Are you ready for the food bubble?

Over the last few months I’ve been getting a progressively worse sticker shock when I go shopping for groceries. The trend has been worrisome, especially given last years’ total garden failure and the subsequent lack of much in the way of home-canned goods to tide us through the winter.

Done!

Even accounting for the lack of home-grown goodies, I estimate our personal grocery bill has gone up by about 25% on items we would have been buying anyway. Even explanations like the sugar beet fiasco didn’t quite seem to make sense because any shortages wouldn’t really hit for another year or so.

So seeing this article yesterday really got my attention:
Food speculation: ‘People die from hunger while banks make a killing on food’

Food speculation? You mean like the real-estate speculation that caused the bubble which has now burst and forced millions out of their homes and into bankruptcy? The same speculation that had banks running roughshod over the little guy, while at the same time allowing a few who knew how to game the system to swindle entire neighborhoods out of their sense of well-being? Apparently so:

“We first became aware of this [food speculation] in 2006. It didn’t seem like a big factor then. But in 2007/8 it really spiked up,” said Mike Masters, fund manager at Masters Capital Management, who testified to the US Senate in 2008 that speculation was driving up global food prices. “When you looked at the flows there was strong evidence. I know a lot of traders and they confirmed what was happening. Most of the business is now speculation – I would say 70-80%.”

Masters says the markets are now heavily distorted by investment banks: “Let’s say news comes about bad crops and rain somewhere. Normally the price would rise about $1 [a bushel]. [But] when you have a 70-80% speculative market it goes up $2-3 to account for the extra costs. It adds to the volatility. It will end badly as all Wall Street fads do. It’s going to blow up.”

This graph was just released last week, showing the extent of the price hikes

(thanks to writer lavida locavore for that link)

Wow.

So if it was unethical when we were talking about people’s homes, what adjective can possibly be used to describe it when it comes to food? How is this going to play out in families (heck, countries) where even a modest rise in costs is going to mean people simply cannot eat?

Well, the rising food prices have already been linked to the uprisings in Tunisia, Egypt, Yemen and Algeria. Many countries are calling for a return of regulations to combat this practice, fearful of even more violence. link to article
“Without naming countries, Le Maire and [FAO Executive Director Jacques] Diouf spelled out the risk that rising prices would fuel more food riots, calling for structural measures – including increased market regulation – to curb price volatility,” …”Regulation does not mean fighting against markets, but improving the way in which markets function,” Le Maire said, … He also “called for an end to market speculation on commodities, saying its equivalent to speculating on world hunger. ‘Speculation on world hunger is economically dangerous and morally unacceptable,’ …

Yikes.
I have to admit that I really had no idea that this was going on. I knew that the increased use of biofuels like corn-based ethanol was causing some problems, and that extreme weather was causing others, but for all of that to be compounded by people trying to game the system in such a morally bankrupt way is some news. It’s also something we need to be aware of when the government and big AG are trying to justify policies regarding GMOs by saying that they are the answer to global hunger. (hint: they aren’t)

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8 thoughts on “Are you ready for the food bubble?

    • I was just reading that! I agree with him about weather causing a good bit of the initial problem, but I think speculators are making it worse than it would be otherwise.

      • Well, you know, I hate to put any confidence in the financial system… but speculation on the futures market and the market for food itself are two different things. At the end of the day, Kroger (or whoever) has to put bacon in the aisles. For Kroger’s prices to be affected by speculation, it has to impact the actual supply of pork belly or the actual number of buyers somehow. Future traders may make or lose money based on where that price goes, but as long as nobody is speculatively buying up or stockpiling actual pork bellies the price of bacon shouldn’t be driven up any further than it already is.

        So Krugman is saying that he doesn’t see inventories of actual food going up, so the market price is probably accurate *right now*. I don’t think he’s said anything about futures speculation not causing a problem in the future, though.

  1. I honestly wonder how much of the rise in prices is attributable to market manipulation compared to other factors. I was listening to an NPR story last week that was talking about global food prices, and they made an interesting point. Rising commodity prices have a disproportionate effect on the poorer nations. They used an example of a sack of wheat or somesuch, where the thing is bought in bulk, and there’s little else to what’s being bought. Whereas in the US, advertising, branding, etc., make up a significant part of the cost of an item, and therefore the rise in prices due to changes in commodity costs is diluted or hidden by other costs.

    • Yeah, I think what WE see here is definitely mitigated by other factors, which is why people in other countries are already at riot point and we’re just now going “ouch”.

      • I also suspect that a significant portion of the rise in our grocery prices is due to increasing fuel prices, which are up more than 20% from this time last year.

        But yeah…these things hurt a lot more in other places. If I were a conspiracy theorist, I’d wonder if high prices are being engineeered to sow unrest in some places that are less than friendly to us.

  2. Pingback: Tweets that mention Are you ready for the food bubble? « lorigami -- Topsy.com

  3. Why won’t it let me thread replies after the first one? Argh!
    Grant: I’ve been trying to read up on World bank policy as it relates to what you’ve just suggested. Jury is still out, but i do think there’s something to it.
    Bill: Yes, I do think this stuff has more of an effect when we’re talking about places that don’t have Krogers.

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