Speculation and the Food Crisis

David WoodwardPHA3, Cape Town, 7 July 2012

World Cereal Prices 1960-2005

World Cereal Prices to March 2008

• “Stocks of key food commodities are 20% higher in 2009/10 compared to 2007/08; yet the nominal food price index averaged 23% higher in December 2009 compared to a year ago, rather surprising given that an often cited reason for the food price spike of 2008 was low inventories”

(Baffes and Haniotis, 2010, World Bank)

“In none of these markets was there any restriction of supply or expansion of demand even remotely sufficient to explain the full extent of price increases…. The 2008 food price crisis arose because a deeply flawed global financial system exacerbated the impacts of supply and demand movements.”(UN Special Rapporteur on the Right to Food)

World Cereal Prices to June 2010

World Cereal Prices to April 2012

Why?

• Very little to do with agricultural supply or consumer demand

• Some potential factors, but not enough– poor Australian crop– increased use of maize for biofuel– higher oil prices (also speculative)– no acceleration in Chinese demand growth

• Based partly on (exaggerated) expectations and financial market considerations

Why?

• Stock adjustment: – small increase in % of portfolio in commodities

large purchases

• Self-fuelling nature of speculative investment

Speculation Promotes Speculation

Speculative demand

High rate of return

Price increases

Why?

• Stock adjustment: small increase in % of portfolio in commodities large purchases

• Self-fuelling nature of speculative investment• Expansion/Globalisation of finance• Post-crisis: flight to safety shift to assets

with “real” value• Financialisation: demand and supply have

little to do with production and consumption

More fundamentally….

• …the problem is inequality, and the failure of economics to take account of it

• Markets are assumed to be “efficient” because those who benefit most are most willing to pay

• But with major inequality, willingness/ability to pay does no reflect need/benefit

Global Inequality

Global Inequality

Global Inequality

Global Inequality

Global Inequality

Global Inequality

Global Inequality

Global Inequality

• By far the most valuable use of food is for a hungry person to eat it

• But to the market, what matters is ability and willingness to pay

• …and an investor who can make 0.1% profit by buying maize to sell the next day can pay much more…

• …as can someone wanting to drive one more mile in their SUV, or an over-weight child wanting another packet of popcorn

• This isn’t just a problem of finance – it’s a fundamental flaw in economics as a whole

• We need to develop a new economics based on real value, which maximises benefits to people’s lives, not financial profit and economic growth