available for trade on the Chicago Futures Exchange. These days there are futures contracts for everything from wheat to oranges to pork bellies. The futures market is a traditional tool for farmers to sell their harvests ahead of time. In a futures contract, quantities, prices and delivery dates are fixed, sometimes even before crops have been planted. Futures contracts allow farmers and grain wholesalers a measure of protection against adverse weather conditions and excessive price fluctuations. They can also help a farmer plan how much to plant for a given year.

But now speculators are taking advantage of this mechanism. They can buy futures contracts for wheat, for example, at a low price, betting that the price will go up. If the price of the grain rises by the agreed delivery date, they profit.

Some experts now believe these investors have taken over the market, buying futures at unprecedented levels and driving up short-term prices. Since last August, this mechanism has led to a doubling in the price of rice -- including the 500,000 tons that the Philippine government plans to buy in early May to address its own shortage.

Greg Warner has worked in the grain wholesaling business for more than two decades. His office sits a block away from the Chicago Futures Exchange. He's an analyst with the firm AgResource, and he says what is happening now in the wheat market is unprecedented.

"What we normally have is a predictable group of sellers and buyers -- mainly farmers and silo operators," he says. But the landscape has changed since the influx of large index funds. Fund managers seek to maximize their profits using futures contracts, and prices, says Warner, "keep climbing up and up."

He's calculated that financial investors now hold the rights to two complete annual harvests of a type of grain traded in Chicago called "soft red winter wheat."

Wagner is stunned by such developments. He sees them as evidence that capitalism is literally consuming itself.

'It's an Election Year'

Even the Commodity Futures Trading Commission in Washington has recognized the potentially explosive nature of the issue. For Tuesday's hearing, the commission called not just on farmers but also on representatives of investment bank Goldman Sachs and major investors like Pimco and AIG to testify. One member of the commission, Bart Chilton, backed away from regulating investors, saying, "These markets have to work for all the participants. If you don't have speculators in the markets, there's no liquidity and you don't have a market." And the editor of a commodities newsletter, Dennis Gartman, flat-out denied that speculators were to blame.

"It is an election year," he said. "To think you won't have senators and congressmen blaming high prices of things on speculators is naive."

But some basic market rules seem to have stopped working. "The enormous influx of capital has resulted in the futures markets no longer reflecting supply and demand," says Todd Kemp of the US National Grain and Feed Association. Ironically, investors have placed their wildest bets on staple foods. Information about supply bottlenecks and famines at the other end of the world is not noted on market quotations.

A commodities dealer named Christoph Eibl soberly concludes that financial managers just want to "benefit from the scarcity of these commodities." Eibl's Stuttgart-based investment firm, Tiberius, manages €1 billion ($1.6 billion). His in-house experts estimate that hundreds of billions of dollars have flowed into the futures sector as a whole within the last five years, much of it for agricultural commodities. Eibl admits the whole thing demands an "ethical discussion." Some futures traders argue that they don't cause prices to rise in the real world because as a rule they never take delivery of a given crop -- other parts of the economy control the actual street price. But futures prices affect real-world behavior (such as inventory hoarding), and Eibl says that buying futures in rice, for example, "eventually causes consumer prices to rise in developing countries like Haiti."

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