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Tuesday, February 01, 2011

Has a "food bubble" replaced the housing bubble?

What caused the Egyptian rebellion? Danny Schechter has offered an analysis which should trouble us all, because what happened to Hosni could happen here.

In Egypt and elsewhere, people are hungry because food prices have risen dramatically.
Prices in Egypt are up 17% because of a worldwide surge in commodity prices that has many factors but speculation on Wall Street and big banks is a key one.

As IPS reported, "Wall Street investment firms and banks, along with their kin in London and Europe, were responsible for the technology dot-com bubble, the stock market bubble, and the recent U.S. and UK housing bubbles. They extracted enormous profits and their bonuses before the inevitable collapse of each.

Now they've turned to basic commodities. The result? At a time when there has been no significant change in the global food supply or in food demand, the average cost of buying food shot up 32 percent from June to December 2010, according to the U.N. Food and Agriculture Organisation (FAO). Nothing but price speculation can explain wheat prices jumping 70 percent from June to December last year when global wheat stocks were stable, experts say."
In olden times, even the most heartless dictators understood the need to make sure that the common people had bread. But the dictatorship of libertarianism has a different logic. As this paper explains:
Thus, the inflow of “investment” money into commodities markets automatically lead into price increases. There is no other way, this is just simple math.
You may also want to read this paper, "Commodities Market Speculation: The Risk to Food Security and Agriculture." This was published in 2008, when the problem had already made itself known but before the real trouble had set in. From the intro:
Today, developing countries are consuming less food. About 43 percent of more than 27,000 people polled in a recent 26-nation survey said that they had cut back food consumption as a result of higher prices.2 The number of those undernourished and food insecure in the world has increased along with prices. Over the last year, riots broke out over food prices, lack of available and affordable food, and insufficient food aid.
Amidst the food price crisis, speculation is a major contributor to extreme price volatility, which is skewing agriculture commodity markets to such a degree that both farmers and consumers are losing out. This paper reviews the role of speculation in the global food crisis. It explains the particular role of U.S. regulation of commodities markets within the global regime. Finally, it offers policy recommendations for how governments can better regulate markets in support of food security and employment goals.
That was 2008. Now we have the ascent of the Tea Party libertarians, who ain't gonna regulate nothin' -- no matter how many people die.

See here:
In fact, America (and Europe, by implication) is at the very heart of this story, with Goldman Sachs and City bankers threatening to push the global economy over the precipice once again with their next bout of reckless speculation.
The Wall Streeters got huge bailouts and are now making huge profits. The money has to go somewhere. Right now, the commodities market is considered the safest place to put it.
Just a few months back, the Food and Agricultural Organization of the United Nations in Rome warned of another impending food crisis in 2011, the two principal causes of which will be climate change and food speculation.

This crisis is now beginning to materialize, as climate shocks in Russia, Pakistan, Australia and Argentina have conspired with rampant food speculation to cause food prices to rise to their highest levels in recorded history.
You thought housing speculation was bad? You ain't seen nothing yet.

One measure of our basic economic weakness is that we lurch from one bubble to another instead of shoring up our fundamentals. We don't have any fundamentals any more. All we have are Wall Street vampires.
In an analysis of the food price crisis of 2007-08, De Schutter documents how the U.S. government passed legislation in 2000 deregulating the food commodity markets and for the first time permitted speculation on speculation.

Here's how it used to work. In January, Farmer Brown would sign a contract to sell his 2011 future crop to a grain trader like industry giant Cargill for 100 dollars a tonne. In the fall, Cargill would then sell Farmer Brown's grain at whatever price they could get to a bakery or feedlot company for cattle. These "futures" contracts insulated both the farmer and the grain trader from wild price fluctuations.

