Goldman Sachs trades off starvation and poverty

Goldman Sachs Made $400 Million Betting On Food Prices In 2012 While Hundreds Of Millions Starved

By Michael Snyder

Economic Collapse Blog
January 24, 2013

Why does it see like wherever there is human suffering, some giant bank is making money off of it?

According to a new report from the World Development Movement, Goldman Sachs made about 400 million dollars betting on food prices last year.

Overall, 2012 was quite a banner year for Goldman Sachs.  As I reported in a previous article, revenues for Goldman increased by about 30 percent in 2012 and the price of Goldman stock has risen by more than 40 percent over the past 12 months.

It is estimated that the average banker at Goldman brought in a pay and bonus package of approximately $396,500 for 2012.  So without a doubt, Goldman Sachs is swimming in money right now.  But what is the price for all of this “success”?

Many claim that the rampant speculation on food prices by the big banks has dramatically increased the global price of food and has caused the suffering of hundreds of millions of poor families around the planet to become much worse.  At this point, global food prices are more than twice as high as they were back in 2003.

Approximately 2 billion people on the planet spend at least half of their incomes on food, and close to a billion people regularly do not have enough food to eat.

Is it moral for Goldman Sachs and other big banks such as Barclays and Morgan Stanley to make hundreds of millions of dollars betting on the price of food if that is going to drive up global food prices and make it harder for poor families all over the world to feed themselves?

This is another reason why the derivatives bubble is so bad for the world economy.  Goldman Sachs and other big banks are treating the global food supply as if it was some kind of a casino game.

This kind of reckless activity was greatly condemned by the World Development Movement report…

“Goldman Sachs is the global leader in a trade that is driving food prices up while nearly a billion people are hungry. The bank lobbied for the financial deregulation that made it possible to pour billions into the commodity derivative markets, created the necessary financial instruments, and is now raking in the profits. Speculation is fuelling volatility and food price spikes, hurting people who struggle to afford food across the world.”

So shouldn’t there be a law against this kind of a thing?

Well, in the United States there actually is, but the law has been blocked by the big Wall Street banks and their very highly paid lawyers.  The following is another excerpt from the report…

“The US has passed legislation to limit speculation, but the controls have not been implemented due to a legal challenge from Wall Street spearheaded by the International Swaps and Derivatives Association, of which Goldman Sachs is a leading member.

Similar legislation is on the table at the EU, but the UK government has so far opposed effective controls. Goldman Sachs has lobbied against controls in both the US and the EU.”

Posted below is a chart that shows what this kind of activity has done to commodity prices over the past couple of decades.  You will notice that commodity prices were fairly stable in the 1990s, but since the year 2000 they have been extremely volatile…

The reason for all of this volatility was explained in an excellent article by Frederick Kaufman…

The money tells the story. Since the bursting of the tech bubble in 2000, there has been a 50-fold increase in dollars invested in commodity index funds. To put the phenomenon in real terms: In 2003, the commodities futures market still totaled a sleepy $13 billion. But when the global financial crisis sent investors running scared in early 2008, and as dollars, pounds, and euros evaded investor confidence, commodities — including food — seemed like the last, best place for hedge, pension, and sovereign wealth funds to park their cash. “You had people who had no clue what commodities were all about suddenly buying commodities,” an analyst from the United States Department of Agriculture told me. In the first 55 days of 2008, speculators poured $55 billion into commodity markets, and by July, $318 billion was roiling the markets. Food inflation has remained steady since.

The money flowed, and the bankers were ready with a sparkling new casino of food derivatives. Spearheaded by oil and gas prices (the dominant commodities of the index funds) the new investment products ignited the markets of all the other indexed commodities, which led to a problem familiar to those versed in the history of tulips, dot-coms, and cheap real estate: a food bubble. Hard red spring wheat, which usually trades in the $4 to $6 dollar range per 60-pound bushel, broke all previous records as the futures contract climbed into the teens and kept on going until it topped $25. And so, from 2005 to 2008, the worldwide price of food rose 80 percent –and has kept rising.

