Revising Speculation and the Global Food Crisis

Last March I argued that the root cause of the sharp increase in global food prices in 2007-08 and again in 2010-11 was speculative investment. While mainstream analyses of the food price spikes tend to focus on variables like increased demand from China and neo-Malthusian assertions population growth outstripping food production, I think they are—in short—misguided.

Everywhere we turn, we see calls for more investment to increase total food output. Bill Gates—who certainly is willing to put his money where his mouth is—argues that countries must embrace genetically modified seeds and high tech agriculture or face starvation.

While increased investment in agriculture is certainly an important component of any strategy to improve the plight of farmers in the developing world, such investment must be targeted. Further, there is no guarantee that increasing yields will necessarily address the underlying problems of hunger or of increasing food prices for urban consumers. Indeed, total farm output increased during both the 2007-08 and the 2010-11 food crises. It was not a decrease in supply but an increase in demand that led to the price spikes. And perhaps most importantly, it was not an increase in consumer demand for foodstuffs that drove the price of basic grains out of reach for millions in the global south. It was the “speculative scrum,” as Kauffman terms it, if futures traders and commodities brokers who thrive on wide fluctuations in commodity prices.

In their paper entitled “The Food Crises: A quantitative model of food prices including speculators and ethanol conversion,”  economists Marco Lagi, Tavni Bar-Yam, Karla Bertrand and Taneer Bar-Yam provide a strong explanation of the relative role of various factors in recent price fluctuations. Their conclusion: “the dominant causes of price increases are investor speculation and ethanol conversion…The two sharp peaks in 2007/2008 and 2010/2011are specifically due to investor speculation, while an underlying upward trend is due to increasing demand from ethanol conversion.” (See figure below from their paper).

But despite the overwhelming evidence that price changes are driven by speculation, there seems to be little political will to reign in such activities. However without such a fundamental change, increased productivity will likely continued to be outpaced by hot money seeking a quick profit. In the balance are the lives of many.

The Limits of Local Food

Defenders of the mainstream food system often level critiques of elitism against those who promote alternative food movements. Proponents of organic food are criticized for their opposition to the increased use of chemical inputs which, from the perspective of the mainstream agricultural system, are central to addressing the problem of global hunger. Advocates of local food are similarly dismissed as out-of-touch. When Barack Obama referenced the price of arugula at Whole Foods in Iowa during the 2007 Democratic presidential primaries, his opponents pounced on the opportunity to characterize him as an elitist intellectual.

This is why I read Eric Schlosser’s recent editorial, “Why Being a Foodie Isn’t Elitist” in the Washington Post last week with such anticipation. I’ll admit to being a big fan of Schlosser’s book Fast Food Nation. I think it’s a great read and offers a powerful critique of the fast food industry in the United States. His discussion of the meatpacking industry is enough to turn nearly anyone off Big Macs.

Over the past forty years, Schlosser observes, our food system has been fundamentally transformed.  Some of the trends are obvious: the number of farms (and farmers) has declined dramatically, while average farm size has increased. Other trends are less obvious: a sharp decline in the number of food processors and distributors, leading to a concentration of market power in the market. Recent developments in alternative food systems have countered some of these trends.

But what’s emerged is not a more inclusive system but a two-tiered system of food access. For the relatively well-heeled, markets provide a plethora of food choices: local, organic food purchased at farmers markets, fair trade products from abroad, and a greater variety of ingredients available at posh restaurants. But for the poor, markets do not provide more choices but fewer. Under perfect conditions, markets respond to demand expressed through purchasing power. Under less than perfect conditions, other factors also enter to consideration. Witness, for example, the problem of food deserts. Large areas in the United States, particularly in (the predominantly minority) poor inner cities across the United States, lack access to fresh fruits and vegetables from supermarkets. For these neighborhoods, the only sources of produce are corner markets, where the selection is limited and prices are high.

The term “food deserts” has entered the lexicon to describe these areas. But the term “food desert” itself is problematic because it naturalizes what is, in fact, a socio-economic phenomenon. Unlike deserts, which emerge from natural rainfall patterns, food deserts emerge when political and business leaders make decisions that result in the exclusion of neighborhoods (predominantly poor neighborhoods of color). A better description of this phenomenon is food apartheid, as food apartheid points squarely to the political and economic dimensions of choices of exclusion.

