In March 2008, The New York Times reported an inexplicable and disturbing variation between actual prices and commodity pricing in some commonly traded crops like corn, soybeans and wheat.
Photo:Sasakei, Creative Commons, Flickr
The disturbing variations occur as a result of hedge fund investing, and may impact not only the American farmer (by creating cash prices that are lower than they should be), but food pricing and production methods worldwide.
Economists who have studied the variation are at a loss to explain it. Meanwhile, more and more Americans join the rolls of food-stamp users, threatening state and regional governments already on the edge as the subprime meltdown impacts every corner of the economy.
In Ohio, one in ten families is on food stamps, the highest number in the state’s history. Many states have had to cut back social welfare programs like LIHEAP (Low Income Home Energy Assistance Program).
In 2007, over 1.2 million households lost heat and electricity for some portion of the year because they were unable to buy food and pay increasingly high heating bills. A preliminary report from the Fordham Law School states that, while military spending has risen exponentially, federal funding for social welfare programs has shrunk, sometimes in equal proportion.
In Maine, where the budget faces a current shortfall of $200 million, the state has proposed cuts to programs that serve the elderly, those with mental illnesses and retardation, as well as those in foster care and low-income adults.
Overseas, the picture is even more dire. India has twice raised the price of exported rice, trying to keep a tight rein on this essential, local food supply. The United Nations World Food Programme says that millions are at risk of starvation as prices for essential foodstuffs like corn, grains and rice exceed the capacity of the poor to pay for them. In Haiti, four people were killed and 20 injured less than two weeks ago when riots broke out over the price of rice, beans, fruit and cooking oil, some of which have risen more than 50 percent in the last year alone.
On Sunday, April 13, these same Haitians went shopping for a new prime minister to replace Jacques Edouard Alexis, who was fired the previous day for not doing enough to control the cost of food. Elsewhere, in Egypt and Cameroon, people are fighting and dying over the cost of their daily bread.
These hungry citizens, and others like them around the world, spell trouble for national leaders who have ignored the plight of the poor while lining their own pockets, and those of their constituents, with stolen wealth. While some prosper in these difficult economic times, and the richest in the U.S. keep the wine flowing and the party going, the poor across our Southern border struggle to pay for a pound of corn tortillas – the only food they may be able to afford on any given day. In Mexico, corn meal prices are up 60 percent. In Pakistan, flour prices are double. China is facing the worst food-price inflation in decades, and sending the increase back to industrialized nations in the cost of finished goods.
According to the The Food and Agricultural Organization (FAO), rice prices have risen 142 percent since 2000 to their highest level in 20 years. Rice, the staple food of 3 billion people worldwide, is being supplanted in many areas by soybeans and other crops which produce higher dollar values as ethanol.
The switch back to rice-growing to feed starving populations will take three years to accomplish, and leave many so emaciated they succumb to otherwise curable diseases. Meanwhile, industrialized nations continue their unfortunate push toward ethanol. In 2007, 27 percent of U.S. corn was withdrawn to make ethanol. By 2012, the figure will top 30 percent.
Crop diseases have clearly contributed to the problem. Variations of wheat rust have devastated crops in Egypt, Syria, Turkey, Iran, Iraq, Afghanistan and Pakistan in recent years to the tune of $1 billion dollars. Wheat stem rust, a parasitic infection, can destroy up to 70 percent of a crop. These diseases are exacerbated by global warming, which is perhaps the leading cause, next to ethanol, for rising world food prices.
Other causes of rising crop prices can be tied to emerging wealth in Asia, as these populations can now afford, and demand, more and better food. Global population rise as a whole is another contributing factor to these rising prices, and economists predict the end of stable commodity prices and the beginning of an era of wildly fluctuating prices as the earth’s population (expected to reach 9 billion by 2050) outstrips the ability of earth’s arable land to meet it.
Increasing scarcity of water – tied to global warming – ties into increased crop prices as well, as desertification takes over greater areas in Africa and China. At the other end of the water spectrum, floods and freak weather patterns delivering rain in the off-season (defeating the efforts of farmers who plant to maximize rainfall) have also reduced crop yields, and are again tied to global warming.
Where hedge fund trading of commodities falls in this complicated equation no one knows, but a stricter regulation of commodity markets and trading factors (and a removal of U.S. crop subsidies, which primarily benefit agribusiness giants) may eliminate at least one aspect of uncertainty in the rapidly-growing problem of how to feed all the people most of the time.
Disclosure: I don’t own stock in any agribusiness or ethanol corporation.
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Photo:panduh, Creative Commons, Flickr