Are you angry yet?

You should be.

Poor families all over the planet are suffering so that Wall Street bankers can make bigger profits.

It’s disgusting.

Many big financial institutions just seem to love to make money on the backs of the poor.  I have previously reported on how JP Morgan makes billions of dollars issuing food stamp cards in the United States.  When the number of Americans on food stamps goes up, so does the amount of money that JP Morgan makes.  You can read much more about all of this right here: “Making Money On Poverty: JP Morgan Makes Bigger Profits When The Number Of Americans On Food Stamps Goes Up“.

Sadly, the global food supply is getting tighter with each passing day, and things are looking rather ominous for the years ahead.

According to the United Nations, global food reserves have reached their lowest level in nearly 40 years.  Global food reserves have not been this low since 1974, but the population of the world has greatly increased since then.  If 2013 is another year of drought and bad harvests, things could spiral out of control rather quickly…

World grain reserves are so dangerously low that severe weather in the United States or other food-exporting countries could trigger a major hunger crisis next year, the United Nations has warned.

Failing harvests in the US, Ukraine and other countries this year have eroded reserves to their lowest level since 1974. The US, which has experienced record heatwaves and droughts in 2012, now holds in reserve a historically low 6.5% of the maize that it expects to consume in the next year, says the UN.

“We’ve not been producing as much as we are consuming. That is why stocks are being run down. Supplies are now very tight across the world and reserves are at a very low level, leaving no room for unexpected events next year,” said Abdolreza Abbassian, a senior economist with the UN Food and Agriculture Organisation (FAO).

The world has barely been able to feed itself for some time now.  In fact, we have consumed more food than we have produced for 6 of the last 11 years…

Evan Fraser, author of Empires of Food and a geography lecturer at Guelph University in Ontario, Canada, says: “For six of the last 11 years the world has consumed more food than it has grown. We do not have any buffer and are running down reserves. Our stocks are very low and if we have a dry winter and a poor rice harvest we could see a major food crisis across the board.”

“Even if things do not boil over this year, by next summer we’ll have used up this buffer and consumers in the poorer parts of the world will once again be exposed to the effects of anything that hurts production.”

We desperately need a good growing season next summer, and all eyes are on the United States.  The U.S. exports more food than anyone else does, and last summer the United States experienced the worst drought that it had seen in about 50 years.  That drought left deep scars all over the country.  The following is from a recent Rolling Stone article…

In 2012, more than 9 million acres went up in flames in this country. Only dredging and some eleventh-hour rain kept the mighty Mississippi River from being shut down to navigation due to low water levels; continuing drought conditions make “long-term stabilization” of river levels unlikely in the near future. Several of the Great Lakes are soon expected to hit their lowest levels in history. In Nebraska last summer, a 100-mile stretch of the Platte River simply dried up. Drought led the USDA to declare federal disaster areas in 2,245 counties in 39 states last year, and the federal government will likely have to pay tens of billions for crop insurance and lost crops. As ranchers became increasingly desperate to feed their livestock,“hay rustling” and other agricultural crimes rose.

Ranchers were hit particularly hard.  Because they couldn’t feed their herds, many ranchers slaughtered a tremendous number of animals.  As a result, the U.S. cattle herd is now sitting at a 60 year low.

What do you think that is going to do to meat prices over the next few years?

Meanwhile, the drought continues.  According to the U.S. Drought Monitor, this is one of the worst winter droughts the U.S. has ever seen.  At this point, more than 60 percentof the entire nation is currently experiencing drought.

If things don’t turn around dramatically, 2013 could be an absolutely nightmarish year for crops in the United States.  If 2013 does turn out to be another bad year, food prices would soar both in the U.S. and on the global level.  The following is from a recent CNBC article…

The severe drought that swept through much of the U.S. last year is continuing into 2013, threatening to cripple economic growth while forcing consumers to pay higher food prices.

