The commodities crisis is being fueled by out of control capitalism

Trading us into a nightmare?

Trading us into a nightmare?

The food crisis being discussed at the UN Food and Agriculture Summit in Rome is really a crisis of capitalism. It is inseparable from both the inner workings of the global financial system and the history of neoliberal reform.

The fates of consumers from Port-au-Prince to Manila are more dependent than ever before upon the decisions of traders in Chicago and London – not just traders in food commodities, but also in oil, upon which industrial agriculture relies. At the same time, their protections against rapid price rises have been gutted through years of structural reform and debt induced retrenchment.

With the global oil price having hit $130 per barrel and food prices up almost 50 percent in less than a year, claims from the media, politicians and business that supply constraints are the major forces at work are nonetheless coming to seem more and more hollow.

Rising demand from both Chinese and Indian consumers has been flagged by many as the driving force behind the commodities surge, or “super-cycle” as economists like to call it yet there are far more powerful forces at work than Indian or Chinese demand. Those two nations together, despite numbering over 2 billion people, account for around 12 percent of global oil consumption. The U.S. alone accounts for 25 percent. Yet it is not U.S. consumers that is driving the destructive commodities super-cycle, it is its dysfunctional financial system.

As Forbes online relates in a recent article on global oil prices, “Speculative investment in commodities has been fuelled by the dollar’s decline, with financial players buying into the market in a bid to hedge against the greenback’s fall and global inflation concerns.”

Institutional investors have turned like locusts towards commodities in the wake of bursting of America’s real estate bubble, generating a short-term spike in global food prices and pushing up oil prices. Mere production is not the culprit. As Venezuela’s oil minister Rafael Ramirez recently said, “Prices have risen spectacularly because of speculation, because of the devaluation of the dollar and world inflation.”

Geopolitical tension – a permanent state of crisis engendered by the Iraq War and rumors of war with Iran – has contributed and this has had the effect of amplifying the effects of speculation. As Wachovia Securities Eric Wittenauer told al Jazeera “We have certainly not ruled out the possibility of conflict later this year.” A mentality like this helps to keep an upward pressure upon oil prices.

Meanwhile, the influence of biofuels cultivation is very real and has pushed prices up. According to the FAO, biofuels diverted about 60 percent of ithe increase in cereal consumption between 2005 and 2007. Massive U.S. demand for corn ethanol has tightened markets, but in general terms the industry remains small, which isn’t to say that concerns about its future impact are misplaced. Land grabs are occurring in palm oil and soy producing areas, with huge ecological and social implications, but the effect on markets has not been critical.


Economist Robert Pollin from the University of Massachusetts-Amherst, and author of the book Contours of Descent , backs this up. According to Pollin pressures such as increased biofuels production or rising demand from Asian economies “are by no means sufficient to explain the rate of price increases for oil and food.” Dollar hegemony might be more significant. As Pollin told me, “If you denominate oil in Euros, you won’t get the same effect” while “there is some pure financial speculation against both the dollar and Euro which is moving into commodities.”

Yet for Pollin, the root cause is clear. “You have to give pride of place to the power of corporations operating in oligopolistic markets to exploit these other factors” he says. “The oil companies and OPEC are perfectly happy to push oil prices as high as possible [while] rising demand in Asia, the Middle East instability gives them the pretext to push harder.”

Speculation is a key element of this oligopolistic arrangement, as companies’ (and nations’) ability to “exploit rising demand and uncertainty is…compounded because of the increased commodity trading on unregulated financial markets.”

The process is akin to the U.S. real estate boom, in which economists argued that securitization of mortgages would actually share risk and stabilize markets. However, according to Pollin, when securitization takes hold, “what really happens is that market swings get exaggerated exponentially. This is what is happening with food markets, and will do so increasingly as food becomes a securitized commodity.”

The pace of food commodities trading is certainly increasing.

As a commodities broker consulted by the Spanish-based NGO GRAIN relates, the scale of such trading has ballooned in recent years, from some $5 billion in 2000 to $175 billion in 2008. Half of the wheat traded in Chicago is also controlled by big investment funds, seeking only short term gains.

Trading is becoming more intense as the money flows in, prompting some to opt out. In March 2008, for example, U.S. agri-giant Conagra sold off its own trading arm to a hedge fund specializing in commodities. $9 billion in commodities holdings were transferred with the stroke of a pen.

The system operates like a pincer movement in battle. One flank gains maximum control over the marketplace through consolidation and predation. The other manipulates prices through trading to turn that control into huge financial gains. The two flanks form part of the same army, and its opponents are left confused, bloodied – and hungry – in the center.

Having a riot

With such speculation in mind, we are getting closer to seeing how it can be that a world which last year generated record rice yields of 30 million tonnes and a record grain yield of 2.3 billion tonnes – is now undergoing a genuine food crisis.

If a supply and demand truly ran the world, then food riots would not be a common news item. A hundred million more people would not be about to lapse into severe poverty and infant malnutrition would not be on the rise again. But the truth is that the world is a whole lot more complex than such models suggest.

