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Financial speculators reap profits from global hunger

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Richard Moore

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Apr 24, 2008, 11:52:32 PM4/24/08

http://www.wsws.org/articles/2008/apr2008/hedg-a24.shtml

WSWS : News & Analysis : Global Inequality

Financial speculators reap profits from global hunger

By Stefan Steinberg

24 April 2008

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A series of reports in the international media have drawn attention
to the role of professional speculators and hedge funds in driving up
the price of basic commoditiesin particular, foodstuffs. The sharp
increase in food prices in recent months has led to protests and
riots in a number of countries across the globe.

On Tuesday, April 22, a UN spokesperson referred to a silent
tsunami that threatens to plunge more than 100 million people on
every continent into hunger. Josette Sheeran, executive director of
the UN World Food Programme (WFP), noted: This is the new face of
hungerthe millions of people who were not in the urgent hunger
category six months ago but now are.

A recent article in the British New Statesman magazine, entitled The
Trading Frenzy That Sent Prices Soaring, notes that increases in
global population and the switch to bio-fuels are important factors
in the rise of food prices, but then declares:

These long-term factors are important, but they are not the real
reasons why food prices have doubled or why India is rationing rice,
or why British farmers are killing pigs for which they cant afford
feedstocks. Its the credit crisis.

The article states that the food crisis has developed over an
incredibly short space of timeessentially over the past 18 months.
It continues: The reason for food shortages is speculation in
commodity futures following the collapse of the financial derivatives
markets. Desperate for quick returns, dealers are taking trillions of
dollars out of equities and mortgage bonds and ploughing them into
food and raw materials. Its called the commodities super-cycle on
Wall Street, and it is likely to cause starvation on an epic scale.

World prices for basic commodities such as cereals, cooking oil and
milk have risen steadily since 2000, but have escalated dramatically
since the developing financial crisis in the US began to bite in
2006. Since the start of 2006, the average world price for rice has
risen by 217 percent, wheat by 136 percent, corn by 125 percent and
soybeans by 107 percent.

Under conditions of growing debt defaults arising from the US
subprime crisis, speculators and hedge fund groups have increasingly
switched their investments from high-risk bundled securities into
so-called stores of value, which include gold and oil at one end of
the spectrum and soft commodities such as corn, cocoa and cattle at
the other. The article in the New Statesman points out that
speculators are even placing bets on water prices and then concludes:

Just like the boom in house prices, commodity price inflation feeds
on itself. The more prices rise, and big profits are made, the more
others invest, hoping for big returns. Look at the financial web
sites: everyone and their mother is piling into commodities.... The
trouble is that if you are one of the 2.8 billion people, almost half
the worlds population, who live on less than $2 a day, you may pay
for these profits with your life.

Investment in soft commodities is currently highly recommended by
leading market analysts. According to Patrick Armstrong, a manager at
Insight Investment Management in London, Raw materials can prove to
be the best investment class for hedge funds because the market is so
inefficient. This results in more chances for profit.

Much of the international speculation in food commodities takes place
on the Chicago Stock Exchange (CHX), where a number of hedge funds,
investment banks and pension funds have substantially increased their
activities in the past two years. Since January of this year alone,
investment activity in the agricultural sector has risen by a quarter
at the CHX, and, according to the Chicago firm Cole Partners,
involvement by hedge funds in the raw material sector has trebled in
the past two years to reach a total of $55 billion.

Large-scale investors such as hedge and pension funds buy futures
shares in basic goods and foodstuffs to be delivered at a fixed date
in the future. When the price of the commodity rises significantly
between the time of the investment and the time of delivery, the
investor is able to take home a large profit.

In light of the current food crisis, substantial returns of profit
are guaranteed. According to CHX figures, wheat futures (for delivery
in December) are expected to rise by at least 73 percent, soybeans by
52 percent, and soy oil by 44 percent.

Major ecological disasters, such as the recent drought in Australia,
which hit food production and drive up basic commodity prices, are
good news for the corporate investor.

