News > July 23, 2008

Let Them Eat Free Markets (cont’d)

Partial explanations

If world grain reserves had been higher, the recent unusual weather might have had little effect, although climate change does pose a major threat to food production and prices in the long run.

China, which resisted much outside neoliberal pressure, maintained substantial rice reserves and has preserved much greater price stability. But as part of joining the WTO, it relaxed restrictions on soybean imports. The world’s largest soy importer now suffers from price spikes and from growing concentration of foreign control over soy oil processing. Yet contrary to the argument that the recent price hike is a result of increased meat (and grain) consumption by the rising Chinese middle class, China has increased production and continues to supply most of its own growing food consumption.

Biofuels have increased demand, accounting for somewhere in the range of 3 percent (the U.S. Department of Agriculture’s estimate) to 30 percent (International Food Policy Research Institute estimate) of recent price hikes.

But the impact is complex: Using corn for ethanol, regardless of questions about its wisdom, doesn’t boost rice prices — and has limited impact on meat prices because the waste mash from distilling is used to feed cattle.

Originally encouraged to use up European and American surpluses, biofuels were seen by many farm and environmental advocates as a potential locally controlled and sustainable business. But biofuels now threaten to become a global, corporate-controlled industrial farming and export business that may put fuel for American SUVs in competition with food for poor people in other countries, all while degrading tropical forests.

The boom in energy prices — oil for production and transport, natural gas for fertilizers — boosts food costs and is likely to have even greater significance on prices in the future. But that’s partly a consequence of free-market failures to properly account for the costs of dependence on cheap oil, including the threat climate change poses to tropical agriculture.

The main culprit: changing futures markets

Yet changes in supply, demand and agricultural costs don’t adequately account for the huge price spikes.

An EU study earlier this year concluded that certain food commodities had increased in price three times more than agricultural markets would explain. One possible reason: speculation in commodity markets.

Agriculture futures markets provide farmers and industrial users of farm products a chance to lock in prices for future delivery. This provides a hedge against damaging price fluctuations and helps to set an openly known market price. Small-scale speculators help provide liquidity for such markets.

But deregulation of American commodity markets in both energy and agriculture in the late ’80s and early ’90s expanded the ways in which companies could make trades without federal regulation.

Other regulatory changes made it possible for large investors, including institutional investors like pension funds, to buy agricultural futures without limits. Congress had imposed such limits to prevent manipulation of the relatively small futures markets — much as Enron did with California electricity rates.

In recent years, these big investors have increasingly bought futures indexes and other bundled futures products as part of a diversification of their holdings. But these investments behave entirely unlike the traditional futures buying and selling by farmers and grain users.

As hedge fund manager Michael Masters explained to Congress in May, these investors — with an estimated $250 billion now invested in commodity futures — tend to hold their investments like a stock or bond, not trade in search of the appropriate market price. They thus skew the price upward, regardless of supply and demand of the real product. As the price increases, more money flows in, pushing the price even higher.

Eventually, such a commodity bubble will burst — as the housing and dot-com bubbles burst — but with harsh consequences for real people.

While Congress has begun to close some of the regulatory loopholes, speculation still magnifies real-world food price increases. Once again, free-market fundamentalism creates real economy failures — taking food out of hungry people’s mouths.

The rise of food sovereignty

As long as the food system is organized around free-trade policy and maximizing private profits, Suppan and Murphy argue, it will exacerbate volatility, inequity and environmental damage.

What’s needed, says Murphy, is “not just a redistribution of wealth but a new model of agriculture and a new model of consumption.”

Food sovereignty advocates propose that people — local communities and nations — should have the right to make decisions about their own food regimes, including how much and what to import and export, and whether to use the genetically modified crops that agribusiness pushes as a false solution to the current crisis.

“The food riots are calling for two things,” Patel says. “Obviously food, but also accountable government.” Under global trade agreements, many governments have lost that accountability to their people.

A new food regime also needs an alternative to current industrial farming, with its ever more costly and damaging practices and growing concentration of profit from feeding the world. This alternative agro-ecological model would rely on the productivity and resilience of small farmers.

Earlier this year, a U.N. commission of 400 agricultural experts concluded that the world needed to shift from agricultural business-as-usual to a more ecological and small-scale approach. To no one’s surprise, the U.S. government and agribusiness refused to endorse its recommendations.

How many more food riots will it take to change their minds?

