The Hunger Games

December 1, 2012

by Ramaa Vasudevan

Real structural forces, including the global reach of and immense power of agro-industry, are jeopardizing food security. The neoliberal policy agenda to undermine public distribution systems as a means of ensuring food security, while promoting futures markets as the panacea for food price volatility has, however, helped unleash the genie of speculation that has exacerbated the food crisis. The relentless quest for profits promoted a gamble on food prices, in particular through the spectacular growth of index speculation. Such speculation has stoked the surge in food prices, wreaking havoc on the capacity of families to feed themselves.

Even as the market for subprime mortgages began to fall apart in U.S.A in 2007, people across the globe came under the siege of rising food prices. In the face of growing hunger, poverty and malnutrition, food riots broke out in about thirty countries across Africa, Asia and Latin America.[1] In Haiti, the doubling of rice prices forced Haitian to start eating mud-pies made of mud, sugar and oil and the storm of protests brought down the government.Between 2005 and 2008 the price of maize nearly tripled, that of rice rose by 170 per cent while prices wheat climbed by 127 per cent.[2] After a brief respite, as the financial crisis held the global economy in the grip of a deflationary spiral, we are now witnessing a renewed surge in food prices. The spiraling price of food was one of the triggers for the uprisings across the Middle East last year – when cries of “Bread and Freedom” were raised. Wheat and maize prices rose by about 50 percent in 2010.[3]

The pernicious impact of rising food prices across the globe has exacerbated the global food crisis. The effects of climate change on crop harvests, the impact of agro-industry on farming practices and food security, the pressure of growing demand for food from the rising middle classes of Asia, the competing claims of the bio-fuels industry, and the tensions created by the ongoing corporate land- grab in Africa are of course integral to understanding how the food crisis was engendered. But the price shock cannot be explained solely on the basis of these structural factors that shape the supply and demand for food. Chart 1 displays the FAO food price and cereal price index. The spike in 2007-8, followed by the collapse with the financial crisis, and the renewed upward impetus can be seen clearly. Apart from the underlying structural factors there is clearly something more going on. This something else is the role of finance- the banks thathave been betting recklessly on food prices.[4]

Chart 1: The Global Spike in Food Prices
FAO Food Price Index; Cereal Price Index: 2002–4 = 100
Source: FAO

Finance has seized commodity markets and overwhelmed their functioning. The process of globalization and liberalization that gained momentum through the past decades, with the neoliberal revolution, has propelled the rise to dominance of finance led by US corporate and financial capital. Apart from transforming the structure of food production globally, this reign of finance has also fundamentally altered the manner in which food markets work. Before telling that story, however, a brief discussion of the commodity futures market would be useful in clarifying the link between the role of finance and the food price hike.

The futures market
A futures contract is a tradable agreement to buy or sell a specified quantity of a commodity at a future date. Futures in agricultural markets have a long history and in theory play a crucial role as a hedge against unexpected price movements. For the seller of the commodity like a wheat farmer, the agreement to supply the good at a future date (a short position) at the price locked in by the future contract is a hedge against any fall in the price. For the buyer – say a flour producer – on the other hand, the contract to acquire the good in the future (a long position) insures against any spike in price. For the advocates of futures markets, a well functioning market, besides helping to offset risks of price volatility, is also regarded as helpful to the process of price discovery – allowing buyers and sellers in the actual physical market to gauge the price prevailing in the markets, and make sensible decisions about production and delivery. As futures prices rise above spot prices, the argument goes, producers will start expanding production, while buyers will try to stock up in the present so that spot prices rise and future prices tend to fall. Futures price and actual spot price would, in this scenario, tend to converge and so the prices prevailing in the futures market serve as useful benchmark for pricing actual trades in the spot market, particularly in the context of globalized integrated markets.