But back to the criticism of the alternative food movement as elitist. Clearly the criticism has resonance. Perhaps the critique’s longevity is a result, as Schlosser asserts, of the ongoing public relations efforts of big ag. It’s also likely popular because of the longstanding culture wars in the United States. But the term’s resonance is also a function of an element of truth. The idea that social change derives primarily from consumer choices reifies the notion of consumer sovereignty and ignores the fact that poor communities by definition cannot exercise the same level of influence in the market. It’s fine to say that upper-middle-class consumers should change their consumption choices and buy more local food. But it’s an entirely different matter for poor communities of color. The demand for better food from this perspective is not just a consumer choice but a matter of class. This is why the demand for a better food system cannot be limited to a reformist campaign for better choices but a demand for more transformative change linking better food with higher wages, as well as racial and gender equity. It means making local food spaces more diverse and inclusive, not simply spaces of whiteness as they tend to be now. It means, in short, thinking big.

The New Global Enclosures

There’s been a great deal of concern expressed in recent months over the global land grab. From Indonesia to Tanzania, global investors from capital-rich, resource-poor countries are purchasing land across the global south. The issue rose to such prominence that even the World Bank has weighed in, issuing a report entitled “Rising Global Interest in Farmland” in 2010, in which they warn of the dangers associated with the lack of transparency and the potential risks to the world’s poor while simultaneously endorsing land grabs in the name of increased efficiency, productivity, and sound investment. According to the World Bank’s figures, in 2009 global land deals rose to 45 million hectares, a ten-fold increase from the year 2000. Two-thirds of those purchases have been in Africa.

The massive increase in demand for farmland occurred at the same time as the spike in global food prices in 2007-08, and raising some serious questions for the world’s subsistence farmers. Theoretically, we can understand the process through the lens of enclosure and primitive accumulation, through which individual farmers are increasingly forced into the market to secure the means of their subsistence and reproduction. Much as the village commons were enclosed across England, Scotland, and Wales between the sixteenth and the nineteen centuries, the communal lands of Africa, Latin America, and Asia today are being increasingly privatized. However, just as the enclosure process was wrought with social dislocation in the English and Scottish countryside, so too is the process likely to result in sharp increases in poverty, inequality, and hunger in the global south today.

And today’s land grabs dwarf the enclosure of the English and Scottish countryside. According to a report by the Economist, in 2009 Sudan signed a deal with South Korea for 690,000 hectares and a separate agreement with the United Arab Emirates for 400,000 hectares. According to the Economist, “An official in Sudan says his country will set aside for Arab governments roughly a fifth of the cultivated land in Africa’s largest country (traditionally known as the breadbasket of the Arab world).: Similar deals are being negotiated by other governments in the Democratic Republic of the Congo, Libya, Mali, Zambia, Zimbabwe, and elsewhere. In Madagascar, a proposed deal with the South Korean Daewoo corporation would have set aside nearly half of Madagascar’s arable land in a 99 year lease that required virtually no taxes or other long-term benefits for Madagascar. Not surprisingly, public protest (and ultimately the overthrow of the government) forced the cancellation of the deal.

To date, much of the land purchased in the global land grab has been dedicated to the production of biofuels. However, as global food prices continue to increase, some of that land may revert back to food production. But given the sharp disparity between the prices commanded for foodstuffs on the global market and what poor, landless laborers can afford to pay, even the reversion of land to the production of food crops may do little to abate the increasing malnutrition associated with higher food prices in the global south.

Speculative Investment and the Global Food Crisis

There’s been a great deal of discussion in recent weeks about the recent spike in global food prices. Nearly all agricultural crops—from cotton to rice, from wheat to cocoa—are near 30 year highs. The respite from 2007-08 food crisis appears to have been short-lived, and most analysts are pointing to a protracted period of expensive food.

US Secretary of Agriculture Tom Vilsack last week published an op-ed in the Financial Times in which he outlines steps necessary to avoid a global food price crisis. His framing of the problem echoes the neo-Malthusian assumptions: too many people, too much demand from middle class consumers, and so on. His prescriptions are pretty much what you’d expect from someone in his position: more investment in agriculture, especially biotechnology, more free trade, conclusion of the Doha Round, and so on.

What’s perhaps most telling about Vilsack’s discussion is what’s missing. As I see it, he’s missing three of the most important issues.

First, Vilsack asserts that corn-ethanol production in the United States has too often been scapegoated in discussion of higher food prices. According to him, “The truth is that a wide range of factors influence food prices – from fertilizer and energy costs, to weather, political instability and the host of actors who touch food as it goes from farms to mouths. During the great run-up in food and commodity prices in 2007 and 2008, biofuel production played only a minor role – accounting for about 4 per cent of the total 45 per cent increase in US food price inflation.” The 4 percent figure has been widely promoted by the U.S. government. But it stands in sharp contrast to an estimate by the World Bank, which asserted that biofuel production was responsible for up to 75 percent of the 2007-08 price increase. An IMF report estimated the figure at between 20 and 30 percent, while a report prepared for the British government simply concluded that the diversion of food crops, particularly corn, to biofuel production likely had a “significant impact” on global food prices. In total, approximately one-third of the U.S. corn harvest is used to produce ethanol, while about half of all E.U. vegetable oils go towards the production of biodiesel.