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• Reader Comments

  What is needed to help re-localize food systems quickly and on a large scale is a franchise-ready sustainable farming system. That is the concept behind SPIN (S-mall P-lot IN-tensive ) Farming. SPIN farmers work plots less than an acre in size, utilize relay cropping to increase yield and achieve good economic returns by growing only the most profitable food crops tailored to local markets. SPIN’s growing techniques are not, in themselves, breakthrough. What is novel is the way a SPIN farm business is run. Contained in the seven SPIN Guides, which can be purchased online and downloaded for immediate access, is everything you’d expect from a good franchise: a business plan, marketing advice, and a detailed day-to-day workflow. In standardizing the system and creating a reproducible process it really isn’t any different from McDonalds. And SPIN-style farming removes the two big barriers to entry – sizeable acreage and significant start-up capital. By offering a non-technical, easy-to-understand and inexpensive-to-implement commercial farming system, it allows many more people to farm, as long as there are markets to support them

  In addition to being a farming system, SPIN is also a “brand”, creating an identity for those who practice it. While this is an oversimplification, here is a way to look at it: In the developed world SPIN is providing those who are already equipped with marketing and business savvy with a growing system that can help them become successful farmers. In the developing world, SPIN can provide those who possess farming skills with the marketing and business expertise to make them successful entrepreneurs. The long-term potential is the common ground SPIN can provide for these two disparate groups to be - and interact - as equals - by providing a platform for collaborative problem solving and innovation.

  Most importantly, SPIN is serving as a catalyst for a sub-acre farm movement that is gathering momentum without major policy changes or government support. It is entirely entrepreneurially-driven. And while this new corps of first-generation farmers who are taking food production into their own hands is now concentrated in the U.S. and Canada, SPIN-style farming has the potential to be global in reach.  As pointed out, there are many obstacles to entrepreneurial farming in the developing world, but among the largest is the opposition and restrictions imposed by local authorities who regard agriculture as a hindrance to progress and modernization.  No policy or institutional support will be forthcoming until farming is viewed as an asset and accorded the status and respect of other industries. By transforming farming from a marginal occupation for the downwardly mobile to that of a mainstream entrepreneurially-driven occupation, SPIN is helping to redeem the image of farming. If people in the developed world, who have options and who are not losers, are choosing to farm, then those who don’t have as many options, and who farm, won’t be regarded as losers either. This can give rise to a multi-national farming class that can unite behind a new kind of farming that spans geography, culture and ideology., and stimulate further inventive activity that will “right size” agriculture for an urbanized century and make local food production a viable business proposition once again.

  Posted by Roxsen on Jul 23, 2008 at 10:41 AM

  Since there are no truly free markets on earth because of intrusive and overbearing government regulations, you can’t really sit there and complain about something that doesn’t exist. 

  As history has shown, most shortages are caused by government regulation, not by “free” markets, or partially free markets, as we actually have.

  The most current example, after such past marxist attempts of control such as the windfall profits tax on oil in the 1980’s, is the current shortage of corn as food. The US government in its blindness decided to mandate production of ethenol.  Thus a shortage of corn for food which impacted other areas looking for a replacement.

  Free markets would actually solve shortages, because ultimately, no one can repeal the law of supply and demand.

  Posted by saintknowitall on Jul 24, 2008 at 10:13 AM

  So they problem is NOT free markets, but the government “running” of those “free markets”.  So the proposed solution, according to the article, is MORE GOVERNMENT CONTROL?!  You’re joking, right?

  Some bureaucrat, with no experience in agriculture (but with greased palms from beltway dealings) is going to force me to: farm a certain crop, in a certain way, sell to a certain buyer, at a certain price, and throw me in jail if I don’t comply?  So when it actually costs me $100 to produce 1 pound of a certain crop, the government will FORCE me to sell that crop at $10 for 1 pound?

  Why farm?  I’ll wait for someone else to feed me.  Wait, won’t that decrease the collective supply of whatever I’m producing?  Won’t that make people wait longer to receive the crop at $10 a pound?  No wonder why the bread lines were so long in The Glorious Worker’s Paradise of Mother Russia!

  The Solution is to get the government 100% out of the equation and ALLOW people to grow their own food without fear of government reprisal if they happen to sell the surplus from a bumper crop to a neighbor who is willing to pay for it.

  When I see, as quoted in the article: ‘What’s needed, says Murphy, is “not just a redistribution of wealth but a new model of agriculture and a new model of consumption.” ‘, it sends shivers down my spine.  This statement reveals that someone else has plans, not only for how much money I’m ‘allowed’ to make, but they plan to ‘allow’ me to spend it in certain ways, they also plan on ‘allowing’ me to eat in a certain fashion.

