Thursday, 11 April 2013

Speculators At It Again: Food in Their Sights

I'm not much of an investor. I've got a small portfolio of renewable energy stocks that have lost virtually all their value over the last decade. I'd get nothing if I sold them, so I hang on. I do get one small bit of satisfaction, that I've INVESTED in something that I believe in. There's a world of difference between that and speculating which is essentially the very wealthy playing games with commodity markets.  There's no interest or caring in the commodity in play, just a hope the price will move. Smart speculators can make money even when the prices go down.  A very smart piece on how speculation has been ramped up in the last few  years, and what it means to local markets, especially to the poor. It's nothing less than cruel. And a thoughtful piece from England where the weather is hammering small livestock producers.

The Links Between Food, Fuel and Finance: A Threat to Food Security

Corn stover.(Photo: Idaho National Laboratory / Flickr)

Just when you thought the unhealthy ties between food, fuel, and financial markets couldn’t get more perverse, we get the announcement that Vitol, the world’s largest independent oil trader, is entering the grain-trading business, hiring a team from Viterra, based in Toronto, to run the show. And lest we toss this off as just another corporate deal, Javier Blas in the Financial Times reminds us that Viterra has itself recently been bought by Glencore, perhaps the world’s greatest global commodity speculator.
What could go wrong?
For the world’s poor, plenty. They’ve already endured three food price spikes in the last six years, fueled in part by financial speculators gambling on agricultural, energy, and metals commodities as they fled the wreckage of the housing and stock market crashes. This corporate deal may not change a thing, but it is a powerful symbol of what’s wrong with our broken food system.
Vitol isn’t alone, of course. Mercuria, another leading energy trader, recently hired commodity traders from Morgan Stanley to build an agriculture portfolio. The connections couldn’t be clearer: energy trader hires investment bank to get it into agricultural commodities. According to Blas, the moves reflect declining profitability in energy. Why? Too little volatility. Remember, the traders are speculating, not investing. They need large and frequent price movements to make money. And if there’s one thing agricultural commodities markets are, it’s bullish on volatility.
Blas points out that the extension into agricultural markets is a natural because it can “allow oil traders to profit from the link between gasoline and diesel and the biofuel market.” And who wouldn’t want oil traders, whose interest is making money trading on vast energy markets, to use their insider knowledge to make money from movements on agricultural commodities markets, when in fact oil price movements are one of the main drivers of agricultural futures prices?
As a recent Oxfam report documents, the links go the other way as well, with the Big Four grains traders –Archer Daniels Midland (ADM), Bunge, Cargill and Louis Dreyfus, known collectively as ABCD – heavily invested in financial trading in the very commodities over which they have a high degree of control.
UNCTAD brought home these perverse connections in a short policy brief last year. They offered two telling graphs that compared price movements of the stock market (red), oil prices (green) and commodity prices (blue) in the first eight months of 2002 and 2012. (Forgive the resolution; they are clearer in the UNCTAD brief.)
2013 0409ch 1
In 2002, before the rise of biofuels and before deregulated financial markets had gone full-in on commodities, price movements were largely independent of one another. Particularly notable is the opposite movement of the stock market from oil and from the broader commodity index, the very relationship that led portfolio managers to recommend commodity investments as a hedge against stock market losses.
In 2012 that hedge was a fiction, though still a profitable one for traders who get paid partly by the trade. As the graph shows, co-movement is nearly complete. Co-movement suggests that supply and demand fundamentals in oil and broader commodities markets, which are indeed independent of one another, no longer determine price. UNCTAD attributes this to “herding behavior” among financial investors still flush with speculative capital in search of quick returns.
UNCTAD’s conclusions: “Because of these distortions, commodity prices in financialized markets do not provide correct signals about the relative scarcity of commodities. This impairs the allocation of resources and has negative effects on the real economy. To restore the proper functioning of commodity markets, swift political action is required on a global scale.”
It hasn’t happened yet, as the financial industry uses the profits from trading to weaken regulations and tie them up in court, a battle that is still going on in the United States.
Why does this matter? Because what happens on international commodity markets does not stay on commodity markets. It ripples out through an increasingly interconnected world. Large international price movements, which may or may not be driven by supply and demand fundamentals in those particular markets, drive commodities prices all over the world. Price transmission is by no means immediate nor complete; local conditions and weak integration with global markets still have an impact on local price movements. But global price volatility is highly contagious.
Consider Uganda, a net exporter of maize. As the graph below shows, maize price spikes transmitted to local retail markets, with a short lag. High demand from Kenya, in response to high global prices, contributed to price transmission. Not atypically, the high prices were “sticky,” holding on despite declining global prices. This is often an indicator of the market power of local traders, who can extend scarcity-prices by inducing continued scarcity.
2013 0409ch 2 The food security impacts? An estimated 65% of Ugandans’ cash income is used for the purchase of food, and the urban poor are most dependent on purchased maize, which gives them 20% of their calories. With the price spikes, the poor get poorer. (See my report.)
Energy traders hiring Wall Street firms to get them into agricultural commodities is truly the least of our problems when it comes to the unhealthy links between food, fuel and financial markets. But it is yet another powerful symbol.
More important is getting Wall Street to stop gambling on food, and getting food out of our gas tanks.

