Goldman Sachs and the food bubble

Gustavo Duch Guillot

01/04/2011

Opinión

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Prices for most agricultural products – all those traded globally – are determined by “supply and demand” on the world’s biggest markets. However, you probably already know that trading on the stock market floor isn’t really about selling sacks of wheat or potatoes. It’s about buying and selling sales contracts for a set amount of a set good on a set date. A virtual market for unpredictable futures.

Until a few decades ago, this model was controlled by a series of regulatory measures that ensured food price stability. Tariffs protected national markets from international trade. Grain storage policies, reference pricing and production quotas ensured domestic trade markets remained stable. But in the 1990s, neoliberal policies were introduced that put an end to regulatory measures. Negotiations were launched to create the World Commerce Organisation, the Common Agricultural Policy, the first free trade agreements, etc. Henceforth, the price of food was indiscriminately determined by the futures market.

With the futures market came speculators, aptly named for what they do – betting on the future. They buy and wait for the best time to sell – and they don’t sit at the window trying to read the clouds. “What problems could possibly affect the next harvests?” they ask, scratching their beards. If the newspapers say there is a drought in Russia, for example… bang goes the media shotgun, and off run the speculators, chasing after the big wildfire wins.

This is what Kaufman is talking about in his article on “The Food Bubble”. He describes one of the key factors driving the evolution of the futures market, and thus food prices: investment funds.“The history of food took an ominous turn in 1991, at a time when no one was paying much attention. That was the year Goldman Sachs decided our daily bread might make an excellent investment. (…) And so with accustomed care and precision, Goldman’s analysts went about transforming food into a concept. They selected eighteen commodifiable ingredients and contrived a financial elixir that included cattle, coffee, cocoa, corn, hogs, and a variety or two of wheat (which they then named) Goldman Sachs Commodity Index. (…) Since Goldman’s innovation, hundreds of billions of new dollars had overwhelmed the actual supply of and actual demand for wheat.”

This investment bank (bailed out by public money), quickly followed by others (Citigroup, the Bank of America, Deutsche Bank), is manipulating a basic human right. These banks caused the food crisis in 2007 and 2008, increasing the number of people suffering from hunger to 250 million. Now, once again, they’re racing each other to blow up the bubble. If the promises to reform financial markets are kept, there is one reform that is clearly needed right now.

- Gustavo Duch Guillot

(Translated by Rhonda Campbell)

Original article published 25/10/2010

https://www.alainet.org/de/node/149652