In India, trade in futures markets through national exchanges is being promoted as a means of bringing stability to agricultural prices as part of neoliberal reforms package, even as the public distribution system is being discredited and dismantled as a means of ensuring food security. Futures trade in wheat, rice, tur and urad was banned in the wake of the 2007-8 price surge, but questions continue to be raised about whether futures markets had stoked the price rise.[5] Meanwhile, trade in agricultural futures has risen from around Rs 670 billion in 2004-5 to Rs 14.5 trillion in 2011-2.[6]

Though futures may have been devised to facilitate actual physical trade, the prospect of returns brought in speculators who did not need any actual hedge in the actual physical commodity. The speculator,in the ideal world of mainstream economic theory, takes on the brunt of price risk while providing more funds and liquidity to the market, for instance by buying wheat futures from a farmer when flour mills and other buyers are not in the market, in the hope of making a profit from price movements. Unlike the hedge contracts of the actual physical traders, which are one time transactions where they either deliver the good or sell the future before the delivery date, speculators trade these futures many times. The commodity futures market is a peculiar hybrid of these two types of traders and its evolution in the recent decadesreflects the process by which finance has come to dominate this global market.

Financialization of commodities
The phase of neoliberal capitalism has been characterized by the emergence of financialization as a powerful force shaping the economy. This emergence ushered a frenetic search,across the globe, for new opportunities of making financial profits. Financialization is, however, more than the relentless pursuit of profit making through financial channels rather than through production and commerce. It reflects the growing power of finance. The pursuit by US financial-corporate capital of an agenda of steady erosion of the regulatory framework has played a key role in the rise to dominance of finance. One such regulation that has been hollowed out is the limit placed on the trading positions of speculative traders in the futures market. Such limits had been imposed in U.S.A. in 1936 with the Commodity Exchange Act,,a legislation that sought to curb the speculative excesses in futures trade by non-commercial entities (that had been rampant in the twenties).

In the post war period, the focus of policies to stabilize agricultural and other commodity markets shifted to price support and public buffer stock policies. In the wake of the neoliberal backlash after the crisis of the seventies, however, as the policy mantra of unleashing the power of markets regained credence, futures markets were promoted as the favored strategy for stabilizing commodity prices.In 1974 the Commodity Futures Trading Commission was set up. to regulate commodity futures and option markets in the United States and for a while the markets remained tranquil.

In 1991 Goldman Sachs came up with an innovation that would transform the market. The bankers devised the Goldman Sachs Commodity Index, a weighted average of the future prices (based on contracts of between one to three months) of a basket of twenty-five commodities including agricultural goods, livestock, energy and metals. As contracts of sets of goods in the basket approach expiry, weights are transferred from these contracts to the next future contracts in a specified manner – a rollover of positions. Investors can speculate in the futures market by putting their money in index funds and getting a return based on its movements. The ‘roll’ of the index is notional in the sense that it involves no actual transactions, but simply the transfer of weights from expiring contracts to new contracts. The manager of the index fund, however, follows a strategy that mirrors the methodology of the commodity index, resulting in actual transactions in commodity futures. The index fund manager thus replicates the rolls in the index by buying futures and ‘rolling’ them over in the exact manner that the index ‘rolls’ over weights from one set of contracts to the next. The managers of the index fund would earn regardless whether prices went up or down, not only from fees and commissions but also because they used only a fraction of the funds in their charge in ‘good faith’ deposits on the future contracts and could deploy the rest to boost their earning capacity.[7] And so the wizardry of financial engineering transformed a mathematical construct into an engine of easy earnings! Other banks, like J.P. Morgan in 1994 also set up index funds. The GSCI index was followed by the Dow Jones –AIG index (now Dow Jones U.B.S index). Index speculation began to pick up.

