There is much here that I think is correct. In my paper of '98 and since
I learned the 'game' in the 80s, I've been for stronger regulation of
physical commodity market trading (both on and off exchanges) I spoke of
the gatekeepers failing to do their jobs as well (using existing
regulations)
Note Soros statement.
Steve
(excerpt)
Deregulation in the agricultural market is worse than the financial
market, as
the Organic Consumer Association points out; while US Federal Reserve and
central bankers across the globe still maintain the ability "to soften
the
spikes and plunges of our monetary system", no such buffer exists in food
markets. Grain reserves that helped stabilize prices for centuries
have been
allowed to drop, and are now at their lowest in three decades.
(whether or not peak oil and increased demand by millions more each year
will permit reserves to grow again - SK)
After the mortgage crisis that tumbled stock markets across the world,
investors
put their money instead into commodities, and to cash in on the new
biofuels
boom. Grain traders started withholding supplies in the hope of higher
prices,
knowing that grain reserves were down, and prices volatile. At the
same time,
speculative investors began hedging their bets on grain futures,
driving up
prices even further. The biofuels boom has exacerbated speculation and
high
prices, but that boom would not have been possible without a
deregulated global
market.
The top tier of big unregulated players
Deregulation has brought even bigger players to the derivatives
market, the big
investment banks. Steve Suppen of International Institute for
Agriculture and
Trade Policy points out that these big, unregulated, financial
institutions -
non-commodity users - now dominate the commodities markets much more
than the
commodity users. In March 2008, Goldman Sachs (currently charged for
fraud over
sales of 'toxic' mortgages) and Morgan Stanley owned 1.5 billion
bushels of
Chicago Board of Trade corn futures contracts, while all the regulated
hedgers
together owned only 11 million bushels (a ratio of 136:1). These
investment
banks operate through commodity index funds that bundle together up to 24
agricultural and non-agricultural commodities in a single investment
portfolio
that usually bets on prices to go up. As the component contracts are
about to
expire - 90 days for agricultural futures, six months for
non-agricultural
commodities - the banks sell the contracts to take profits, creating
price
volatility in the wake of selling. Since 2003, commodity index
speculation has
increased 1 900 percent, from an estimated $13 billion to $260 billion.
Economist Christopher Gilbert at the University of Trento in Italy is
among
those calling attention to these unregulated index-based investment in
commodity
futures that controlled 33 percent of all US agricultural futures
contracts in
2006-2008, but are not yet incorporated into academic market models.
In June 2008, financier, philanthropist and author George Soros
testified to US
Congress that investment in instruments linked to commodity indices
had become
the "elephant in the room", arguing that they might exaggerate price
rises. The
commodity-index investment funds, though the sheer amount of money
involved,
both increased commodity prices and made them so volatile that many
physical
hedgers such as grain importers, particularly from developing
countries, could
no longer use the futures markets to manage price risk [12]. The UN
Food and
Agriculture Organization estimated that the developing country's food
import
bill rose from $191 billion in 2006 to $254 billion in 2007.
Announcing Science in Society #46 - Summer 2010
#######################################
The Only Radical Science Magazine on Earth
Science in Action, In and For Society
Subscribe here.
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From the Editors - Financing World Hunger
#################################
How the financial markets create hunger and make huge profits
World food crisis rerun?
Food prices have been rising since 2003. By mid-2008, the food commodity
price
index peaked at 230 percent of its 2002 value, with most of the increase
due to
the grain prices. Corn and wheat both reached 350 percent and rice 530
percent
respectively of their 2002 values. The United Nations declared 2008 the
year of
the global food crisis even before prices peaked, and an estimated 150
million
were added to the world's hungry that year. Although food prices have
fallen
from their peak, they remained well above 2002 levels. By the end of
2009, more
than a billion people are critically hungry, with 24 000 dying of hunger
each
day, over half of them children. The UN Food Programme faces a budget
shortfall
of US$4.1 billion.
The UN's special rapporteur on the right to food Olivier de Schutter blames
"inaction to halt speculation on agricultural commodities and continued
biofuels
policies", and warns of a rerun of the 2008 food price crisis in 2010 or
2011.
What happened in 2007-8 was a "price crisis, not a food crisis", he says,
precipitated by speculation in the financial market that was not linked to
insufficient food being produced.
It would be a mistake to dismiss other threats to food production,
notably the
inherently unsustainable "green revolution" agricultural model that is
highly
dependent on rapidly depleting resources such as fossil fuels and water,
and
monoculture crops especially vulnerable to physical and biological stresses
associated with climate change (see 'Land Rush' as Threats to Food Security
Intensify). Nonetheless, the disproportionate influence of the unregulated
financial market on the real economy of goods and services (see Financing
Poverty, SiS 40) is most devastating for people's access to food, a basic
necessity.
The global commodity food trade and its deregulation
Food is produced by farmers everywhere in the world; but it is mostly
bought and
sold as commodities by 'middlemen', now mostly big corporations that trade
globally, not just in a commodities market, but also in an elaborate
financial
derivatives market that pushes food prices up and creates price volatility.
