On January 20, 2011, GPF invited investigative journalist Frederick Kaufman and Karen Hansen-Kuhn to discuss wheat market prices, grain futures and the "financialization of food", the "subversion" of market, and using government food reserves as a method to confront price volatility. Click the Read More button for a summary of Kaufman and Karen Hansen-Kuhn's lectures as well as the audio for the Q&A section.
Global Policy Forum Summary of a Talk by Federick Kaufman on the "Financialization of Food"
In 2008 the general price of wheat doubled, and then doubled again, rising by an astounding 400%. A new kind of financial speculators drove the price skyward. Speculators took advantage of tight markets, due to increased demand for food in the developing world, greater dependence on biofuels, and shrinking supply associated with the effects of climate change and natural disasters. Ultimately, the "financialization of food" has amplified and destabilized global food prices.
For a long time economists have been concerned with stabilizing food prices throughout the year. After the US Panic of 1857, farmers were able to obtain a "forward contract" in order to sell wheat before the product was out of the ground, allowing millers to purchase wheat before it had been grown. Market operators could then set the price of wheat in advance. Essentially, the contracts committed buyers and sellers of grain to purchase and sell grain at a later date at market prices. This practice, known as "hedging", allows parties involved to manage risk.
At present there are only five futures contracts for wheat per year, when buyers and sellers have to balance out their positions - sell if they promised to sell, and buy if they promised to buy. This allows both farmers and millers (and others who buy wheat) to manage their risk. It also allows speculators to buy and sell as daily price fluctuations occur on futures contracts. The market has worked like this for the last 100 years in the United States, one factor in keeping the price of food relatively low.
In 1991, Goldman Sachs decided that this system was not profitable enough, and therefore transformed the market again by creating a new kind of investment called the Long Only Index Fund. Goldman Sachs wanted to accumulate large sums of cash for long periods, which they could then invest in the commodities market (for items such wheat, energy, gas, crude oil). Goldman assumed that commodity prices would increase over time, although traditionally this is not the way in which commodity markets function. Most actors who are not bona fide hedgers (those who do not buy or sell actual wheat) are limited to 5000 future contracts, but an exception was made for certain actors, like Goldman Sachs who could buy significantly more. Through accumulating futures, but not selling them at the close of the futures contract period, Goldman has thus been able to generate enormous profits. Other banks decided to follow their lead by creating and investing in Long Only Index Funds.
These futures contracts put pressure on market supply, causing prices to increase. These commodities were also linked to others, such as oil. When the price of oil increased in 2008, so did the price of food. In the future the price of food may become de-linked from the price of oil, causing a permanent "food bubble".
[Frederick Kaufman teaches at the City University of New York and CUNY's Graduate School of Journalism. He is a freelance investigative journalist, and has published many magazine articles and three books about American food culture and other subjects, including for Harper's Magazine, the New Yorker, and the New York Times Magazine. In June 2010 he wrote The Food Bubble: "How Wall Street Starved Millions and Got Away With It" for Harper's magazine.]
To visit Frederick Kaufman's website, click here.
Listen to the audio -
Part 1
Part 2
Global Policy Forum summary of a Talk by Karen Hansen-Kuhn on Food Reserves to Confront Price Volatility
Public food reserves can be an important tool to ensure security at the national and regional levels. However reserves alone are not enough to curb food price volatility. Governments must also regulate speculation on commodity markets, and invest in agricultural development to halt large price variations. Though food reserve systems have been around for a long time, they were largely dismantled under neoliberal reforms that culminated in the 1990s. At present reserves are more necessary than ever, as climate change results in the increase of droughts and floods, and food supplies have become more precarious.
According to the UN Special Rapporteur on the Right to Food, Olivier de Schutter, deregulated food markets and open world trade in food do not result in food security. Since the 2008 food crisis, policy-makers recognize that countries cannot rely on imports to achieve food security. While in theory WTO rules would limit developing countries' ability to implement food reserves, in practice there is some flexibility they could utilize. For example, the WTO limits public spending on agriculture to 10 percent of the value of the sector. This is more than most African countries can actually spend, and much more than would be needed to implement a grain reserve. In addition, many countries interested in using price bands to raise tariffs when prices are low (in coordination with the reserves) could use the difference between the "bound" upper limits they have committed to and the actual tariffs they apply.
Around the world, governments are putting in force food reserve systems. Emergency reserves are most commonly used by the World Food Program in African countries. Buffer stocks (in Indonesia, for example) are used as one instrument in a more comprehensive overall policy to manage prices. The US opposes food reserves and food price management. At a regional level, the South East Asian nations (ASEAN plus China, Korea and Japan) have agreed to coordinate an emergency rice reserve. Brazil, Russia, India and China have agreed to coordinate similar policies. In Africa, the Club du Sahel has agreed to share information on national level reserves, using technology to keep electronic data on price fluctuations and supply levels.
At an international level, the FAO is working on world food security with input from civil society in the High Level Panel of Experts and the Committee on Food Security. France, as the current Chair of the G20, has called for a special meeting on agriculture, speculation and food reserves. Food reserves are on the way back - one tool to stabilize prices in a tightening world market.
[Karen Hansen-Kuhn is the International Program Director, at the Institute for Agriculture & Trade Policy. She works on trade and economic justice, focusing especially on finding policy solutions that advance food sovereignty in the South and North.. She has published articles on U.S. trade and agriculture policies, the impacts of US biofuel policies on food security, and women and food crises.]
To view Karen Hansen-Kuhn's PowerPoint presentation, click here.
Listen to the audio -
Part 1
Part 2
To listen to the Question & Answer session, click on the links below -
Part 1
Part 2
Part 3