The Rise of the Index Speculator
A favored way investing was through index swaps. Index swaps allow the institutional investor to exchange (or swap) the earnings from the index fund for a payment to the swap-dealer bank three month treasury rate plus some management fee. The swap dealer hedges its position by actually trading in the futures. The big banks were able to persuade the regulators that the trades undertaken by the index funds were a ‘hedge’ and should be exempt from the position limits imposed on non-commercial speculative traders. It was, however, only in 2000 with deregulatory push of the Commodities Futures Modernization Act, when banks effectively lobbied for exempting the shadowy over-the-counter commodity derivatives trade, which took place outside the regulated commodity exchanges where these trades had so far been confined, that the genie was unleashed from the bottle.
Investors were caught up in the search for new avenues of profit in the wake of the dot com bust were drawn into these funds. They were touted by the dealers as an ‘asset class’ in their own right, and had the added ‘virtue’ of performing well when equities went into a down turn and when inflationary pressures picked up. They were offered to clients, including pension funds and mutual funds – with the promise of ‘equity-like’ returns and risk diversification, and the swap-dealers grew richer on the proceeds. With the collapse of the housing bubble, and the unraveling of the architecture of fancy and arcane financial products that was built around the housing bubble, commodities became even more attractive market. Over the counter commodity derivatives trade, which had been growing steadily through the decade surged sharply in 2007-8 before plunging as financial markets imploded (Chart 2). Speculation in commodity derivatives rose against the backdrop of a falling dollar.

Chart 2: The Spike in Over the Counter Commodity Derivative Trade
(Notional Amounts outstanding, $ billions)
Source: BIS

The big impetus, however, came from the growth of index speculation. In 2008, 85-90% of index speculators traded through swaps and four swap dealers – Goldman Sachs, Morgan Stanley, J. P. Morgan and Barclays – controlled about 70% commodity index swap positions.[8] Exchange traded funds are another way for investors to bet on commodity indices. Here too, the strategy is to mirror the performance of the commodity index by holding futures in proportion to weights of the index. The added wrinkle is that investors can buy and sell shares in the fund. The growing dominance of index speculators and the concentration of the market for commodity derivatives in the hands of a few big banks, has transformed the commodity futures market completely.

The long shot
Futures markets were supposed to provide a hedge against risk and facilitate price discovery. In an ideal world ‘traditional’ speculators would enter into both long positions and short positions, so that the pressure on prices would in the normal course swing either way. In stark contrast the index speculator enters only into ‘long positions’ and quite often intend to maintain these positions for a long time.The index fund managers keeps accumulating ‘long positions’ since they continue to buy passively, regardless of price, at each rollover when the weights of one set of future contracts would be transferred to the next set. To avoid having to actually make a delivery the trader simultaneously buys a more distant future and sells the expiring future- a double transaction called the calendar spread. Physical delivery becomes irrelevant as the transactions can continually rolled over. A vibrant market for these calendar spreads has emerged. In effect the index funds are hoarding commodity futures and pushing futures prices upwards, independent of any future market.

In fact,index speculators bought more commodities futures than physical traders and traditional speculators put together in the period from 2003 to 2008.[9] In the hybrid futures market index speculators effectively cornered the market through this unrelenting stream of buy orders. This corner has emerged quite independently of any stockpiling of actual commodities or any real physical orders! The absence of physical hoarding has been one argument raised against those who blame speculation for the steep rise in food prices.[10] The argument is that rising future prices will raise current prices only if suppliers start hoarding food and artificially restricting food supply. The fact of the matter is that speculative pressure can inflate future prices quite independently of physical hoarding. Index speculators,who entered the fray in search for returns, to hedge against inflation or the falling dollar or simply to diversify their portfolio, have added a whole new dimension to demand.[11] Funds invested in commodity index replication strategies grew from $13 billion in 2003 to $317 billion in July 2008 and are still rising. At the same time the prices of the 25 commodities that made up the index rose by an average of over 200%.[12] (Chart 3: Note that 2008 figure in the chart is for March end.) The fact that index speculators did not actually physically ‘demand’ the commodity does not in any way mitigate the impact on actual prices.

Source: Masters and White, 2008

A paradoxical and perverse impact of the surge into index funds was that commodities whose prices earlier moved in unrelated ways, began after 2004 (even before the collapse of the housing bubble) to move together and exhibit spillover effects as investors would trade in and out of the entire group of commodities constituting the index at the same time. Energy commodities dominate these indices (about two-thirds of the GSCI index) while food commodities are a much smaller share. Future prices of the non-energy commodities in the index began to display stronger correlations with that of energy commodities after 2004.[13] This suggests that grain and agricultural prices could in a sense be swayed by the tide of energy prices, without regard to the actual situation in their own markets. The illusory alchemy by which a number was turned into profits, it turns out had far-reaching consequences beyond the calculations of the financial engineers who devised them.