“The drought will have a significant impact on prices, especially beef, pork and chicken,” said Ernie Gross, an economic professor at Creighton University and who studies farming issues.

So let us hope for the best, but let us also prepare for the worst.

It looks like higher food prices are on the way, and millions of poor families all over the planet will be hard-pressed to feed their families.

Meanwhile, Goldman Sachs will be laughing all the way to the bank.

Wall Street profits from the hungry

Profiting off hunger: Wall Street makes big gains over food price spikes

AFP Photo / Tony Karuba

RT,

21 January, 2013

Powerful firms like Goldman Sachs have made hundreds of millions of dollars in food future trades. Critics accuse them of profiting off starvation and market manipulation, while traders claim their profits are due to increasing consumption in China.

World food prices tracked by the UN Food and Agriculture Organization (FAO) have more than doubled in the past 10 years. The FAO’s Food Price Index, which baskets prices for five prime food commodities, peaked in 2008 and 2011, each time rising more than 50 percent from the previous year. The latest price spike was one of the key factors that triggered the series of uprisings in the Arab world resulting in the fall of several governments.

The year 2013 may see another price hike, following the worst draught in the US in 50 years and poor harvests in Russia and Ukraine. The UN has warned that the world may be approaching a major hunger crisis.

At the same time, the industry is bringing millions in profits to those who rushed to invest in food. Goldman Sachs made an estimated $400 million in 2012 from investing its clients' money in a range of "soft commodities," from wheat and maize to coffee and sugar, according to an analysis by the World Development Movement (WDM).

"While nearly a billion people go hungry, Goldman Sachs bankers are feeding their own bonuses by betting on the price of food. Financial speculation is fueling food price spikes and Goldman Sachs is the No, 1 culprit," Christine Haigh of the WDM told the British newspaper The Independent.

The London-based organization – along with similar NGOs like Foodwatch, Oxfam, or Weed (World Economy, Ecology and Development) – have for years blamed financiers for inflating food prices, or for at least making the market dangerously volatile.

They argue that the amount of speculative money is too big in proportion to the physical inventories of the commodities. Deregulation in the late 1990s allowed financial institutions to bet on food prices,  resulting in some $200 billion being poured into the market.

For example, hedge fund Armajaro virtually single-handedly sent the global price of cocoa to a 33-year high in July 2010 by buying around 15 percent of global cocoa stocks.

The overall effect of speculation on food prices is an issue of dispute. Influential analysts, such as US economist Paul Krugman, have argued that speculation is a marginal factor compared to rising demand from developing countries, as well as the expanding production of corn and maize for biofuels at the expense of foodstuffs.

Diagram from "The Food Crisis: Predictive validation of a quantitative model of food prics including speculators and ethanol conversion" By Marco Lagi, Yavni Bar-Yam, Karla Z. Bertrand and Yaneer Bar-Yam

A study by the New England Complex Systems Institute last year showed that the Food Price Index should only change if ethanol production had an impact. The study estimated that a 2008 ethanol price hike was largely due to speculation, while a 2011 spike was significantly fueled by investors.

Many financiers dismiss the accusations, and say they will continue bidding against food prices. On Saturday, Deutsche Bank Co-Chief Executive Juergen Fitsche told the Global Forum for Food and Agriculture that Germany’s biggest lender “will continue to offer financial instruments linked to agricultural products.”

"Agricultural futures markets bring numerous advantages to farmers and the food industry," he said.

Others seem to be yielding to pressure. Last year, several German banks, including the second-largest Commerzbank, ceased to speculate on basic food prices for moral reasons.

Wheat Futures

Wheat Futures Jump Most in Four Weeks as U.S. Export Sales Surge

Wheat rose the most in four weeks as export sales surged to the highest in almost two years in the U.S., the world’s biggest shipper. Corn and soybeans climbed.

Bloomberg,

29 December, 2012

Exporters sold 1 million metric tons of wheat in the week ended Dec. 20, the most since Jan. 13, 2011, and the fourth straight weekly increase, government data showed today. Prices have fallen 9.8 percent this month, boosting the appeal of U.S. supplies for overseas buyers, said Brian Hoops, the president of Midwest Market Solutions.