Let's not bet the farm

Frozen lambs warn of our vulnerability to climate change – and the free market doesn't offer any shelter from food insecurity
Gareth Wyn Jones and his sheepdog Cap with rescued sheep
Gareth Wyn Jones and his dog Cap with a pregnant sheep that was trapped for four days beneath snow on his farm in Llanfairfechan. Photograph: Dave Thompson/PA
How should we – not just the farmers but all of us, in Britain and worldwide – respond to the report from Wales that sheep are dying by the hundreds in snowdrifts up to 20 feet deep?
We could just apply the logic of the neoliberal free market, and do whatever seems cheapest. Then – as Britain came within a whisker of doing under Tony Blair – we would probably let all our farming go the way of our mining, since others can grow food (or dig out coal) much more cheaply than we can, and we can always buy whatever we need on the world market.
Or, still within the spirit of the free market, we could just tell the sheep farmers to get on with it – or else clear off and do something else. Indeed, in the words of farmer David Pittendreigh, chairman of the National Sheep Association in Wales, "It's survival of the fittest now!" – and the neoliberal market is nothing if not Darwinian. The government will probably take this line. It will be another of its "tough decisions".
Or, although this would be a huge departure, we could get serious. First we should acknowledge that the economics of the neoliberal free market are too simplistic by half, and for farming it is disastrous. For common sense and past experience suggest that we shouldn't let farmers go to the wall just because the weather changes or some sheikh decides to hike up the price of oil.
We need our agriculture, and we need it to be secure. The Napoleonic wars and the two world wars showed how vulnerable we are if we take our farming for granted and allow it simply to take its chances. Blockade is not an immediate threat, but food imports are precarious nonetheless. Other countries – including those we rely on, like Brazil – could be hit even worse by climate change than we are. If there is food at all on the world market then others, like China, could outbid us, and may need to.
In fact the only sensible course for all countries is to strive for self-reliance – growing all that is necessary to get by – while using (fair) trade to buy in luxuries that others really can grow better (in our case, bananas and coffee). Trade routes should be open too, because in times of crisis they will be necessary. The serendipity is that unless the weather fails utterly, most countries could be self-reliant if that was the policy. Britain certainly could, and so could most of the countries of Africa that are now the beneficiaries of Red Nose Day.
But for Britain to achieve self-reliance we would need a balance of arable, horticulture, and pastoral, in general on mixed farms and with the lowest possible inputs – and this is quite at odds with the dogma of the global market. As things are, it would be more profitable to increase the yield of grain in East Anglia even more, to fatten beef cattle to sell to Chinese millionaires, as recommended by secretary of state Owen Paterson at this year's Oxford Farming Conference.
So if we were serious – if we really thought about the present with compassion, and considered the future at all – we would acknowledge that neoliberal market economics just won't do. This isn't so shocking. We merely need to reinstate the strategy that was espoused both by the Tories and Labour in the pre-Thatcher years – treat each individual farm as a business (a million miles from Stalin's state-owned collectives) but ensure that all businesses of all kinds conform to principles of common sense and common morality. In principle, we just need capitalism with an acceptable face: not neoliberalism but social democracy.
Secondly, we should at last acknowledge that climate change is real, and prepare for it as urgently as our grandparents prepared for the second world war (except that the present threat is bigger). Specifically, we should accept that hill sheep are necessary – because Britain has an awful lot of upland and grass is our biggest crop, and sheep and cattle make best use of it.
The Guardian's report quoted Glyn Roberts, whose sheep survived in Snowdonia because he got them into the farmyard before the snow came. In Iceland, extreme cold is usual until May, yet sheep are among their biggest industries and a principal item of diet – basically because the farmers keep them in cozy wooden sheds for about half the year. We Brits simply need to accept that terrible weather of all kinds is liable to become the norm and take steps accordingly. The capital investment in sheep sheds would be huge, of course – but minute compared with what we have of late been spending on bankers, and surely far less than we are currently squandering on genetically modified organisms (GMOs). Sheds in these times are appropriate technology, while GMOs are purely speculative (though in line with the neoliberal urge to maximise short-term wealth.
Will the coalition take serious things seriously? There is no sign of this. None of the major parties has any coherent strategy for food and agriculture – only the usual Paterson-style pleas for short-term lucrative exports. So if we, people at large, give a damn we have to do what needs doing for ourselves. The only immediate hope lies with grassroots movements – and the one bright ray is that these are spreading. This whole approach is discussed on the Campaign for Real Farming website,