Friday, May 24, 2013

Continuing Hunger, Vampire Squids, and a Bit of Good News

Rising food prices have been driving millions of people across the world into extreme poverty over the last few years, even as banks and financial investors have been making a killing. 

Goldman Sachs, the US investment bank -- (which journalist Matt Taibbi famously described as "a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money") -- made an estimated $400 million from speculating on food in the year 2012.

The amount of financial speculation on food nearly doubled, from $65 billion in 2006 to $126 billion in 2011.

(Speculation is generally defined as the practice of engaging in financial transactions in an attempt to profit from short or medium term fluctuations in the market value of a commodity, such as wheat or rice. In its present global form, speculation has acquired a scale so as to distort or even drive the market in a manner that a few traders could make huge profits at the expense of millions of consumers and producers.)

Any trader -- or anyone who has an instinct for how markets operate in the real world -- would tell you without batting an eyelid that huge speculative investments in commodities do drive up prices.

Despite this common knowledge -- as it happens in a world ruled by corporations -- there has long been a "debate" over the factors causing unprecedented rise in prices of food commodities across the world. 

Given the empirical evidence that has been accumulating over the years, even this apology for a debate would long be over, had it not been for Goldman Sachs and other Wall Street vampire squids.

The mounting evidence and public pressure have, nevertheless, resulted in positive developments; some big European banks have recently pulled back from speculative trading in farm commodities.

Check below a link to the website of WEED (World Economy, Ecology and Development), to find a PDF containing a list of 100 summarized studies -- compiled by this European research and advocacy organization – which establish the role of speculation in driving up food prices.

The varied sources of these studies include Harvard University and UN's Food and Agricultural Organisation (FAO).

This list may come in handy for Right to Food activists and as material adding weight to the empirical evidence establishing the role of speculation in distorting food markets.

Read below a report published on 23 May, 2013 in British newspaper The Guardian to get a sense of how the American vampire squid is blocking the measures that will protect the vulnerable populations across the world from wild fluctuations in prices of food. 

That follows another report, published in British magazine New Internationalist, on the ending of food of speculation by Barclays and other European banks.

Pasted at the very bottom of this post is a report, published in the Indian Express, which talks about FAO's dire warning against "tremendous human impact" of financial speculation. 

What Goldman Sachs should admit: it drives up the cost of food
As Goldman shareholders meet today, they should be hearing about the financial titan's exploitative business practices
Deborah Doane, Thursday 23 May 2013

Today, 23 May, is the annual general meeting (AGM) of financial speculator Goldman Sachs, the archetypal villain of the global economic meltdown, bailed out by US taxpayers to the tune of $5.5bn. Perhaps they'll hand out last year's Community Impact report, which shows how they've tried to redeem themselves with charity, like serving up almost 30,000 meals and preparing about 250,000 others in community projects in the US and around the world.

The irony, of course, is that while they're serving up a few meals, their core business is virtually starving people at the same time. In 2012, the US investment bank made an estimated $400m from speculating on food.

The World Bank estimated in 2010 that 44 million people were pushed into poverty because of high food prices, and that speculation is one of the main causes.

Since Goldman led the drive to deregulate commodity markets in the 1990s, after constraints were imposed following the 1930s Wall Street crash, they've been at the vanguard of creating and promoting complex commodity instruments, from which they've raked in huge profits.

Wallace Turbeville, a former vice president and the inventor of commodity index funds, has been outing the company's methods. He says that in his time at Goldman, investment increased from $3bn in 2003 to $260bn in 2008, and commodity prices rose dramatically during the same period, increasing from 2006 to 2008 by an average of 71%.

In 1996, speculators held 12% of the positions on the Chicago wheat market, with most of the market being made up of the legitimate users of food – from farmers to producers. But the legitimate hedging element of commodity markets has virtually disappeared in the intervening years.

By 2011, pure speculators made up a staggering 61% of the market. Of course, Goldman Sachs isn't the only player, but it is certainly the largest.

For several years, it was hotly debated whether speculation in food commodities drives up prices. But the evidence now firmly says it does, and that there's little correlation between rising prices and actual supply and demand.

There are now well over 100 studies which agree (pdf), from sources as varied and valuable as Harvard University, the Food and Agricultural Organisation and the United Nations.

The knock-on effect of increased speculation has meant price spikes are now more and more common. In November 2012, the World Bank declared a new era of food price volatility.

While regulators play catch-up on both sides of the Atlantic, financial lobbyists are doing their utmost to block progress. The Dodd Frank Act, passed in 2010, imposed limits on speculation; but industry lobbyists are fighting at every pass.