Commodities are the raw materials while 'commodities derivatives' are
financial
contracts derived from the value of the underlying commodity. At the
bottom of
the commodities derivatives is the 'futures' contract, which brings
together
buyers and sellers in a regulated auction market like the Chicago Board
of Trade
(CBOT) in the United States, to bid and settle a price for the delivery
of a
quantity of a commodity, say corn, at an agreed time (usually 90 days) and
place. This futures contract enables commodity sellers, such as grain
elevator
operators, to avoid sudden price drops and commodity users or traders to
avoid
sudden price increases; and is generally regarded as a kind of
insurance. But it
ceased to work as such after the deregulation of the global agricultural
markets.
The deregulation of global agricultural markets was part of the economic
deregulation driven by the World Trade Organization (WTO), the World
Bank and
the International Monetary Fund. It was a process initiated by the
Breton Woods
Agreements of 1944 to standardize international trade and marketing
policies to
facilitate global trade. It eliminated government intervention in
agricultural
markets, dismantling global commodity agreements, price supports, and other
mechanisms that had helped stabilize global supplies and prices. The WTO's
Agreement on Agriculture, and other multi-lateral and bilateral free-trade
agreements including the North American Free Trade Agreement (NAFTA),
opened up
markets in the developing world to an increasingly powerful global
agribusiness
industry.
The consequence of deregulation was "to replace local market access for the
majority of small farmers with global market access for a few global
transnational companies. Thanks to non-existent anti-trust enforcement and
rampant vertical integration, [t]hree companies - Cargill, Archer Daniels
Midland (ADM), and Bung - control the vast majority of global grain
trading,
while Monsanto controls more than one-fifth of the global market in seeds."
Farmers may have benefited from a windfall in higher prices paid for their
produce in the short term, but they have had to pay more for inputs like
fertilizers and diesel for tractors. Only big agribusiness corporations
could
profit from the long term rise in the market. Cargill's 2007 third-quarter
profits increased 86 percent, General Mills' were up 60 percent, and
Monsanto's
45 percent. Bunge saw profits of the last quarter of 2007 increase by 77
percent
compared with the same period of the previous year. ADM, the second largest
grain trader in the world gained a 65 percent rise in profits to a
record US$2.2
billion. Thailand's Charoen Pokphand Foods, a big player in Asia,
predicted a
revenue growth of 237 percent for 2008.
Deregulation in the agricultural market is worse than the financial
market, as
the Organic Consumer Association points out; while US Federal Reserve and
central bankers across the globe still maintain the ability "to soften the
spikes and plunges of our monetary system", no such buffer exists in food
markets. Grain reserves that helped stabilize prices for centuries have
been
allowed to drop, and are now at their lowest in three decades.
After the mortgage crisis that tumbled stock markets across the world,
investors
put their money instead into commodities, and to cash in on the new
biofuels
boom. Grain traders started withholding supplies in the hope of higher
prices,
knowing that grain reserves were down, and prices volatile. At the same
time,
speculative investors began hedging their bets on grain futures, driving up
prices even further. The biofuels boom has exacerbated speculation and high
prices, but that boom would not have been possible without a deregulated
global
market.
The top tier of big unregulated players
Deregulation has brought even bigger players to the derivatives market,
the big
investment banks. Steve Suppen of International Institute for
Agriculture and
Trade Policy points out that these big, unregulated, financial
institutions -
non-commodity users - now dominate the commodities markets much more
than the
commodity users. In March 2008, Goldman Sachs (currently charged for
fraud over
sales of 'toxic' mortgages) and Morgan Stanley owned 1.5 billion bushels of
Chicago Board of Trade corn futures contracts, while all the regulated
hedgers
together owned only 11 million bushels (a ratio of 136:1). These investment
banks operate through commodity index funds that bundle together up to 24
agricultural and non-agricultural commodities in a single investment
portfolio
that usually bets on prices to go up. As the component contracts are
about to
expire - 90 days for agricultural futures, six months for non-agricultural
commodities - the banks sell the contracts to take profits, creating price
volatility in the wake of selling. Since 2003, commodity index
speculation has
increased 1 900 percent, from an estimated $13 billion to $260 billion.
Economist Christopher Gilbert at the University of Trento in Italy is among
those calling attention to these unregulated index-based investment in
commodity
futures that controlled 33 percent of all US agricultural futures
contracts in
2006-2008, but are not yet incorporated into academic market models.
In June 2008, financier, philanthropist and author George Soros
testified to US
Congress that investment in instruments linked to commodity indices had
become
the "elephant in the room", arguing that they might exaggerate price
rises. The
commodity-index investment funds, though the sheer amount of money
involved,
both increased commodity prices and made them so volatile that many
physical
hedgers such as grain importers, particularly from developing countries,
could
no longer use the futures markets to manage price risk [12]. The UN Food
and
Agriculture Organization estimated that the developing country's food
import
bill rose from $191 billion in 2006 to $254 billion in 2007.
