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Lindsay Newland Bowker

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Commodities Speculation: A Cause of Food Crises? A Crime Against Humanity?

An important and credible new study, discussed at length in a recent Scientific American Article, seems to have penetrated all the hype and confusion about derivatives and about the causes of the food crises world wide that have caused famine, death, and revolt.:

http://necsi.edu/research/social/foodprices.html

The study concludes that ethanal has indeed been a major factor but also that the role of commodities market speculation is undeniable.

American and EU central banks and the biggest EU and American Banks are firmly commited to derivatives and resolutely opposed to any regulation, to any clearing houses or any changes that would fundamentally alter the current global free market in derivatives. Derivatives are an essential tool in global risk management, but if this studyis true are we allowing a systemic crime against humanity in not making least those corrections that would remove price distortions.?

Recently 10 ordinary game geeks with no background in scince and medicine solved a very complex problem in the study of HIV. . Can we do that here a TED conversations with this very important question?
Can we go beyond opinion, go beyond what we each already possess in expertise and knowldedge and become together here a global citizens collaborative seeking to understand and offer meaningful solutions to this truly critical global problem?

Can we become a collaborative of investigative journalists seeking the truth and bringing it here via links with commentary?

I think we can and I am proposing that we try. A monumental undertaking for anyone person but I believe the answer is out there in work that has alreday been done and published on the web. I think we as global citizens without a clue about global markets and murky mysteries of derivatives can penetrate this truly critical question. Can offer solutions the experts haven't come up with . I think its a great way to support Occupy Wall Street and use TED.

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      Oct 3 2011: Hi Vineet,

      Thanks for joining us in the is exploration. You make many worthy points that we should all visit.

      (1) Agree completely that speculation didn't cause global hunger and fixing the commidities market won't cure global hunger. However, even market insiders acknowledge the very dramatic inflationary effect that speculation has had in food prices, completely unrelated to underlying market factors..eg the real cost of producing a particular grain.

      (a) As early as April 2006, MerrillLynch estimated that speculation was causingcommodity prices to trade at 50 per cent higher than if they were based on fundamental supply and demand alone

      (b) famous businessman George Soros, in an interview with Stern Magazine published in the summer of 2008, acknowledged that speculators create the bubble that lies above everything." Their expectations, their gambling on futures help drive up prices, and their business distorts prices, which is especially true for commodities. It is like hoarding food in midst of a famine, only to make profits onrising prices. That should not be possible.”

      http://issuu.com/stevebutton/docs/hunger_lottery_report_6.10 The Great Hunger Lottery: How Banking Speculation Causes Food Crisis The Wolrd Develpment Movement Oct. 10 2010

      (2) You are right that india is more isolated from the effects of speculation than many other nations. Could you tell us more about that? Rice is not included in commodities indexes..is that part of the reason? Is India's food market more internal ( india feeds itself?)?

      (3) I am not an expert in global economics or food economics but what you say about the continual rise in prices and cite as causes is well supported in the what I have seen rseraching this issue of the effects of speculation on food prices. The point of the many studies on speculation and food prices is that unbridled unregulated growth of derivatives has driven prices significantly above market fundamentals .
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          Oct 5 2011: Hi Vineet

          Agree to a great extent about the self sufficiency of India with food, but it's really diificult to understand in a global economy in which India is big partner how come Indian food market remain insulated.....

          From my naive understanding if the food price outside India goes up, Indian food marchents will sell those out to get higher profit , if there is not any stirct ban on food export. If it is not even export , it will smuggled out..... clear example is Bangladesh , we are marginally self sufficient...all the time Indian grains, potatos , onions etcs are coming in my country as prices are higher here compared to India so this exodus of food from India supposed to have an definite impact on food price in India..... your thoughts will be apprecaited

          Other point being self sufficient and as per your view being insulated why India is unable to fight hunger ?
          Please check the link
          http://news.bbc.co.uk/2/hi/7669152.stm

          Moreover it seems in recent times India is on the brink of losing food sufficieny that it achieved in 60s & 70s
          http://www.financialexpress.com/news/india-is-losing-selfsufficiency-in-food-produces/331515/