Second, Vilsack’s framing of the challenge of high food prices and their impact on hunger and malnutrition as essentially a neo-Malthusian nightmare ignores longstanding evidence that hunger and malnutrition result not from insufficient food production but from an inability to access available food. Vilsack’s solutions—investing in biotechnology to make plants more resilient, reducing pre- and post-harvest losses, expanding total agricultural output, and so on—may increase total output without necessarily addressing global hunger. If people cannot afford the food that is produced, or if farmers grow food for sale in European and American export markets rather than for domestic consumption, it doesn’t matter how much food is produced in a country, there can still be hunger. Indeed, one of the historical tragedies of many great famines was that the country experiencing the famine often continued to export food. This was true, for example, in the Irish Potato Famine (1840-52), during which some 1 million people died and another 1 million were forced to emigrate while food exports to England continued unabated. Kinealy’s excellent history of the famine, This Great Calamity, notes that throughout the famine, Ireland remained a net exporter of food. The food was there, it just didn’t reach the people. Amartya Sen’s work on famines shows that this is a common feature.

Finally, Vilsack’s analysis completely overlooks the important role played by speculative investment in food commodities over the past decade. Indeed, if we look at the 2007-08 global food crisis, we can see the impact of speculative investment. In the 2007-08 food crisis, production of key crops, like wheat, actually increased and total demand actually declined. Yet food prices continued to increase, driven in part by deregulation of futures markets for food commodities. Investors, fearing a global economic downturn, were looking to stash their money in commodities that would maintain their value. Traditionally, oil was one of the key investment instruments. After deregulation, however, food futures were also available. Money flooded in, while the total number of futures instruments (and the total food production on which the instruments are supposedly based) remained relatively unchanged. The value of the contracts, and thereby the price of the food that underscored them, increased dramatically.

This conclusion is further reinforced by the fact that the dramatic food price increases of the 2007-08 crisis was generally limited to commodities for which large futures markets exist. Crops for which there are no or very limited futures markets—cassava, millet, potatoes—did not see dramatic price increases over this period.

Consequently, Vilsack’s assertion that the solution to the crisis is further deregulation of global food markets is particularly problematic. What is needed is not less regulation but strict limits on the ability of investors to engage in the type of speculative investment that drove food prices higher in 2007-08, and are driving food prices higher again today.

Blood Chocolate

Cocoa Beans

According to a report in the Financial Times, cocoa traders appear to be preparing to pay the regime of Laurent Gbagbo an estimated $300 million in taxes in exchange for the release of some $1.3 billion worth of confiscated cocoa stocks. The dispute stems from the Ivory Coast’s disputed elections last November, when both Gbagbo and his rival, opposition leader Alassane Ouattara, claimed victory. The international community recognized Ouattara as the legitimate winner of the election, but Gbagbo refused to step down and maintains control of the government and military.

In January, Ouattara called on traders to stop exporting cocoa from the Ivory Coast. The Ivory Coast is the world’s largest cocoa exporter, accounting for approximately 40 percent of global production. Taxes on cocoa exports are the single largest source of government revenue, and the international ban was intended to deny Gbagbo the revenue necessary to finance his government. International observers believe that Gbagbo needs about $150 million per month to maintain his military forces. The ban also contributed to a spike in the global price of cocoa, reaching its highest level in more than 30 years.

So far, most international cocoa traders, including Barry Callebaut, Archer Daniels Midland, Cargill, Olam, Noble, Touton, Ecom Agroindustrial and Armajaro, have abided by the export ban. But one, the Hong Kong-based Noble Group, now appears to be breaking ranks, indicating in an official statement that it would be willing to pay the taxes.

Like all luxury commodities, the ability to sell chocolate depends on a strong positive association with the experience of consumption. A chocolate bar likely does not taste as sweet if the eater knows that their purchase helped fund the murder of 30 people in a mortar attack in an Abiidjan market last week. The “blood diamonds” discourse effectively helped to shape consumer behavior and resulted in the creation of diamonds certified (however imperfectly) to be sourced from non-conflict sources. Similarly, concerns over the killing of dolphins during tuna harvesting led to changes in tuna harvesting practices. Is blood chocolate next?