Features » 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?