“This is something we’ve not seen from the wheat market for a while, in terms of export business,” Hoops said in a telephone interview from Springfield, Missouri. “It’s an indication we’re at a level where we’re going to stimulate demand.”

Wheat futures for March delivery climbed 0.8 percent to settle at $7.7875 a bushel at 2 p.m. on the Chicago Board of Trade, the biggest advance since Nov. 27. The price is up 19 percent this year, the largest gain among the 24 commodities tracked by the Standard & Poor’s GSCI Spot Index.

Corn futures for March delivery rose 0.4 percent to $6.94 a bushel in Chicago. The price has dropped 7.8 percent in December, heading for the largest monthly decline since May.

Soybean futures for March delivery added 0.3 percent to $14.18 a bushel on the CBOT.

Corn is the biggest U.S. crop, followed by soybeans, hay and wheat, U.S. government data show.

Rising food prices

Mass slaughter of farm animals set to push food prices up 14%

Farmers who cannot afford feed 'liquidating' pig and cattle herds will drive food inflation to record high, says Rabobank report

the Guardian,

18 September, 2012

The mass slaughter of millions of farm animals across the world is expected to push food prices to their highest ever levels.

As well as hitting consumers' pockets, the predicted 14% jump in food prices will also dash the Bank of England's hopes of pushing inflation down to 2% by next year.

Farmers across the world have begun a mass slaughter of their pig and cattle herds because they cannot afford the cost of feed, which has soared following the worst US drought in living memory, according to a report published on Wednesday.

Experts at investment bank Rabobank warn that the mass "herd liquidation" will contribute to a 14% jump in the price of the average basket of food by next summer.

On Tuesday, the Office of National Statistics (ONS) said lower food prices had help bring inflation down to 2.5% in August.

That brings it closer to the Bank's 2% target and should help consumers who have seen their spending power shrink as wages fail to match inflation. The Bank expects inflation to ease below the 2% target by early next year, but that could be scuppered by rising food, oil and commodity prices.

Rabobank said the slaughter of millions of pigs has already led to a 31% increase in the price of pork and the costs of other meats are also expected to soar as "US livestock herds are likely to be liquidated at an accelerating pace in the first half of 2013".

Nicholas Higgins, a Rabobank commodities analyst and author of the report, said: "There will be an initial glut in meat availability as people slaughter their animals to reduce their feed bills. But by next year herds will be so reduced that there won't be enough animals to meet expected demand and prices will soar."

US farmers, who are suffering from the worst drought since the 1930s, have already reduced their cattle herd to the smallest since 1973.

While all meat lovers will be affected by the record-breaking price rises, Higgins said bacon butty fans may suffer the biggest increases because it is easier for farmers to slash and rebuild pig herds that cattle.

"Farmers cut back pigs because they can rebuild them the quickest. Replacement cattle take a lot longer to breed – a year and a half compared to six months for pigs," he said.

The report said the mass slaughter of pigs had led to a steep decline in the price of pork for delivery next month, but a 31% increase for pork delivered in July 2013.

Because meat and dairy products already account for 52% of the cost of the average global basket of food Rabobank predicts the overall price of the basket will soar to a record 243 on the United Nations Food and Agriculture Organisation (FAO) index next summer.

If Higgins' prediction is correct it will be the highest the index has ever reached and 175% higher than it was in 2000.

Higgins said he did not expect a repeat of the 2007-8 food riots in developing countries across the world because most meat is consumed in the west.

"People are less likely to be irate over meat prices when they can switch back to staples – an option not available in 07/08 due to severe shortages of wheat and rice," he said. "The risk [of riots and social unrest] is still there but it is not as high as 07-08. The prices will hurt here [in the west] more."

But he said western consumers are unlikely to significantly change their diets or become vegetarian in response to price rises.

