Betting on Food

By Beacon Staff

Last year was a bumper crop in commodities like wheat, corn, soy and rice. Production was up, demand stable, but food prices still skyrocketed.

Early this year, governments across the world began stockpiling food staples in an attempt to contain panic buying and social unrest. Algeria bought nearly a million tons of wheat while Saudi Arabia announced intents to double its stash. Bangladesh doubled its stockpile of rice while Jakarta increased buys by four fold.

Commodity traders blame food price spikes on shortages, bio-fuels, weather and civil unrest. But Wall Street speculators are making piles of cash by betting on foods as drought ravages countries like Russia and China.

Global investment banks, like Goldman Sachs, lead a new kind of financial trade that enabled pension funds and other investors to bet on food prices.

“Financial speculation now accounts for more than two-thirds of the market, and only about 30 percent is physical hedgers,” said Michael Masters, a hedge fund manager who testified in the U.S. Senate on food price escalation.

Indeed food speculation suddenly looks similar to oil, the world’s largest commodity. Wall Street is betting it can make money on food futures while middle class families are paying the price at the grocer.

Back in 1991 Goldman Sachs came up with a novel investment derivative that became a new mathematical formula for speculators. Today, food traders are the world’s biggest banks: Bank of America, Citibank, Deutsche Bank, HSBC, Morgan Stanley and JP Morgan. In 2009 Goldman Sachs alone was estimated to have made more than $1 billion from trading commodities.

In the past decade there was a 50-fold increase in the dollars that poured into these commodity indexes. Much of this investment increase occurred as a result of the 2008 housing bubble burst, when Wall Street transferred billions of dollars into food markets betting that people still have to eat.

Deborah Doane, director of the World Development Movement, said, “First, it was sub-prime mortgages, now it’s food commodities.” “The lack of transparency in these markets bears worrying resemblance to the behavior that led to the 2008 financial crash.”

In this month’s Rolling Stone, Sen. Jon Tester noted that Wall Street speculators ran amok. Tester dubbed Goldman Sachs housing pacts “a wreck waiting to happen,” remarking that collateralized debt obligations “were all downgraded to junk in very short order.”

Around 1997, Montana learned a powerful lesson from Wall Street. Goldman Sachs was a financial advisor to Montana Power and traveled 100 times to our state. After energy deregulation, Montana Power liquidated hydroelectric dams, coal mines and power plants. Next, Montana Power boasted it was selling the transmission and distribution system. But in the end local pensioners and stockholders got hosed as subsequent owners filed bankruptcy.

If Congress is concerned about Wall Street’s exploitation of food, leaders ought to consider a grain reserve before speculators take American families on a joy ride at the grocer. Hungry families at the table are interested in “who’s your farmer” not whose Wall Street banker is benefiting.

Farmers can produce all the food that is needed to feed a hungry world. But betting Wall Street bankers have changed the eating game by creating paper shortages and wagering on food futures.

Bettors, index traders and futures speculators do not have a real stake in food. They neither produce corn chips, nor bake pizzas, nor knead bread. Rather out-of-state bankers are making enormous money, while hungry people can’t afford to eat less food.

Wall Street became yet another layer of profiteers between the farmer growing food and the middle class feeding a family. America witnessed what happened when Wall Street casinos got involved in housing and oil. Food should not be bet upon, nor controlled by the world’s biggest banks to the detriment of growing families.

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