Speculating with Lives How Global Investors Make Money Out of Hunger
Part 3: Number of Speculators Will Continue to Grow
The players include companies like Goldman Sachs. In 2009, the US investment bank earned more than $5 billion in commodities speculation -- more than a third of its net earnings.
"What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets," hedge fund manager Michael Masters conceded in testimony before a US Senate committee addressing the food crisis in 2008.
As long as the market is not regulated, the number of speculators making money at the expense of hungry people will continue to grow, fears UNCTAD economist Flassbeck. The consequences would be devastating. According to the World Bank, an increase of only about 10 percent in worldwide food prices results in another 10 million people slipping below the poverty line. Even though there is enough food, many die of hunger simply because they can no longer afford to pay for it.
"To restore the proper functioning of commodity markets, swift political action is required on a global scale," the UNCTAD study concludes. It calls for increasing transparency in commodities markets and tightening regulations on market participants. The experts believe that it would be helpful for governments to introduce their own commodity reserves, which would enable them to inject these reserves into the market to contain sudden price spikes. They also suggest that the introduction of a transactions tax "could generally slow down financial market activities" and curb speculation.
For a time, it seemed as if such proposals stood a chance of being addressed by politicians. The images of protesting North Africans struck fear into the hearts of the powerful. There was talk of "hunger uprisings." But that idea too can now be relegated to the realm of myth.
"One could also call them oil uprisings," says Bettina Engels, an expert in peace and conflict studies at the Otto Suhr Institute of Political Science in Berlin. "The struggle is all about political participation and the redistribution of wealth," she adds. The fact that the middle class, and not the poorest of the poor, has been taking to the streets in Tunis, Cairo and Tripoli, reinforces her argument.
"Hungry people have other things to do than demonstrate," says Ralf Südhoff, head of the Berlin office of the United Nations' World Food Programme. Most, according to Südhoff, are small farmers, people who die quietly and inconspicuously in rural areas.
Still, the subject of food prices has gradually made its way up the political agenda. Even the free-market liberal Guido Westerwelle, Germany's foreign minister and the former leader of the Free Democratic Party, is now sharply criticizing "irresponsible speculation" in food products. "Between 2006 and 2009, millions of men, women and children suffered from hunger, because the sale of dubious financial products caused food prices to explode," Westerwelle said during an event at the German Foreign Ministry in May.
Taming the Market
French President Nicolas Sarkozy says that it is in the "nature of a market" to be regulated, or else it would be a "jungle." Sarkozy, who is chairing both the G-8 (the group of the leading industrialized countries) and the G-20 (the community of the 20 major industrialized and emerging economies) this year, has made the problem a major focus of his presidency.
The subject of rising food prices was also at the center of the conference of G-20 agriculture ministers in Paris on June 22-23. The French president energetically argued for tighter controls on agricultural markets, saying: "An unregulated market is not a market, but simply a lottery in which fortune favors the most cynical."
But the politicians only managed to agree on the introduction of a global Agriculture Market Information System, which will allow governments to share data on commodities. It is intended to make it easier to react more quickly to price increases in wheat, corn, rice and soybeans in the future.
But there is still no concrete regulation of financial transactions involving agricultural products. There is too much resistance to the idea, especially in the United States and Great Britain, which are concerned about the potential impact on the health of their financial markets.
Shifting to Over-the-Counter Trading
Brussels, at least, now intends to revise its guidelines in relation to trading in commodities and commodity derivatives. Lawmakers there want to make such trading more transparent, so that everyone knows who is doing what. They are also considering imposing position limits on speculative contracts, which individual traders would not be permitted to exceed for a given product.
The EU is unlikely to reap much praise for the initiative. While there are no legal restrictions on positions in the commodities trade on European futures markets, such limits have long been the standard in the United States. US regulators are currently discussing the imposition of limits for other commodities, like milk, cotton, coffee and cocoa.
But even then, banks, companies and hedge funds will likely shift their business to the over-the-counter market, conducting their trades directly with one another, without middlemen and well removed from any supervision whatsoever. Already only a fraction of the worldwide trade in derivatives is conducted on the official exchanges.
In light of this dangerously uncontrolled growth, it seems only reasonable to strictly regulate the business. Plans to do so are even in the works in the United States, and yet lobbyists for the financial industry have consistently managed to stall legislation.
Even as politicians have been hesitant to address the question of feeding the world, the business community has been eager to get in on the game.
Looking for Opportunities
In early May, hundreds of attendees crowded into the Waldorf Astoria Hotel in New York to learn about the latest agricultural investment opportunities at the third Global AgInvesting conference. Bankers, brokers, producers, traders, asset managers and large investors were there, as were representatives of the Dallas Police and Fire Pension System and the chief investment officers of elite institutions like New York's Columbia University and George Washington University in Washington, DC.
They all wanted to know how best to use rising food prices to turn a profit. Is it better to invest in farmland in the United States, or perhaps Brazil? Is land for biofuel production cheaper in Africa or South America? And how quickly can investors get out of these investments, if necessary?
Financial investors have little interest in the effects of their investments on the countries involved, or in the social and environmental consequences. The organizers of the AgInvesting conference prudently scheduled a presentation on responsible investing in agriculture at the tail end of the event -- when most attendees were already on their way back to the airport.
Critics refer to investors who buy up agricultural land in other countries as "land robbers." Former FAO Director-General Jacques Diouf berated them as "neo-colonialists." But those being chided in this manner are unaware of any culpability. They see their investment as beneficial, arguing that they are helping to feed the rapidly growing global population.
Although the world population is not growing as fast as it did in the last 40 years, during which it almost doubled, the projected 30 percent increase in population by the year 2050 means that more than 9 billion people will have to be fed.
Under these circumstances, the land grabs did not look like such a bad idea at first. Even the World Bank initially advocated investments in underdeveloped countries, hoping that everyone would benefit once the infrastructure had been developed and jobs had been created.
But the idea of combining the greed of investors with the fight against hunger as a mutually beneficial business venture has failed miserably.
A conference at the University of Sussex and a study by the World Bank both came up with conclusions that are almost entirely devastating. Researchers describe corrupt elites who have sold off the land of farmers deprived of their rights; job promises that are not being kept; irrigation systems that deprive local residents of water; deforestation, destroyed habitats and monocultures contaminated with pesticides; and forced displacement. According to the World Bank, some 80 million hectares of land have fallen into the hands of foreign investors in the last few years.
- Part 1: How Global Investors Make Money Out of Hunger
- Part 2: Every Bubble Needs a Story
- Part 3: Number of Speculators Will Continue to Grow
- Part 4: 'It's the Government's Responsibility to Feed People'
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