In September last year, just before new rules would have come into effect, a Washington DC court ruled in favour of the International Swaps and Derivatives Association and the Financial Markets Association, which brought forward a claim that the rules were drafted faultily. An appeal is now pending, putting any effective regulation way out into the long grass.

Meanwhile, across the Atlantic, as Brussels tries to bring forward similarly progressive regulation, the tentacles of Goldman's influence are everywhere. In the UK, Goldman Sachs gave £8.8m ($13.4m) to political parties. The UK is the primary opponent blocking Brussels-regulation against commodity speculation.

Members of the European parliament on the economics and monetary committee met with representatives of Goldman Sachs, its lobby groups and PR companies nine times in the first six months of 2010 alone – the year regulation was drafted.

Meanwhile, Goldman Sachs is represented on 16 industry groups that were invited to join a "special working group" to look at financial reforms for the European Commission.

Charity may be alive and well, but until the regulators stand up to its influence, Goldman Sachs and its financial sector cohorts are still able to give with one hand while taking significantly more with the other.

Barclays ends food speculation
By New Internationalist Editorial, Feb 2013  

Barclays, which announced an end to its speculation on food on Tuesday 12 February, made up to an estimated £278 million from the trade in 2012. The figure brings the bank’s total revenue from food speculation from 2010 to 2012 to an estimated three quarters of a billion pounds.

Campaigners have welcomed the move to pull out of speculative deals with hedge funds but are disappointed by Barclays’ decision to continue selling investment products that allow other financial players, like pension funds, to speculate.

The £278 million ($431.4 million) figure was released by the World Development Movement, which is calling for regulation to prevent banks betting on food prices and contributing to the global hunger crisis.

Barclays has been the leading British player in speculating on food. Goldman Sachs is widely recognised as the world leader.

Barclays’ withdrawal follows announcements in 2012 by several German, Austrian and Scandinavian banks that they would reduce or suspend trading in food commodity markets. But German giant Deutsche Bank, one of the banks indicating a withdrawal, has since returned to speculating on food.

Legislation to curb speculation is on the table at the EU, but the British government has so far opposed effective controls.

World Development Movement campaigner Christine Haigh said: ‘Barclays’ announcement is a welcome step. One of the world’s biggest banks has acknowledged that gambling on food is not an acceptable way to make money, and other speculators like Goldman Sachs should take heed. But Barclays remains in the market peddling investment products which enable others to speculate on food prices, and could return to larger scale speculation at any time. The only thing that will prevent banks driving up prices is tough regulation, and this is what the UK government should be supporting.’

Excessive speculation leading to volatile food prices: FAO
Indian Express, Jul 08, 2012

New Delhi: Excessive speculation in futures and commodities markets is leading to high volatility in food prices, which has a "tremendous human impact", United Nation's body Food and Agriculture Organisation (FAO) has said.

"Let's make one thing clear, we are not talking about speculation related to price discovery and the normal functioning of the futures markets. We are talking about excessive speculation in derivative markets, which can increase price swings and their speed," FAO Director General Jose Graziano Da Silva said in a statement.

Speaking at a high-level debate on role of financial speculation in food price volatility last week, Da Silva said that the world needs to take a hard look at speculation on the financial markets and its potential impact on food price volatility.

"Excessive food price volatility, especially at the speed at which they have been occurring since 2007, has negative impacts on poor consumers and poor producers alike all over the world," he added.

Keynote speaker at the debate, President of the Dominican Republic Leonel Fernandez Reyna stressed on the need for more information to get a clearer picture on market transactions, in order to better understand the role of speculation in agricultural commodities.

Fernandez said that the food price swings were having a "tremendous human impact" and cautioned against using food commodities purely as financial instruments.

"Financial speculation is exacerbating market fluctuations and this exacerbation is generating uncertainty - this uncontrolled, unregulated exacerbation is provoking a dramatic impact on countries that are net food importers," he added.

FAO has pointed out that the period between 2008 and 2011 was characterised by a series of extreme highs and lows in food pricing, which made it difficult for economically vulnerable consumers and agricultural producers to cope.

"Food price inflation has already been higher than overall inflation in almost every country. This has a greater impact on the poorer population, who can spend up to 75 per cent of their income in food," Da Silva said.

The view that speculation contributed to recent price volatility has led to more awareness among governments on the need for the introduction of greater regulation to limit this activity. However, the question of how much and what form of regulation is a matter of debate, he added.

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