As anti-poverty campaigner and academic Walden Bello has detailed in a recent article for the Nation, food scarcity is inseparable from the political economy in which it occurs. In that article, Bello looks at a series of nations in which food riots have occurred or in which high prices are forcing large numbers of people into poverty. In Mexico, he finds that a nation which once produced all of its own corn requirements trade has come to be dominated by two massive firms, one American owned (Cargill) and one part American owned (Maseca). Bello describes how these two firms, through “operating on both sides of the border,” have come to wield “tremendous power to speculate on trade trends, so that movements in biofuel demand can be manipulated and magnified many times over” – forcing up food prices and stimulating riots.

In the Philippines, Bello finds that a nation which once produced much of its rice is now “the world’s largest rice importer” with prices having tripled in the past year. As in Mexico, Bello finds that a nation which once had a thriving agricultural sector has now become dependent upon imports. State support has retreated and investment in agriculture has dried up, with money diverted for debt repayments. Meanwhile, the economy of the Philippines has been opened up wholesale to foreign importers after entry into the World Trade Organization.

As Bello concludes, “The one-two punch of IMF-imposed adjustment and WTO-imposed trade liberalization swiftly transformed a largely self-sufficient agricultural economy into an import-dependent one as it steadily marginalized farmers.”

This analysis can be extended to other nations in which food riots have occurred. Haiti, once an important rice producer in the Caribbean, now imports most of its food from the U.S., the victim of a series of structural adjustment packages. It’s physical ability to produce food is unimpaired, but the dumping of subsidized foreign produce has made the recovery of its domestic agriculture all but impossible.

Eating is anachronistic

The current food crisis was anticipated long ago by Reagan-era Secretary for Agriculture John Block who, when asked about the implications of world trade talks then opening in Uruguay would have upon developing nations replied that “[the] idea that developing countries should feed themselves is an anachronism from a bygone era.” Developing nations could, Block contended, “better ensure their food security by relying on US agricultural products, which are available, in most cases, at much lower cost” which is exactly what they did, although it was hardly ever a voluntary decision, least of all a democratic one.

In fact, the 2008 food crisis really began with the implementation of the Block Doctrine. As activist and writer Raj Patel put it in his recent testimony to the U.S. House Financial Services Committee, Block enunciated the policies of a “food regime” that would enhance American power across the globe, and enrich its agri-corporations at the same time.

“For this food regime to work,” Patel told the Committee, “existing marketing boards and support structures needed to be dismantled. In a range of countries, this meant that the state bodies that had been supported and built by the World Bank were dismantled by World Bank.”

Import surges resulted and very often they originated in the fields of Europe and the United States. Ghana, for example, liberalized its import regime in 1998 when it produced 80 percent of its rice needs. By 2003, that figure was down to 20 percent.

The overproduction of the rich world has been systematically dumped in the developing world – like a tsunami of waste products powered by the motive force provided by billions of dollars in subsidies. As Eric Holt-Gimenez and Loren Peabody have put it, “Far from the result of ‘overpopulation,’ or the “invisible hand” of the market, hunger is the result of systematic destruction of southern food systems through a series of northern economic development projects.”

Speculate to annihilate

The current wave of speculation that has been resultant upon the bursting of America’s real estate bubble has been made much more devastating for poorer nations by this history of systematic assault. This is a point that is being missed by most attendees of the FAO “crisis summit” in Rome.

UN Secretary General Ban Ki Moon, for example, has begged powerful nations to lower trade barriers and remove export bans while stating that “The world needs to produce more food.” Others have recommended a “new green revolution” and of course, Monsanto and its cohorts are keen to counsel the introduction of GMOs wherever possible to stimulate production. There is no mention of systemic changes, or simple policy measures in developing nations that can be funded by international institutions.

Peasant based campaigning organization Via Campesina attempted to bring this massive omission to the attention of conference-goers with a peaceful protest on 3 June. Ten activists stood up in the press room carrying posters which precisely detailed the profits enjoyed by the world’s largest agri-corporations in the most recent reporting quarter. As their posters stated, “Profits for Monsanto, the world’s largest seed company, were up 108 per cent, while Cargill and Archer Daniel Midlands, the world’s largest food traders, registered profit increases of 86 and 42 per cent respectively. Profits for Mosaic, one of the world’s largest fertiliser companies, rose 1,134 per cent.”

The activists were summarily ejected from the premises, leaving them understandably enraged. As indigenous rights campaigner Saul Vicente Vazquez put it, “this Summit will only reinforce corporate control of the food system and lead to a further destruction of the way of life of indigenous peoples and their survival.”

With civil society either neutered by the summit’s organization or excluded altogether, there is no hope that the FAO crisis summit will move towards regulating multinational agribusinesses or commodity speculation. For example, a global “tobin tax” on commodity trades, is not on the agenda. Simple things like that could make a great deal of difference – dampening demand for short term trades.

But dampening commodity trading and reigning in agri-corporations is not on the agenda for very good reasons, reasons that the Via Campesina activists had pinned to their chests in the press room.


2 Responses to “Speculate to Annihilate”

  1. […] A year ago we were talking about an epochal food crisis brought on by rising biofuel production and the general advance of China and India, along with financial speculation in commodities. […]

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