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Unguarded, unregulated capitalism is one of the most destructive combinations on earth. If kept in check, if tightly regulated....capitalism, with it's built-in motivation of greed, works the best for a national or even, world, economy.
I am extremely proud to call myself a liberal, and yet, I embrace capitalism....if tightly, closely regulated....as my economic theory of choice. Regulated capitalism works.
Having said that.....here's some food for thought on today's "food speculation" capitalism. It's not pretty....
There has always been modest, even welcome, speculation in food prices and it traditionally worked like this. Farmer X protected himself against climatic or other risks by "hedging", or agreeing to sell his crop in advance of the harvest to Trader Y. This guaranteed him a price, and allowed him to plan ahead and invest further, and it allowed Trader Y to profit, too. In a bad year, Farmer X got a good return but in a good year Trader Y did better.
When this process of "hedging" was tightly regulated, it worked well enough. The price of real food on the real world market was still set by the real forces of supply and demand.
But all that changed in the mid-1990s. Then, following heavy lobbying by banks, hedge funds and free market politicians in the US and Britain, the regulations on commodity markets were steadily abolished. Contracts to buy and sell foods were turned into "derivatives" that could be bought and sold among traders who had nothing to do with agriculture. In effect a new, unreal market in "food speculation" was born. Cocoa, fruit juices, sugar, staples, meat and coffee are all now global commodities, along with oil, gold and metals. Then in 2006 came the US sub-prime disaster and banks and traders stampeded to move billions of dollars in pension funds and equities into safe commodities, and especially foods.
Pausing for a second......this food speculation stuff sounds an awful lot like the mortgage derivative mess we're still digging our way out from under,.....or the speculative run up of oil pricing in 2005. Balloons are blown up, speculators go all ape-sh*t, reasonable hedging is turned into a spectator-based game of roulette, millions of people scramble to make ends meet in a new ballooned-up sector.....and then of course, the inevitable bust.
That disattached-from-reality casino game is still going on.....money never sleeps you know.....and the recent target of the gamblers has been....food.
"We first became aware of this [food speculation] in 2006. It didn't seem like a big factor then. But
in 2007/8 it really spiked up," said Mike Masters, fund manager at Masters Capital Management, who testified to the US Senate in 2008 that speculation was driving up global food prices.
"When you looked at the flows there was strong evidence. I know a lot of traders and they confirmed what was happening. Most of the business is now speculation – I would say 70-80%."
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."
And it's not just food either. Coffee prices....chocolate prices....have gone up considerably in the last couple of years. I'm sure you've noticed. Why?
....the speculation is not just in staple foods. Last year,
London hedge fund Armajaro bought 240,000 tonnes, or more than 7%, of the world's stocks of cocoa beans, helping to drive chocolate to its highest price in 33 years. Meanwhile, the price of coffee shot up 20% in just three days as a direct result of hedge funds betting on the price of coffee falling.
When I blog negatively about deregulated capitalism, the only capitalism American conservatives fight for, it is because of numerous stories just like this food speculation story.
Gambling on a piece of paper, which is supposed to represent real foodstuffs, in order to scalp a profit....leads to a horrible paradox.....
Olivier de Schutter, UN rapporteur on the right to food, is in no doubt that speculators are behind the surging prices.
"Prices of wheat, maize and rice have increased very significantly but this is not linked to low stock levels or harvests, but rather to traders reacting to information and speculating on the markets," he says.
"People die from hunger while the banks make a killing from betting on food," says Deborah Doane, director of the World Development Movement in London.