The food bubble
There has been some debate on the mechanisms by which rising future prices pull up spot prices and whether speculation played a role in the food price rise.[14] There is empirical evidence suggesting that spot prices are led by future prices.[15] In grain and energy markets in particular the common practice is to price the spot transaction at the future price plus or minus a spread (to take into account local factors like transportation costs). With futures being promoted for their role in price discovery, it is not surprising that the future prices are regarded as a good signal of market conditions. It does make intuitive sense that as exchanges for agricultural commodities develop and become more globally integrated, dispersed agricultural markets will rely more and more on centralized future markets as benchmarks for spot transactions, more so with the spread of electronic trading and the larger volume of information flows.[16] With the promotion of futures trading exchange trading, a dealer of grain in exchange , say in India, would turn to the global trends in the futures markets as a reference pricing transactions.

The dominance of speculative finance however distorts the relation between future prices and market conditions. This is not to say that the fundamentals of supply and demand are irrelevant to soaring prices. Recurrent and persistent drought conditions in different parts of the globe, dwindling investments in agriculture, the switch of vast swathes of land to bio-fuels, for instance, have all without doubt played a role.[17] But the dominance of speculators in the market has swamped the food market. The commodity futures market has undergone a sea change in the past decade. In 1998, in the US, only 7% of all long open interests –outstanding future buy orders that are unfulfilled at a particular date – were held by index speculatorsand another 16% by other speculators. The bulk (77%) of these contracts was held by physical hedgers who were actually involved in buying and selling commodities. By 2008 the share of index speculators had grown to 41 %, the traditional speculators to 28% while physical hedgers had fallen to about 31%. About two-thirds of futures positions are held by speculators today. In these ten years the positions of speculators rose by about 1300% while that of commercial hedgers (actually trading in the commodity) rose by only 90%.[18] There is thus a huge source of speculative demand that is unrelated to actual demand and supply of these commodities. The problem is not simply that the futures market is inherently pernicious. It is the logic of finance that has taken hold of the commodity markets that has made the market a hunting ground for finance in its continual search for new prey. The futures markets have become compromised, both as a mechanism of price discovery and means of insurance against price volatility,by the frenetic forays of finance to exploit every speculative opportunity.

Futures trading has been promoted in India as enabling small farmers from to benefit from high prices and sidestep the rapacious middlemen-traders, and become a player in a more globally integrated market. With the growing dominance of global investors in these futures markets, the middlemen – who would tend to enter the futures market primarily as hedgers (even while fleecing small farmers who supply the grain) – would get swamped by global investors seeking speculative returns. The spike in prices as a result of this speculation, however, need not translate into higher earnings for small farmers, who could continue to sell to the middlemen at low distress sale prices. Nor do they lead to higher levels of investment in agriculture in the absence of necessary infrastructural and related support to small farmers.[19] While global agro-industrial capital has been engaging in a renewed land grab in particular in Africa, for global institutional investors it is more profitable and easier to play with commodity index funds rather than in direct investment in agricultural production.

There are, without doubt, real structural forces including the global reach of and immense power of agro-industry that are jeopardizing food security. The neoliberal policy agenda to undermine public distribution systems as a means of ensuring food security, while promoting futures markets as the panacea for food price volatility has helped unleash the genie of speculation exacerbating the crisis. Last year 450 economists submitted a letter to the G20 meeting urging action against speculation in food commodities.[20] In August this year twenty-five lobby groups urged the European governments to curb speculation on food and enforce strict limits on speculative positions in the futures markets.[21]

The tragedy is that this gamble on food and commodity prices is depriving more than a billion hungry and impoverished families of access to food and grain. At low incomes and in developing countries, a larger share (between 70-90%) of the household budget is spent on food. The rise in food prices, fuelled by the thirst of speculative finance for new avenues of earnings, has brutal consequences for their lives and livelihood. The story of how bankers’ greed threw many families in USA out of their jobs and homes with predatory loans and fraudulent paperwork is now well documented. This same relentless quest for profits has promoted this gamble on food prices, which is now wreaking havoc on the capacity of families to feed themselves.Finance has launched unconscionably cynical hunger games, rigging the system in such a way so that the odds would always be in their favor.