"Investment banks play the market not to manage inherent commodities price
volatility (e.g., weather related), but to induce volatility through
huge "bets"
allowed by financial services deregulation." Suppen writes. Commodity
prices
rose with their bets until July 2008. When aggregate commodities prices
fell
from their July peak by 60 percent in mid-November, these banks lost
their bets,
and had to ask the government for taxpayer bailouts. By then, according
to The
Wall Street Journal, commodities speculation had contributed $1.5
billion to
each investment bank, about a third of their projected net income in 2008.
Regulation at last?
In May 2008, the newly appointed chair of the Commodities Futures Trading
Commission (CFTC) Gary Gensler, a former Goldman Sachs partner, proposed
new
regulatory measures on over-the-counter (OTC) trades, and capital reserve
requirements to cover losses. OTC trades take place between private
parties;
they are unreported and not cleared on a public, regulated exchange. An
estimated 85-90 percent of non-commercial investment (by investment
banks) in
commodities markets occurs through OTC trades, about which the CFTC has
no data
and over which it has no authority. In other words, the CFTC has little
or no
information on the quantity of OTC contracts and the credit-worthiness
of the
parties to those contracts; so insolvent parties may well continue to
depend on
the government to bail them out of their imprudent trades. Goldman Sachs
and
Lehman brothers were among a handful of banks that were exempted from
prudential
capital reserve requirements in 2004 by the US Securities Exchange
Commission.
This led to extremely high debt ratios relative to reserves and other
equity
holdings.
Under Gensler's proposal, OTC trades are still allowed, but the criteria
for
reported price risk managements between private parties will be
tightened; at
the same time capital reserve requirements to cover losses will be
increased.
The UN Conference on Trade and Development (UNCTAD) has gone one step
further,
calling for an international agreement to prevent excessive speculation in
commodities markets. The agreement could be financed by a Financial
Transactions
Tax (FTT), which if applied by national exchanges to the commodities
futures
share of all financial transactions in 2007 at a rate of .01 percent,
would have
generated about $10 billion. An FTT would have an added benefit of
reducing the
frequency of trading, one of the drivers of price volatility.
Policies on food and energy security before trade
To put world trade commodity in perspective, the total world grains
output in
2009 was 2 122.99 Mt, of which only 275.59 Mt, i.e., 13 percent was
traded on
the global commodity market. It is absurd that so much taxpayers' money and
bureaucratic effort is dedicated to global trade and its regulation,
which end
up profiting agribusiness and big banks and starving people, many of
whom the
very farmers and farm workers that produce the grain. Of the one billion
hungry,
half are small farmers, a quarter are landless labourers working on
plantations
and the rest are urban poor who have migrated from rural areas because
they can
no longer find a living there.
The UN special rapporteur on the right to food notes [5] that many
developing
countries, previously exporters of food, have become net importers
because they
were convinced they could always buy food at cheap prices on the
international
market, an illusion shattered by the global food crisis of 2007/8.He
says those
countries are now re-orienting investments toward feeding themselves,
and it is
vital for them to "decrease their dependency on the international market."
Governments and inter-governmental agencies need to devote much more effort
towards promoting self-sufficiency in food and sustainability in
agriculture
instead of trade, or only promoting trade when the food needs of its own
people
are satisfied. Food and energy self-sufficiency should be the most
important
step to sustainable development (see Sustainable Agriculture and the Green
Economy, paper presented at Multi-year Expert Meeting on Commodities and
Development, 24-25 March 2010, UNCTAD, Geneva).
Governments need to put in place a variety of policies and practical action
programmes that support small-scale organic, agro-ecological farming,
improve
access to land and land tenure for small farmers, encourage local
production and
consumption for both food and green energies, recover indigenous crop
varieties
adapted to local conditions and hence much more resistant and resilient to
climate change than industrial monoculture crops, stimulate local
markets and
help establish consumer-farmer cooperatives, and promote regional trade and
cooperation in sharing resources and knowledge.
Contents
From the Editors
Defend Independent Science
Defend Gilles-Eric Séralini and Transparency in GMO Risk Assessment!
Greening China
The Green Shoots of China
China's Pollution Census Triggers Green Five-Year Plan
China's Soils Ruined by Overuse of Chemical Fertilizers
Sustainable Agriculture, Green Energies & the Circular Economy
Real Climate
The Real Importance of the Amazon Rain Forest
Green Growth for Developing Nations
Letters to the Editor
Freeing the World from GM
Bt Brinjal Halted but Fight against GM neo-Colonialism Continues
GM Crops Facing Meltdown in the USA
Glyphosate Resistance in Weeds
The Transgenic Treadmill
US Farmers Oppose 'Big Ag' in Anti-Trust Hearing
After Monsanto's GM Meltdown in the USA.
SmartStax Corn: Corporate War on Bees
SmartStax Maize a Medley of Transgenes with Problems
Field Testing of Genetically Engineered Eucalpytus
Environment Assessment Still Inadequate
Technology Watch
Nanotoxicity in Regulatory Vacuum
Food Watch
'Land Rush' as Threats to Food Security Intensify
The Food,Inc. Horror Movie
Rethinking Medicine
Yes! to Organic Medicine
Read the rest of this article here:
http://www.i-sis.org.uk/AnnouncingScienceinSociety46.php
--
"There is nothing more dangerous than a shallow thinking compassionate
person" Garrett Hardin
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