Shut Down the Global Financial Casino Where Food Is Traded Like a Poker Chip
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This Thanksgiving, most farmers around my hometown in central Minnesota are celebrating a good harvest. Rain -- for once -- fell at the right time in the right amounts, and prices for many crops grown in Litchfield are high.
After yo-yoing up and down for the past several years, corn prices are particularly high. In mid-October, the national average was $4.78 per bushel, up $1.17 from the year before. Corn-Belt families still have to cover the costs of expensive fertilizer and other inputs, but many will be able to enjoy a more bountiful holiday this year.
In the long term, however, such drastic price swings are as bad for farmers as they are for consumers. How do you plan for the future? If farmers make plans now to plant more corn next year, the price bubble may pop before they can sell their crops.
One reason agricultural commodity prices have been so volatile is the rampant gambling in the futures markets. These markets were originally created to help ensure more stable prices for the actual producers of corn, wheat, milk, and other commodities, as well as food manufacturers, like flour mills and cereal makers.
A farmer-owned grain elevator, for example, can use a futures contract like insurance to fix a price for a future sale. This allows them to plan ahead without having to worry about wild price swings.
Today, however, the commodities markets are dominated by speculators who have never gotten their hands dirty in a corn field, or come anywhere near a food processing plant. They're simply big-time gamblers, hoping to profit from changes in futures prices.
It's now widely recognized that excessive speculation played a significant role in the 2008 food crisis, when soaring prices pushed 130 million people into hunger in the world's poorest countries. Here in the United States, consumers also faced the sharpest increases in grocery prices since 1980. These problems were exacerbated by the dismantling, over the past couple of decades, of programs designed to protect farmers and consumers, such as food reserves, price supports, and import controls.
The financial reform bill that became U.S. law in July made some progress in cracking down on speculation. It limits how much a trader can hold in a certain commodity and increases market transparency.
However, the new law doesn't address problems with commodity index funds and exchange-traded funds. Institutional investors like pension funds and university endowments have been plowing money into such funds, driving prices artificially high. Then, as we saw with the 2008 crash, speculators can exit in a stampede, causing prices to plummet.
A coalition of family farm, faith-based and anti-hunger groups, along with business associations have initiated a campaign to persuade investors to pull out of commodity index funds. Their first target: CALSTRS, the California teachers' retirement system, which had been considering shifting $2.5 billion of their portfolio into commodities.
In response to the divestment campaign, the CALSTRS board decided on November 4 to adopt a different strategy. Instead of $2.5 billion, they will invest no more than $150 million in commodities for 18 months, while further studying the potential problems.
This is an important step towards shutting down the global financial casino where food is traded like a poker chip. The big-time gamblers should stick to the Las Vegas casinos. Let's keep food where it should be -- on our tables.
Sarah Anderson is the director of the Global Economy Project at the Institute for Policy Studies.