Higgins said the major danger to global stability was the threat of countries stockpiling supplies. "We've already seen the first indications of that, with Indonesia hinting it is going to increase corn stock pile levels, South Korea considering a domestic purchasing regime and very strong wheat purchases in Iran disproportionately higher than in its past history."

While the food price spike is likely to lead to an increase in starvation and malnutrition across the world, global food traders are expecting bumper profits. The multimillionaire head of Glencore has said the US drought will be "good" for the commodities trader because it will lead to opportunities to exploit soaring prices.

Commodities speculation driving up prices

Speculation and Criminal Manipulation of Food and Commodities Prices

Michael Greenberger: Weak regulations on speculators swamping markets and lack of enforcement of existing laws on criminal intent, are driving up prices.

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Global North VS South Over Financialization of Food

US and West fighting BRIC and other southern countries that want limits on speculation on food.

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The West vs BRIC nations over food speculation

Global North VS South Over Financialization of Food

Vijay Prashad: US and West fighting BRIC and other southern countries that want limits on speculation on food.

The life of commodity speculators

The food rush

Commodity speculators have moved into food - with dire consequences for the world’s poorest. Hazel Healy finds out how it’s done.

New Internationalist

‘The world is on a knife edge in terms of supply and demand,’ proclaims agricultural derivatives trader Bill Plumber. ‘If we have a crop failure, honest to God, I don’t know how the world is going to handle it.’

Gold dust: a Malawi village gets a delivery of maize. Its price on international markets has trebled in the last decade. Mikkel Ostergaard / Panos

Bill is speaking on a ‘hedge fund TV’ video channel, where legends of the managed-money trade share their wisdom. He goes on to explain how he’s going to handle food scarcity – to his advantage. ‘As an ag trader, I’m looking forward to the most exciting years in my career. Instead of boom and bust, it’s going to be boom and back up again.’

Glued to screens in London’s square mile, Canary Wharf and Wall Street are thousands of traders who, like Plumber, are working on the assumption that, pretty soon, there will not be enough food to go round.

Banks have designed products to get consumers and pension funds to bet on products as diverse as aduki beans, greasy wool and ‘leveraged soya beans’. Uptake is high. This year, 

investments in food derivatives stood at $126 billion, compared to $3 billion in 2003.

But there is one hitch to the ‘ags’ bonanza. The top three food (or ‘soft’) commodities – wheat, rice and maize – are also the staple diet of the world’s two billion poorest people. And since high-finance got in a frenzy about food, one billion – a seventh of the world’s population – cannot afford to eat.

Children stop growing

Since powerful, new investors started pouring money into food markets, prices have been behaving in strange ways. Markets are aggressively volatile: wheat shot up by 46 per cent in three weeks in January and February of 2008, fell back completely by May and was up again by 21 per cent within the month.4 Maize has surged by 102 per cent in the year to April 2011. Steady upward pressure pushed food prices up by an average of 83 per cent between 2005 and 2008.

High prices translate directly into misery and malnutrition.

In poor households in the developing world, food can account for 70 per cent of income, leaving families with stark choices. People eat fewer and less nutritious meals, cut back on healthcare and schooling. Children stop growing, as malnutrition takes it toll. The World Bank estimates that since June last year, food prices have catapulted an additional 44 million people into poverty and hunger.

Getting rich off hunger is immoral. But causing hunger is nothing short of murder. Naturally, banks are quick to deny any correlation between the billions of dollars flooding food markets and the under-fives dying of malnutrition. They say prices reflect a squeeze on supply caused by failing harvests and a run on demand caused by biofuels, China’s appetite for meat and a growing world population.

‘Yet Olivier de Schutter, the United Nations Rapporteur for the right to food – who is concerned with feeding people, not making money from money – says these factors are, at best, minor catalysts. Instead, he maintains, the wild fluctuations and price inflation are caused by a ‘speculative bubble’.

But how did investors get their paws on the world’s food supply in the first place? Who exactly is doing it and how? To find out, I decide to invest in one of the products advertised on an online investment site promoting agriculture as ‘the new gold.’

