A recipe for financialised food

This recipe is increasingly common for consumers in global food markets. Although unpalatable, it is gaining popularity with investment bankers and hedge fund managers.

Method:

1. Take a bunch of financial regulations, cut off the good parts and water them down.

2. Measure out several thousand tonnes of grain and other staple foods and add them to global markets. 

3. Quickly pour in huge amounts of hot speculative capital from investment banks and hedge funds. 

4. Watch as basic food prices rise. 

5. Serve with fat profits and a large portion of widespread hunger, poverty and malnutrition for the world’s poorest people.

Back in the 19th century, ‘futures markets’ for crops such as maize and wheat were set up to allow US farmers and buyers of food, such as millers and bakers, to protect themselves from changing prices. In the 1930s, following the Wall Street Crash, regulations were put in place to limit the involvement in these markets of banks and other financial institutions that had no interest in the food that was being sold, but were simply out to make profits.

These regulations stayed in place until the 1990s, when they were severely weakened by lobbying from banks such as Goldman Sachs and Barclays Capital (the investment arm of the high street bank).

Subsequently, as the recipe above shows, recent years have seen the number of contracts traded on these markets increase fivefold, and food prices have become increasingly volatile, hitting record highs, as in the food price crisis of 2007-08. Though other factors such as climate change and demand for biofuels are also contributing to higher food prices, speculation rides on the back of changes in supply and demand, exacerbating food price spikes.

For example, in the summer of 2010, following a drought in Russia that caused wildfires and damaged the wheat crop, the price of wheat skyrocketed. Yet with a bumper crop in the US, the global wheat harvest was the third highest on record – there was no shortage of wheat. The price spike was due to speculators piling into the market, anticipating a shortage and looking to make a quick buck.

Similarly, between April 2010 and April 2011, the value of futures contracts for maize owned by financial institutions such as hedge funds and investment banks increased by 127.5% to $15.7 billion. In the same period, the price of maize itself – Africa’s most important staple food - increased by 102%. 

While this type of profiteering is affecting people’s grocery bills around the world, the greatest impact of food speculation is felt by the poorest people in developing countries, who typically spend 50-90 per cent of their income on food. As a result of rising prices, many families have to cut back on food, use up savings, or cut back on other essentials such as health care and education.

The good news is that in 2010, the US passed new regulation to prevent excessive speculation on food, and the European Union is bringing forward similar proposals. Food speculation has even made it on to the G20 agenda this year. 

The World Development Movement has been calling on the UK Government to support proposals from the European Union to regulate the commodity markets to prevent excessive speculation. The bad news is that with the UK’s historic tendency to favour “light touch” regulation, it’s been challenging. We need everyone who wants to see a food system that serves people rather than profits to join the fight – find out more at www.wdm.org.uk/food.