          Insulation also seems getting hurt
          http://www.youtube.com/watch?v=uNEymFp-xc0
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          Oct 5 2011: Hi thanks for your further thoughts and information, Vineet. I afound thi sinteresting Princeton Study on food prices and poverty in India

          www.princeton.edu/.../deaton_price_trends_in_India_version_3_Jan

          (if this link doesn't work go to princeton.edu and do a serach on 'india food prices')

          I haven't had time to fully digest it yet or explore other food price trend data in India but it would be interesting to compare food price trends in India vs the global food inndexes..there might be something instructive and important in that for all of us on this issue as India is a closed food economy and their story might tell us what is possible for food availability and affordability without the dustorting influences of esternal markets and their price distortions.Just skimming this white paper I gather that the food prices in India are much more stable and have risen less steeply than food prices in the Global food price index. is this correct?

          Also what % of people in India live in hunger..is it more than the roughly 18% of the global population?

          What do you see in India's story that might instruct the world, on how to manage food..whether global food security is well served by speculation, whether humanity is well served by allowing the control of food globally to be concentrated in so few companies and prices continually rising to benefit those few companies.??

          Are there lessons for us in other closed food systems? What do they tell us?
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          Oct 6 2011: Salim,

          Thank for that link showing that Indias insulation from the adverse influence of the commidities market has not created food suffuciency or food security for the Indian people.
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          Oct 6 2011: Vineet

          ,Thanks for this further analysis of India food producion and price system. It is clear that India's insulation from MNC ( Multi National Corporations) and commodities market distortions, government food security and price protection systems have not been able to feed India..to protect vast numbers of its people from living in hunger

          .we have already noted, the lack of investment in agricultural production is a global fundamental food issue.There is already consensus here in the conversation and in many indepedendent studies that globally, even without speculation market fundamentals were driving food prices high and that taking speculation out of global food markets will not cure hunger

          .Are you ponting us to something beyond that? Are you suggesting that the India expereience has relevance for global food markets..that food production capacuty globally i is not adequate?
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          Oct 6 2011: Hi Vineet
          Understand your point about speculators, also agree that speculation is one of the factor that pushing a portion of humankind to hunger and die starving....but defintely there are other factors....

          Your point about insulation against MNC is not specific to food industry of India. All the industries of India were insulated through government protection ,law & tax barrier for decades. After WTO things are changing. But thats not the point. Point is freedom from MNC does not make market free from internal profit sharks in a greed based economy.

          What are reasons of hunger in India when it is self sufficient in food and insulated from external stimuli and also when India is not driving bio-fuel production? Being biggest democracy of the world it seems it's going contrary to Amartya Sen's observation on famine and hunger & positive impact of democracy in reduction of hunger.......

          Please don't take me wrong, I am trying understand the reason of hunger from Indian example being unique with most of the criteria having in favor not to have any hunger......

          Is it a distribution problem , is it a problem marketing problem from the part of growers or it is something else..... would love to get insight from you.........

          Just giving a small example how internal system can push growers to hunger

          Some years back , I went outside my capital city Dhaka in a winter day, just 100 km away . Next early morning on way back , I saw numbers of farmers carrying different vegetables. I stopped and wanted to buy , one farmer agreed to sell to me if I buy his all 50 coliflowers. Asked about the price , he told in Bazar I will get 100 Taka (1.3 USD), now its up to you whatever you want to give above that.

          I gave 150 Taka , he was happy and I also felt good that I could give him a bit more money. But later I felt sad , when I realized each coliflower sells 25 Tk to 30 Tk in the capital city which is just 100 km away...........

          You see how local mechanism kills the grower
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          Oct 6 2011: Vineet, Salim

          Have you seen this really fascinating white paper on the Indian commodities market suggesting that india's attempt to provide price stability and food security through government price controls is not as efficient and effective as derivatives in "price discovery" ( ie finding the correct market price for a future delivery date given market fundamentals and trends).?