I should first come clean as a die-hard, risk-averse investor. The biggest financial gamble I ever took was to open an ethical savings account, long since emptied. But after just minutes of googling, I discover a ‘Trade for a Pound’ ad, which shows an overweight man scrambling for coins down the back of the sofa. This turns out to be the gateway to an online trading account.

Before long I am introduced to a product called The Agriculture Booster that includes a mix of commodities, most of the ingredients of your breakfast: wheat, corn, sugar and coffee plus the cotton in your tablecloth. The pull of this ‘Simple. Secured. Liquid’ investment, a helpful man called Steve from Deutsche Bank explains, is that I can get exposure to commodities without the bother of actually having to take physical delivery of, say, a tonne of wheat.

The Booster derives its value from the underlying asset of food prices. The past performance graph shows that it peaked during the 2008 food crisis and again in January this year: this is a bonafide way to profit from hunger.

Back to the futures

The Booster is based on something called a ‘commodity index’, which was pioneered in 1991 by the canny and opportunistic investment bank Goldman Sachs.

Their index melded together 24 different raw materials – agriculture, energy and metals – transforming them into an asset that performed like a stock or share.

The index tracked futures prices on the commodity derivatives exchanges. When these markets were tightly regulated they functioned well – reflecting supply and demand – and the real price of wheat declined. But in 1999, after intense lobbying, the US Commodity Futures Trading Commission relaxed the rules. Banks – such as Barclays, Deutsche Bank and JP Morgan – were now allowed to hold as large a position10 in food futures as they liked.

Indexes took off when other investment areas dried up. The dotcom crash in 2000, the US property meltdown in 2006, the global financial crisis in 2008: these all sent pension fund managers on the hunt for new, safe places to grow their cash. Trades in commodity indexes increased 50-fold in a decade, hitting $376 billion by 2010.

A bewildering range of products has sprung up to allow investors to bet on these index funds. Many deals are done by swaps, or ‘Over The Counter’ deals, private arrangements between banks and clients that are not open to public scrutiny.

The main route into food derivatives for consumers and institutional investors are Exchange Traded Funds (ETFs), like Deutsche Bank’s Agriculture Booster. The agriculture elements in ETFs leapt by 35 per cent in six months to reach $15.7 billion at the end of June 2011.

Futures Exchanges

Financial speculators bet on the price of foodstuffs by trading in derivatives called ‘futures’.

Futures contracts were originally designed to allow farmers to sell their harvests in advance at a fixed price, allowing both buyers and growers to hedge against risk.

Over time, food futures came to be traded on commodity exchanges, such as the Chicago Board of Trade. This is where financial speculators get involved, to bet on the future price of commodities such as maize, lean hogs or pork bellies.

They do not plan to take delivery of say, a tonne of wheat, for milling into flour, or a hog of any shape or size.

Traditionally, speculators played a minor role in these food derivatives markets. But in 1999, the finance industry lobbyists secured de-regulation. In the last decade, vast sums of capital have flooded into food futures.

Footloose and FTSE-free

In early August, just as $3 trillion was wiped off the value of world shares, I make like an investor and join the food speculators.

I buy 10 securities for $14.40 each and watch as the graph begins its vertical climb.

Before long I am checking the Agriculture Booster compulsively. I get the heady rush I remember from a visit to a Panama casino. Since I bought-in, Google ads pop up all over the internet as I browse, encouraging me to spread-bet and play Black Jack.

The line of the graph has long stopped representing the price of food, and I can’t help willing it upwards.

But as divorced as I may feel, my returns are tracking the ups and downs of food derivatives. And this brings us to another of the banks’ arguments: that a bet on the price of something cannot influence the real price.

To understand how it could be that derivatives do drive up the price of food, I travel to the City of London, the world’s second largest agricultural commodities market, to find out what the traders think.

