How Wall Street Starved Millions and Got Away With It
High finance really intrigues me. Shocking, I know, because who wants to talk about financial instruments? Futures, swaps, derivatives, blah, and blah. While the nature of high finance is obscure, their effects on the real world are painstakingly real.
This fact is demonstrated when food is traded as a commodity, like any other piece of stock – when you can draw the line between how those futures and affect the real cost of our daily bread. No clearer was this fact was demonstrated than during the food crisis of 2008.
An article recently published in Harpers Magazine, entitled “The Food Bubble: How Wall Street Starved Millions and Got Away with It” by Frederick Kaufman, provided the inspiration for what you’re reading today. The article chronicles Kaufman’s attempt to get to the bottom of the 2008 food crisis, and the real reason behind why millions of people were shoved into food insecurity and starvation in 2008.
Headlines spoke of the “food crisis”, shortages, famine, and riots. The blame for this apparent shortage fell on biofuel production, drought, and climate change despite the fact that there was never a shortage in food. In fact, today there actually is enough food produced to feed double the world’s inhabitants. It’s when the price of food rises, that’s when people starve. But if there was always enough food, then how does the cost of food rise so dramatically?
Let’s rewind a few years. In 1991, Goldman Sachs decided to start trading food products – a brand new idea which completely transformed the market. They selected eighteen food products (such as coffee, corn, hogs, etc.), which were then passed through the black box of estimation, elixirs, sums, and mathematical formulas that is financial instrument development. It was dubbed the Goldman Sachs Commodities Index. This brand new food index attracted buyers, whose shares rose in value, which then proved that food was a fabulous investment. Investors poured into food commodity index funds. And so the food bubble began to grow.
But farmers and brokers have hedged the price of wheat and other commodities for centuries, right? Yes, farmers have, for centuries, made agreements to sell their wheat at a given price in the near future, and this guaranteed future sale protected them from falling prices, and so on. These contracts allow both producers and consumers to hedge their risks. So then, what’s the difference between what Goldman Sachs starting doing, and the trading of wheat that’s been going on for centuries? What was so special leading up to the 2008 food crisis?
The difference lies in the fact that the managers of these new commodities indexes, instead of buying and selling as everyone else did, were only buying. And kept buying, rolling over, and buying more of these historically unprecedented wheat futures. The investment banks introduced a completely unnatural and artificial demand for wheat, and sent the price skywards.
In early 2008, everything boiled to the surface. The banks were fueling this artificial demand, and speculation drove wheat prices out of control. This spurred riots in more than thirty countries and drove the world’s food insecure to over one billion people. Somehow, this so-called fabulous investment was causing some serious trouble.
Hard red wheat, the world’s most commonly produced wheat variety, generally trades between $3 and $6 per bushel. On February 25th, 2008, hard red spring futures settled at $25 per bushel. Media coverage kept speaking of food shortages. The real irony here is that 2008 was the greatest wheat-producing year in world history.
This far away world of high finance and commodities trading impacted the price of bread, cooking oil, butter, and other items all over the world. This is when the price of food gets scary – it’s as if the masters of high finance have the ability to reach down and take the food right off of the tables of the poor. For most of the readers of this blog, you are maybe spending 15 or 20% of your income on food. But most people on this planet are spending upwards of 50% of their daily earnings on food. For many, the food bubble pushed that up to 80%, and right into the arms of food insecurity, malnutrition, and starvation.
The maddening part is the banks made a killing trading food indexes this way. Should the price of food be gambled, thrown about on a trading floor in pursuit of profit as prices rise and the rest of us suffer? I mean, we’re not talking derivatives, currency, or bonds – this is food.
Most people’s eyes tend to glaze over the moment the discussion turns to commodities, corn futures, wheat futures – and understandably so. These terms sound confusing because they are. It’s precisely the fact that most people don’t understand, which is why the banks have been able to exploit these markets to the extent to which they have. But we can try to understand the way these markets work, and I think we must. Because if the food crisis and financial crisis and their victims have taught us nothing, that would just be another tragedy.
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