  Sounds like Socialism/Communism.  That worked REALLY WELL in the The Glorious Worker’s Paradise of Mother Russia.  Oh, yeah! the The Glorious Worker’s Paradise of Mother Russia went bankrupt because of their Socialism/Communism based economy.

  Capitalism my be unfair to some, but it’s less unfair than the alternatives which are unfair to everyone but the ruling class.

  Posted by Craig Gorsuch on Jul 24, 2008 at 12:22 PM

  Speculators belong in jail. People die and wars have started as a result of speculators.

  The timing of the start of the Korean War may have come about as a result of soy bean speculating by Chiang Kai Shek, Syngman Rhee and their friends in the U.S. 

  Almost 60 years later and this “stuff” still goes on. This “stuff” makes me #@$%#@ sick.

  Posted by drobe on Jul 24, 2008 at 9:06 PM

  Agricultural markets have price inelasticity.  They lack “price responsiveness” on both supply and demand sides.  This is understood by agricultural economists.  Search “Daryll E. Ray,” “Price Respons,” Wallace.

  In the New Deal farm bill government stepped in in a limited way to make up for the supply and demand failures of the Great Depression.  (So too with the National Family Farm Coalition today.)

  They managed supply and used price floor loans to bring prices up above costs.  They used strategic reserves and price ceilings to protect processors, livestock production and consumers.  The programs made millions for the government on interest, and we had no depression after World War II. 

  Knowing the economic facts, conservative corporate think tanks (like the Committee for Economic Development’s “An Adaptive Program on Agriculture,”) nevertheless chose to lobby to drive prices down below costs.  So they chose, in effect, for you to sell it for that “$10” while it cost you that “$100,” only not those actual numbers. 

  Government modestly managing those markets worked successfully, for example 1942-1952, but not as conservative corporate special interests increasingly took over 1953 through today. 

  Ok, the conservative alternative, as it started under Eisenhaur and especially grew under Nixon and Earl Butz, with a big boost from Reagan/Block, and then with (Clinton and) Gingrich’s Contract for America (Freedom of Farm), was to make up for the massive market losses (lack of price responsiveness) by just having the government pay massive subsidies for most of the losses.  Democrats helped along the way.  Conservatives like Farm Bureau love to call it “a safety net.”

  That’s the record.  So actually the politics of farm subsidies (as America exported farm “program commodities” at massive losses for a quarter of a century and more, pouring our wealth out to foreign countries-processors-livestock-consumers,) is just the reverse of recent comments.  Go look at farm bill voting records.  It’s all there in black and Republican red.  Republican conservatives were the “Socialism/Communism” utopians for “The Glorious Worker’s Paradise of Mother Russia.”

  We did see Mitt Romney’s support for farm subsidies, er “safety nets,” right?  Did it send shivers down your spines?

  Ahhh but we’re saved by the market.  Too ignorant to put in a real stimulus package like the Steagall Amendment that prevented America from losing money on farm exports, we basically get credit cards.  We get stimulus checks of borrowed money that has to be paid back later.  But now we have a rare farm price spike.  That will help our economy tremendously, if it lasts.  So Comrade Daughter Amerika (under these antibusiness export loss policies) probably won’t go belly up like Mother Russia.

  You can go to USDA ERS for data on prices vs. full costs.  We lost money virtually every year 1981-2006 with low/no price floors on corn, wheat, rice, cotton, soybeans, grain sorghum, barley, oats.  We lost $180 billion.  Going farther back and in 2007 constant dollars, and in comparison to a decent profit, the shortcomings mount into the higher hundreds of billions and then trillions by my figures.  It’s easily a multi Trillion dollar scandal (that’s TRILLION with a T) when economic multiplier effects are considered. 

  Imagine OPEC trying to massively lose money on oil exports, then just making up for the market by subsidizing the industry with “safety nets!” And here we were with 60% to 90% of corn and soybean world market shares!

  It’s all for Cargill, ADM, Kelloggs, etc. Tyson & Smithfield each got more than 2.5 billion in below cost gains 1997-2005 according to a Tufts University study using conservative figures.  I estimate that Cargill often got a billion a year in below cost gains just on U.S. corn exports, (not on all commodity exports world wide plus all processing plus all animal factories and feedlots).  And against the folks eating clay “biscuits.”

  Posted by Brad Wilson on Jul 26, 2008 at 2:51 PM

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