1. M. Baviera and W. Bello, Food Wars, Monthly Review, July 2009.

2. The 2008 Food Price Crisis: Rethinking Food Security Policies, Anuradha Mittal, UN Conference on Trade and Development (UNCTAD), 2009, gdsmdpg2420093_en.pdf

3. FAO, Crop Prospects and Food Situation , December 2010.

4. IATP, Commodity Market Speculation: Risk to Food Security and Agriculture, O. Schutter , Food Commodity Speculation and Food Price Crisis; T. Jones The Great Hunger Lottery, World Development Movement, 2010.

5. GOI, Report of the Expert Committee to study the impact of futures trading on agricultural commodity prices, 2008; S. Sen and M. Paul, The Dangers of Providing Speculators a bigger playground, Aspects of India’s Economy, August 2011; S. Srinivasan, Futures Trading in Agricultural Commodities, Working Paper 193, Center for Civil Society

6. S. Sen and M. Paul, The Dangers of Providing Speculators a bigger playground, Aspects of India’s Economy, August 2011, GOI, Economic Survey of India, 2011-2

7. F. Kaufman, The Food bubble: How Wall Street starved millions and got away with it, Harpers Magazine, July 2010

8. M. Masters and A. White How institutional investors are driving up food and energy prices Special Report accidental hunt Brothers July 2008,

9. M. Masters and A. White How institutional investors are driving up food and energy prices Special Report accidental hunt Brothers July 2008.

10. P. Krugman, Signatures of Speculation, Conscience of a Liberal , blog (

11. Masters and White M. Masters and A. White How institutional investors are driving up food and energy prices Special Report accidental hunt Brothers July 2008.

12. Masters and White M. Masters and A. White How institutional investors are driving up food and energy prices Special Report accidental hunt Brothers July 2008.

13. Wei and Xiong Now, this might simply reflect surging, across-the-board demand. Wei and Ke concede this has played a role (and, unsurprisingly, fuelled correlation between emerging market assets and commodities). But they point out that the Chinese commodities markets – which are off-limits to foreigners and thus also index funds – have been far less correlated than western markets. “Off-index” commodities are less correlated too.

14. D. Headey and S. Fan, Reflections on the Global Food Crisis, IFPRI Research Monograph 165, 2010; M. Robles, M Torero and J. von Braun, Why Speculation Matters, IFPRI Issue Brief 57, Feb. 2009; D.R. Sanders and.H. Irwin, A speculative bubble in commodity futures prices? Cross-sectional Evidence, Agricultural Economics, 41,1, 2010, J. Ghosh, The Unnatural Coupling: Food and Global Finance, Journal of Agrarian Change, 10,1; 2010; J. Ghosh, J. Heintz and R. Pollin, Speculation on Commodities Futures Markets and Destabilization of Global Food Prices: Exploring the connections, PERI working paper 269

15. M. Hernandez and M Torero Examining the dynamic linkages between future and spot prices of agricultural commodities , June 2010 IFPRI Discussion Paper 00988

16. M. Hernandez and M Torero Examining the dynamic linkages between future and spot prices of agricultural commodities , June 2010 IFPRI Discussion Paper 00988

17. As stressed by D. Headey and S. Fan, Reflections on the Global Food Crisis, IFPRI Research Monograph 165, 2010

18. Masters and White M. Masters and A. White How institutional investors are driving up food and energy prices Special Report accidental hunt Brothers July 2008

19. FAO, The State of Agricultural Markets 2009: High Food Prices and the Food Market, 2009,

20. 450 economists urge curbs on speculation,

21. US drought renews food speculation concerns, Financial Times August 19, 2012

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