Squaring up to the square mile

Barclays Capital and Deutsche Bank have declined to comment, but a leading fund manager has agreed to speak to me on condition of anonymity.

Before the interview I climb the Monument to the Fire of London. Looking out over the square mile with my heart pounding from the 311-step ascent, I vaguely wonder whether I’ll get to see my Agriculture Booster blinking on a screen at the London International Financial Futures and Options Exchange (LIFFE).

On my way to the meeting, I see mudlarks picking through the piles of rubble on the banks of the Thames. Ten feet up, a personal trainer is directing two women through a strenuous work-out on mats laid out on the concrete.

Dark-haired café staff in uniform walk alongside quick-stepping men in suits and women in smart heels through the ancient heart of London, its streets evocative of centuries past: East Cheap, Pudding Lane, Threadneedle.

On one of these streets I meet up with a fund manager – let’s call him Mike.

He patiently explains I won’t see my Booster anywhere, as it’s traded electronically on desks. Instead, he downloads a Bloomberg App on to my mobile phone so I can see it blinking there.

Mike is an experienced commodities trader, who ran a sugar hedge fund in the 1980s. He’s in no doubt that these commodity funds and my Booster are pushing up prices. ‘Of course,’ he says, ‘because it’s pushing demand, and that pulls supply out of the chain.’

Blowing bubbles

A closer look at the small print on my Booster tells me that before my futures contracts expire, they will be ‘rolled’ over into a ‘longer dated contract’. This is key to understanding the artificial pull on prices.

It means that the index is structured to buy futures automatically, on the assumption that prices will rise.

Against the grain: Chicago Board of Trade rice pit. Orjan F Ellingvag/Dagens Naringsliv/Corbis

When a flood of investors keep on buying, experts say, it creates a ‘demand shock’ in the commodities exchanges, pushing up the cost of futures.

Taking their price signals from the exchange, traders on physical markets delay sales and hoard reserves in anticipation of higher prices. Panic buying starts and countries impose export bans.

The index fund manager is effectively hoarding futures contracts, triggering real-life hoarding that makes the bet on rising prices a self-fulfilling prophecy. Even when the commodities crash comes – as it did in 2008 – the process simply begins all over again.

Mike believes that, as with property before it, there’s a food bubble growing. He uses the word ‘timebomb’.

These products have a psychological appeal. ‘People could relate to the desire to own property. In the same way, they’d like to own commodities. They empathize with it – after all, we all have to eat.’

The story of tightening demand is just another way for banks to get their hands on extra money. They only have to put down a fraction of my cash to buy a food future, the rest will be lent on or invested – for better returns. He points out the bank charges: 0.45 per cent management fee and 0.16 per cent collateral fee.

Before leaving, I ask him about the ethics of this kind of investment. He smiles and tells me ‘it’s like the rioters’ (who ransacked London’s shops around the time I invested in food).

‘The rioters?’

‘They get caught up in the action. They don’t think about the ethics until later.’

Complex. Risky. Wrong

Next I ask one of Britain’s leading economists, Financial Times columnist John Kay, whether he believes food prices are being pushed up by big investors.

‘I think it’s very likely true,’ he says. ‘Investment banks are bound to say it isn’t. They’re making a lot of money out of it,’ he adds dryly. ‘Fund managers are under less pressure to lie.’

It’s hard to prove. ‘But if one looks at what’s been happening, it seems very plausible,’ he says. ‘I find this idea that it’s because Chinese people are eating more meat to be very unconvincing.’

Kay’s views are supported by data from the US Department of Agriculture, which show no shortfall or excessive demand in maize or wheat when prices rocket skyward.

We do some more head-scratching over my DB Agriculture Booster. I’m beginning to wonder whether anyone truly understands this thing. Closer reading tells me the product is created through a swap contract and ‘fully collateralized by gold bars’, which (and this next bit comes in tiny writing) can sometimes be ‘replaced by financial securities’.

Kay jumps on this as a new ethical concern with the Booster. Banks have to put up collateral against my investment so that I can get my money back, ‘but they put up stuff that’s illiquid [unsellable] rubbish.’

