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By speculating, investors are worsening the global hunger crisis
Our investigation shows that investors are increasingly betting on the rising prices of food causing them to rise even more and making food unaffordable for millions around the world.
Yes. Yes. I am aware that I have been away. Some have even said that the hiatus has felt like an eternity. Well, I have missed you too. Profoundly.
Part of the reason I haven’t written Unequal in a long time is because I have been busy with an investigation that we published today.
It’s a global collaborative project called “Hunger Profiteers” led by the Europe based nonprofit newsroom Lighthouse Reports. Media partners of the investigation include Der Spiegel, Follow The Money, The Continent and my former home The Wire.
The investigation shows that financial institutions have been speculating in the commodities market – particularly food – contributing to the spike in prices of food. Their share of interest in the major food markets around the world, including Chicago, Minneapolis and Paris, has increased substantially.
They have been betting on the prices of food to increase. Or as one expert put it, “They are indeed betting on hunger, and exacerbating it.”
Here is the link to the story. Please read and share widely.
But, don’t worry. I will also tell you more of what it’s about right here.
As I have written before, most developing countries in the world have been facing a growing food security crisis as people struggle to put adequate nutritious food on the table. In the last two years, the pandemic has dealt a body blow to the global economy.
That has meant that the poorest have had their incomes severely hit or even wiped out in many cases. Not everyone has the luxury of working from home. Not everyone has the luxury of a formal salaried job. So, when you can’t work because of a lockdown, you don’t get paid.
Incomes have been hit and the ability to buy food has been severely constrained. Across the developing world, the poor have been forced to skip meals.
A United Nations report released earlier this week notes that 193 million faced acute food insecurity in 2021. That number has doubled since 2016, with most of that increase coming in the last two years.
So, things were dire already. Then in the last few months, food prices began to really spike. You might have noticed too. Your grocery bills have gone up. Food has become dearer.
The reason, you have been told (including by me), is that Russia has invaded Ukraine and that will cause severe disruptions in the food supply chain. Both Russia and Ukraine are key producers and exporters of agricultural commodities and a prolonged conflict will mean shortfalls in supply. And that is why food inflation is increasing.
While those concerns are legitimate, they are not the entire story. Prices havent only increased, they have skyrocketed. The price of wheat, for instance, has increased by an incredible 61% between January and April. And concerns about the supply of wheat cannot explain the increase.
In fact, according to the UN’s latest estimate, the production of cereals will remain quite stable this year. The production of wheat might even go up a little. The global cereal stock to use ratio too remains stable too.
And this is something we have seen in the past as well. This graph shows that the prices of food and cereals have shown volatility even as the production and supply of food have remained quite steady.
It also tells you that the world of food prices has been quite disconnected from the fundamentals of physical demand and supply of food.
The world saw food security crises in 2008 and 2011 that contributed to the Arab Spring. Even then it was speculators who were driving prices up to levels they would not have reached had they been determined only by the fundamentals of physical supply and demand.
Well, lessons were not learnt, as our investigation shows. And we are here again.
Speculators have increased their interest in the Paris milling wheat market, the benchmark for Europe. In May 2018, speculators made up 23% of open interest in the buy-side of wheat futures contracts. That number has increased to 72% now.
Breaking the data down further, we found that investment funds increased their presence in the buy-side of the wheat futures market in Paris from 1% of open interest in 2018 to 21% in April this year. Investment firms increased their presence from 4% to 25%.
A similar story has played out in the US.
In the Chicago Board of Trade, net long positions of index funds in Soft Red Winter wheat increased to a nine-year high. Money managers also increased the net positions in Minneapolis wheat futures and options by 180% between February and April.
ETFs linked to agricultural commodities have also seen a dramatic increase in interest this year. Just two funds attracted net investor investment of $1.2 billion dollars in the first 3 months of 2022 compared to $ 197 million for the whole of 2021.
So, it’s the growing interest of speculators that has contributed to the food price spikes. It has led to a situation where the World Food Programme has had to cut down its food rations for the most deprived people in the world because there is only so much food it can now afford.
The impact of the price spikes on food security will be “dramatic”, according to Jayati Ghosh, professor of Economics at the University of Massachusetts Amherst.
The situation, according to her, is already worse than it was in 2008. “Because along with the food price increases, you have livelihood collapses and wage income collapses in most of the developing world. So you're talking about people with lower money incomes facing even higher prices. It's much worse than 2008,”
In the future things will only get worse. With climate change, we will likely see actual physical shortfalls of crops due to extreme weather events. Given the way the market is structured that will lead to even higher price spikes.
To be fair, futures markets have an important role to play in price discovery and in providing liquidity for agricultural commodities. But, speculation in these markets that leads to price spikes out of sync with physical demand and supply situations perhaps needs to be regulated better.