          As mentioned in my comment above to Salim ( I hadn't found this particular study then) the UN Food security/ food access people are also hot on derivatives in poor and developing nations.Is this being actively puyrused or studied by the Indian Government? What have they said ? Is there real pressure to do this? What do you see happening?www.icra.in/Files/MoneyFinance/CommodityFutureMarket.pdf
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          Oct 7 2011: @ Frans not all monsoons...

          I did know....it is a truth that must be told..Monsanto is very much at the center of all this..their evil seed should be banned world wide
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      Oct 4 2011: Vineet,

      Your issue of inadqeaute investment in agricultural production was mentioned in the USDA study quoted at length above in a post this morning.

      I have to back track a bit, but if I am not mistaken either the USDA or the FED said that high prices and continuing high demand for food globally should serve to stimuate reinvestment in the agricultural sector. But as the Global Issues study of the 2007-2008 food crisis I think correctly notes, without some global intervention that will only push more people into hunger..push more people out of the picture of having access to adequate food and water.

      “ Some 80% of the world’s production is consumed by the wealthiest 20% of the world suggesting an inequality in resource use due to social, economic and political reasons

      http://www.globalissues.org/article/758/global-food-crisis-2008

      The gap will only widen.See the quote in the post above from this same study on the few companies who control and dominate world food markets..obviously they are the only winners in any succesful strategy to drive world prices higher than fundamentals would otherwise take them.

      Isn't it likely that greater investment in agricultural production will not benefit the $1billion hungry or lower prices?Everywhere I have gone on this issue comes back to where you, Luigi, Salim, and others began. It takes a global initiative aimed at undoing the constraints that the IMF, World Bank have imposed on poor nations and creating a true global initiative to end hunger and poverty

      .Of course, that is not to say we shouldn't be trying to get food and other global essntials protected from speculative abuses and profiteering in the market place.. Indeed. wouldn't you agree, that taking speculation out of food is a key part of getting out from under the global corporate food monopoly.?
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        Oct 4 2011: I also agree with some things I've read here about spreading knowledge about the problem and reaching a larger audience. While a global initiative to end hunger is a noble idea, it is also a naive one. Humanity, in its current state, doesn't have the compassion for that unfortunately. Reinvesting in agriculture is a great idea for a multitude of reasons. The only way you could sell it though is through some sort of monetary gain and as a job creator. Before we can realistically work on getting food for everyone, we have to move our own morality and understanding forward.
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      Oct 4 2011: Vineet yes I agree farmers are poor and they don't understand stock market or ETF. But that doesn't mean they control the food market.

      From my country experience , farmers are even worse victims. They pay high for insecticide, pay high for seeds, fertilizer , electricity for irrigation purpose , but during harvesting season food barons create a situation ,that grain price go down at the village level (while at city level price remain almost static ) where farmers are actually puppet in the hands of those barons. Being poor farmer unable to hold the grain he produced for long to sale at a favorable price form the perspective of his/her investment. End result producers of food starve for certain period of year while food baron pockets get fatter and fatter.

      That proves food market is not controlled by producers (I would be happy like anything if farmers could control the market what they produce) rather the middlemen who are educated enough to understand stock market and capable enough to speculate.....

      What would you say about real estate boom.... which later collapsed like anything...... how much of that boom was due to the speculation.......?

      So impact of speculation can not be ignored ........... please check the article below about impact of speculation on food price

      http://www2.weed-online.org/uploads/weed_food_speculation.pdf
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        Oct 4 2011: Your point is valid Salim. The real estate boom and collapse though was due more to fraud and lies than it was to speculation.
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          Oct 5 2011: It's long time Ted to hear from you. Feeling great you are back with your sound insight of financial market.....which is good opportunity for me to learn.