In other words, Exchange Traded Funds (ETFs) like mine are opaque products that distribute risk in weird ways – like the ones that helped prompt the last crisis.

‘If there’s another blowup – which there will be – ETFs will aggravate things and send them spiralling,’ Kay concludes.

‘Cheetahs, a new breed of cat’

But we can’t blame all the mountainous ups and downs on my risky Agriculture Booster. Investment banks, hedge funds and grain companies also use their own money to play the markets. This is a ‘traditional’ form of speculation, but one practised by ‘a new breed of cat’, according to Bart Chilton from the Commodity Futures Trading Commission (CFTC).

Chilton, with his knack for folksy nicknames, labels these traders ‘cheetahs’ because they are in and out of deals lightning fast. A bank may have a thousand mathematicians and physicists using algorithms to carry out this high-frequency trading.

The huge influx of speculators into food markets means they now outnumber commercial hedgers three to one on exchanges. And when markets are made up of speculators betting on each other, the herding instinct exerts a stronger pull than any information on wheat stocks. You only make money if you get the sentiments of the markets right. If you go the opposite way, you get wiped out.

The result is wild leaps in prices and flash crashes, and an outcry from the food industry. ‘Are these guys parasites on the market? I’m leaning that way,’ ventures Chilton.

My final line of inquiry takes me to the vice president of the National Farmers Union of Scotland, Allan Bowie. ‘As growers we’ve got to deal with the weather, global trade and now the city traders,’ complains Bowie, who also grows barley for malting into whisky. ‘In 30 years growing wheat, I’ve never seen volatility like I’ve seen over the last 18 months.’

He believes the markets are not working correctly. ‘It’s getting harder to know where the markets are going to go. It’s causing huge shifts in what’s grown. The balance is skewed,’ he concludes.

Asset liquidation

By mid-September it’s time to junk my Agriculture Booster. Over the last five weeks I’ve watched as it clocked up the percentiles, leaping by 7.4 per cent in three weeks, peaking at 9.0 per cent – before plunging back down again. It was a good reminder that volatile investments like this are gambling, pure and simple.

My mouse clicks on the little red ‘sell’ button, sold for $14.60. My modest $2.32 profit (1.6 per cent) is wiped out by $10.45 in charges.

But if I had invested $1million for a pension fund, a $16,000 profit would have done nicely. I’m reminded of a closing piece of advice from a ‘profit-munching’ advocate on MoneyandMarkets.com: ‘The ride can be rough – but the rewards can be super-sized.’

While I bet on commodity prices, famine had taken hold in Somalia. According to the World Bank ‘shortages and near-historic prices for staples such as corn, wheat and sugar have magnified the impact’ of an emergency triggered by conflict and drought.

Famine helps bring the activities of speculative capital into sharp relief. Our food system fails to feed the hungry at the best of times, without entrusting it to the same gamblers whose risky finance already brought about a global financial crisis.

And there is something particularly sick about wealthy and unaccountable élites increasing their fortunes in a way that stunts – and starves – children. This is raw-edged capitalism at its worst.

Starbucks vs Goldman

With ever-growing public revulsion at the excesses and arrogance of banks, time is ripe for a clampdown on speculation.

‘If the regulators get it right, and don’t cave in to pressure from Wall Street and the City of London, simple legislation will help stabilize food prices,’ says Deborah Doane from the World Development Movement.

Right now the opposing sides are squaring up. The powerful financial services lobby is backed by the OECD, International Monetary Fund and countries like the US, Britain and Brazil.

They face a hotchpotch of unlikely allies. Social justice campaigners, French President Nicolas Sarkozy and the Dominican Republic are calling for limits to speculation, and so are major companies hurt by the soaring cost of raw materials – such as Starbucks, the airline industry and food processing giant Unilever.

Food is for eating, not indexing, leveraging or ‘betting long’. Let’s get it out of high-finance and put it back on the plates of the hungry.