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

By Beat Balzli and Frank Hornig

Vast amounts of money are flooding the world's commodities markets, driving up prices of staple foods like wheat and rice. Biofuels and droughts can't fully explain the recent food crisis -- hedge funds and small investors bear some responsibility for global hunger.

The Philippines will take delivery of 500,000 tons of rice in May to address its shortage. But the price has been bid up by speculators.
AFP

The Philippines will take delivery of 500,000 tons of rice in May to address its shortage. But the price has been bid up by speculators.

Not long ago, Dwight Anderson welcomed reporters with open arms. He liked to entertain them with stories from the world of big money. Anderson is a New York hedge fund manager, and as recently as last October he would talk with enthusiasm about his visits to Malaysian palm-oil plantations and Brazilian grain farms. "You could clearly see how supply was getting tight," he said.

In mid-2006 Anderson was touting the "extraordinary profitability" of field crops from corn to soybeans. He was convinced that rising worldwide hunger would be synonymous with highly profitable -- and dead-certain -- investment bargains.

In search of new investments, Anderson sends dozens of his employees to visit agricultural regions around the world. Back in New York, at his company's headquarters on the 27th floor of an office building high above Park Avenue, they bet on agricultural markets from Peru to Vietnam.

But in the towers above Manhattan's urban canyons, it's easy to lose touch with the ground. Hedge fund manager John Paulson was recently celebrated for achieving a record annual profit of $3.7 billion (€2.3 billion). Those who work in this environment have only one rule: Don't disappoint profit-hungry investors.

"I'm constantly wired," Anderson used to say, back when he talked to journalists. His nickname in the industry is the "Commodities King," and his Ospraie hedge fund is the world's largest. These days, though, Anderson avoids the media. He's even kept his face out of the media by buying up rights to all photos of himself on the market. His spokesman is now paid, mainly, to say nothing.

A Broken Market?

There are plenty of questions to ask Anderson, though -- in particular about the role of international investors in the current spike in the price of staple food. Not only is there talk that investors have profited from desperate hunger in Honduras, the Philippines and Bangladesh; critics also wonder if commodity speculators are making the crisis worse.

Up and away
DER SPIEGEL

Up and away

On Tuesday in Washington, DC, a regulatory body called the Commodity Futures Trading Commission held public hearings on this very question. Farmers and food producers argued that the market was "broken," suggesting that the steep rise in the price of staple crops was hurting everyone -- farmers as well as the people they feed. "The market is broken, it's out of whack," said Billy Dunavant, head of a cotton-producing firm in the United States, at the Tuesday hearing.

Regulators on the commission warned against government intervention, and no doubt fund managers like Anderson would, too. But the crisis keeps deteriorating. India and Vietnam have imposed export bans on ordinary rice. Indonesia is following suit. According to the United Nations, North Korea is on the brink of a humanitarian crisis. After unrest shook countries from Egypt and Uzbekistan to Bangladesh, thousands of South Africans took to the streets of Johannesburg last Thursday to protest high food prices. In Haiti, the prime minister was fired after riots over the price of rice.

Biofuels and global warming have been blamed for shortages driving up the price of food, and both trends have played their role. The planet's grain reserves are almost empty for a number of reasons, including global population growth and greater prosperity in some countries like India. Feed corn is in short supply because industrialized nations have used it for ethanol. Droughts -- in Australia, for example -- have devastated rice and wheat harvests. Wheat reserves worldwide are only sufficient right now to cover about 60 days of demand.

This helps to explain why commodity prices have rallied since early 2006, with the price of rice ballooning 217 percent, wheat 136 percent, corn 125 percent and soybeans 107 percent.

But classic supply and demand theory offers only a partial explanation. Sudden price hikes since last January have been alarming. The UN estimates that at least $500 million (€312 million) in immediate aid will be needed by May 1 to avoid serious famines. Agricultural scientists at the world body's Educational, Scientific and Cultural Organization (UNESCO) have presented a report on the world food crisis. And criticism is growing that hedge funds, index funds, pension funds and investment banks bear part of the blame.

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Photo Gallery: Food Riots around the World
Photo Gallery
Photo Gallery: Food Riots around the World


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