          I feel the civilized name of fraud /lie or may be fortune telling is SPECULATION in these times
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          Oct 6 2011: systemic issues, glovally vineet? more than lack of investment inn production? are you referring to post- peak agricultural production..? to depleted soils and inadequte water sources funamentally limiting world food production globally.?
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        Oct 5 2011: Haha Salim you can be so pithy sometimes! You're right it is speculation and you are well aware of my views on that particular topic.
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          Oct 6 2011: Thanks Ted for your words. Yes I am aware that's why was missing you my friend!
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        Oct 6 2011: Saliim,

        Thank you for finding this wonderful paper exploring the impact of speculation on food prices. This paper, which does take a look a market fundamentals and long term ttrends takeakes a very close look at the 2006-=2008 impacts of speculation citing factors widely recognized evenin the USDA and Global Issues studies cited elsewhere here."The paper argues that the speculative move on commodity markets distorts prices, reinforces instability, increases market inefficiency and periodically leads to the formation of bubbles. The worst effect however is the aggravation of hunger in developing countries. The price bubble has pushed 120 million additional people into poverty. Behind the façade of pinstriped respectability lurks misery and hardship for millions of people.""

        A powerful introduction with some noteworthys stats right off the bat:

        "The FAO food price index which covers the prices of the most important food commodities showed a price increase of 71% during the 15 months between the end of 2006 and March 2008. The increase was particularly dramatic for rice and cereals where the prices sky-rocketed to a peak of 126% in this time period.
        The poor are affected the hardest. In an industrial country, the proportion of expenditure for food in a typical household budget amounts to 10% - 20 %, whereas it is between 60% and 80% in the LDCs (FAO 2008). According to a U.S. Department for Agriculture calculation, a 50% price increase on basic food leads to a mere 6% rise in expenditure for a high income country, but it amounts to 21% for a food importing country of low income (U.S. Department for Agriculture. Economic Research Service. 2008: p. 25).

        The FAO estimates that food costs of the LDCs 2008 will again increase by 37% - 40 %, after having already risen by 30% - 37% in 2007."
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        Oct 6 2011: Salim,

        Another wonderful quote from the study on speculation and food prices which you have brought ys showing by reference to rice trends, which are not a bio fuel crop, that that theinfluebceof bio fuel demand for food grains has been exaggereated by main stream economists:"When the food prices sky-rocketed in 2007, the role of speculation was mentioned as an afterthought or completely ignored by mainstream economists. Instead, mainly long-term factors such as the increase in demand and the production of biogas were made responsible for the drastic price increases. A World Bank study even claimed that agrofuels contributed a proportion of 70% to the food price increase.In a study on the food crisis, even before the food price reversal, UNCTAD pointed out that this factor could not be so important in increasing prices to more than double in such a short time period. For example, the price of rice increased by 165%between April 2007 and April 2008, and rice cannot be used for biogas, and there is no substitution of acreage in the countries where it is grown, either.
        It has become incontestably clear since the decrease in food prices from July 2008 at the latest, that neither increasing demand in the emerging economies nor agrofuel production caused the food price trend. It cannot be that the Chinese suddenly start to eat much more yoghurt only to stop again just a few months later. Neither has agrofuel cultivation risen so sharply only to decrease again just as abruptly. Short term factors, such as poor harvests, did not play a role in the price upswing either"

        I find this analysis persuasive..
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          Oct 6 2011: I am wondering if the rice futures could be obscuring the influence of biofuels simply because of the increase in demand in rice consumption. After all with the Asian nations increasing in buying power dramatically per capita consumption of rice would likely trend upward. If there was less corn that would also increase demand for rice as an alternative. These though would likely be small in comparison to speculation.
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        Oct 6 2011: Salim...and this absolutely cinches it for me..(also from the sttudy you brought us)..if the U.S. Commodities Market Supervisor says commodities are distorting pirces..well it must be really bad..and it must be true..no?:

        "iThe U.S. supervisory authority very clearly speaks out against the trade in commodity derivatives. The CFTC (Commodity Futures Trading Commission) probably possesses the best expertise with respect to the US Markets, and observes that the commodity markets have begun to set the price of commodities as an asset instead of setting the price solely according to factors of supply and demand. They have therefore created price distortions, or possibly even a speculative bubble. In plain language:j. The commodity market has detached itself from the fundamental data of the economy,. commodity prices, as can be seen in the futures market, have become a source of monetary wealth accumulationl. the prices have thus become a target of speculation, this has caused the formation of a bubble, the excessive foodstuff prices, i.e. speculation has added a price bubble on top of the price increases resulting from realmarket dynamics.

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