Now, after the passage of the U.S. Commodity Futures Modernisation Act in 2000, Cargill could sell Farmer's Brown "futures" contract to an investment bank on Wall Street for 120 dollars a tonne, who could in turn sell it to a European investment company for 150 dollars a tonne and then sell it to a U.S. public pension fund for 175 dollars a tonne and so on. Add in some complex financial instruments like 'derivatives', 'index funds', 'hedges', and 'swaps', and food become part of yet another highly-profitable speculative bubble.
Now there is a new and bigger food price bubble that began midway through 2010. It's no surprise since nothing was done to change the conditions, Ghosh wrote. Regulations that could prevent or at least limit such speculative financial activity are not in place. The 2010-11 food price bubble is blamed on last summer's Russian drought and increased consumption by India and China. However, FAO figures clearly show grain consumption by those latter two countries has actually fallen, mainly because many simply can't afford to buy as much grain, Ghosh told IPS in an email interview.
Yes, we're going to be hit too
U.S. grain prices should stay unrelentingly high this year, according to a Reuters poll, the latest sign that the era of cheap food has come to an end.
Masters says the markets are now heavily distorted by investment banks: "Let's say news comes about bad crops and rain somewhere. Normally the price would rise about $1 [a bushel]. [But] when you have a 70-80% speculative market it goes up $2-3 to account for the extra costs. It adds to the volatility. It will end badly as all Wall Street fads do. It's going to blow up."
You can be sure that the fucking teabaggers are going to want to put out the fire by spraying it with gasoline. Only idiots think that the problem is "socialism" -- an imaginary bogeyman. The problem is unregulated capitalism. In a word: Libertarianism.
Comments:
Blame the policies of the Fed.

The reason for every bubble is simple: lots of cheap money. The Fed is lending at zero percent, and throwing more liquidity into the system by buying U.S. Treasuries (QE2). The banks borrow for nothing and buy commodities, pushing their price up, from oil to wheat. People must now pay higher price for everything, and the "investors" who bought the commodities make an easy buck. The reverse Robin Hood of taking from the poor to give to the rich continues.

Blame Helicopter Bernanke who throws mass quantities for money to the banks.
Blame Obama for appointing Bernanke.
Blame the Democrats for approving Bernanke.
Blame the Democratic voters who chose Obama because he was for "change".
 
We've had eras of cheap money before, without having a food bubble.

Blame deregulation. That's what is different now.
 
Blame every Republican from Reagan on pushing the deregulation of everything and blame Carter for deregulating the airlines.
 
Great point, Joseph. It is the deregulation.

Maybe you are both tuning into the same vibration, but The Ed Show also explored this topic tonight, coming to the same conclusion. I have not watched the show much but he made good showing on this topic.

djmm
 
I prefer the term neoliberalism, which is actually the same thing, but it has little to do with so-called "social libertarianism." I think using the word libertarianism might might be confusing to some.

Neoliberalism or Friedmanism (as in Milton) is the poison that is ruining economies and governments throughout the world and has captured both political parties in this country. It must be destroyed.
 
These neoliberal cultists never understood that the regulations were there for a reason. Deregulation started with Carter, but Reagan was in love with the neoliberalism spouted by crackpots like Milton Friedman, and deregulation accelerated, and this philosophy has helped destroy the country.

I'd piss on Milton Friedman's grave if I could.
 
That was Bernanke's second term. He was a Bush man.
 
I have spec'd on food. Its a troublesome area and one I dont feel entirely comfortable about, so I have kept my activity moderate. can see why you would think this is highly questionable morally. I feel it is morally better to buy companies which increase agricultural productivity. Hence my larger investments are in fertiliser companies related agricultural technology companies - I draw the line at Monsanto. Those people are scum.

I believe food prices will tend to go up in the next 5 years. I think this is due to rising incomes in what we call "the third world", increasingly volatile weather causing damage to crops, and loose monetary policy in the US which is creating liquidity bubbles and encouraging speculation in general. I also think we are in the midst of an incipient water crisis which will become apparent in the next 20 years. I think thats why the Bush family bought that enormous range in Paraguy. It sits on one of the worlds biggest aquifers.

There is another side of speculation which should be taken into account. For years, excessively low food prices resulted in very little investment in productivity enhancement in the sector. Our best and brightest minds didnt choose to go into farming. They went into banking. I think that higher food prices will help stimulate investment in agriculture. The earlier this response happens the better. Better that food prices rise 25% now than 100% in 3 or 4 years time.

However, I will also sell the grain etf. I just dont feel comfortable owning food speculatively. The truth is that even though I wont see it happen, at the margin, someone in Africa will go hungry because I bought before them. However to my mind this will do nothing to prevent grain prices going up. To me it is inevitable. If we banned all speculation it would only delay the inevitable and probably with unfortunate effects. However it would change the time profile of food prices. They would go up less now and more in the future.

I am not denying markets are manipulated. They are. I am just arguing that in this case some food inflation is justified. Farmers should be paid more for farming. It is in all of our interests. Perhaps we should pay for that by paying bankers a little less.

If we want to do something about this, we should all eat less meat, or better still STOP ETHANOL SUBSIDIES NOW! IT IS OBSCENE!

Harry
 
You must screen the comments, because the goofy paul "tories" come out of the woodwork over these types of comments. Thanks.
 
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