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Speculative Investment and the Global Food Crisis

March 26, 2011

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.

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