Substantially reduced harvests in Australia and Canada this year have
led to soaring wheat prices. Deutsche Bank has estimated that the
price for corn will double, while the price for wheat will rise by 80
percent in the short term.

Such ecological disasters, which can ruin ordinary farmers and mean
poverty for millions through increased food prices, are an aspect of
the inefficiency of the raw materials market referred to above,
which currently makes soft commodities such an attractive prospect
for major speculators.

Deadly greed

An article headlined Deadly Greed in the current edition of the
German weekly Der Spiegel gives some details of the activities of
hedge funds in food market speculation. The magazine cites the
example of the hedge fund Ospraie, which is generally regarded as the
biggest of the management funds currently dealing in basic foodstuffs.

The manager of the fund, Dwight Anderson, is nicknamed the raw
materials king. Already, in the summer of 2006, Anderson was
recommending the extraordinary profitability of agricultural crops
to his shareholders. While Ospraie is reluctant to publicise its
profit levels from speculation in basic commodities, a leading German
investor is less reticent.

Andreas Gr|newald started up his M|nchner Investment Club (MIC) in
1989 with seed capital equal to just 15,000. MIC now controls a
volume of 50 million, of which 15 million is from investment in raw
materials.

According to Gr|newald, Raw materials are the mega-trend of the
decade, and his company intends to intensify its involvement in both
water and agricultural stocks. MIC investment in wheat alone has
already yielded profit levels of 93 percent for the 2,500 members of
the club.

The Spiegel article points out that MIC and its members give little
thought to the catastrophic consequences of their speculative
investment policy for undeveloped countries. Most of our members are
rather passive and orientated to profit, Gr|newald notes.

MIC, with its 50 million, is a minor player compared to the finance
giant ABN Amro, which recently acquired a unique certificate allowing
it to speculate on behalf of smaller investors on the CHX.

In the wake of the hunger revolts that took place a few weeks ago,
ABN Amro put out a prospectus noting that India has enforced a ban on
exports of rice, which, together with poor harvests in a number of
countries, has led to a worldwide decline in rice reserves. Now,
ABN Amro notes in its prospectus, it is possible for the first time
to have a share in the number one foodstuff in Asia.

According to the Spiegel report, those responding to the ABN Amro
appeal were able to realise a 20 percent rate of profit in the space
of three weeksa period that saw a huge increase in investment in
rice in Chicago and other major centres.

Biofuel investment

Another particularly lucrative investment sector contributing
substantially to the current global food crisis is biofuels.
Initially championed as a means of protecting the environment,
biofuels have become increasingly identified by big business as a
profitable alternative to increasingly expensive oil. Within the
space of a few years, biofuel has become a booming private industry
capable of generating large rates of profit.

Huge tracts of land across the planet have in recent years been
switched from food crops to the production of ethanol or biofuel,
aimed primarily as a supplement to oil-based gasoline. Next year, the
use of US corn for ethanol is forecast to rise to 114 million tonnes
nearly a third of the entire projected US crop.

In the words of Jean Ziegler, the United Nations special rapporteur
on the right to food, the switch to biofuels at the expense of
traditional forms of agriculture is nothing less than a crime
against humanity.

Although maize production worldwide is growing, the increase is being
more than absorbed by biofuel diversification. According to the World
Bank, global maize production increased by 51 million tonnes between
2004 and 2007. During that time, biofuel production in the US alone
(mostly ethanol) rose by 50 million tonnes, absorbing almost the
entire global increase.

Subsidised by the US government, American farmers have diverted fully
30 percent of corn production into the ethanol scheme, driving up the
cost of other, more expensive, grains that are being bought as
substitutes for animal feed.

The European Union, India, Brazil and China all have their own
targets to increase biofuels. The EU has declared that by 2010, 5.75
percent of all gasoline sold to motorists in Europe must stem from
biofuel production. This month, a UK law enforced a mandatory mix of
2.5 percent biofuel in gasoline sold to motorists. A similar law
stipulating a staggered 10 percent increase in biofuel share in
gasoline was recently struck down in Germany following opposition
from the auto industry, as well as ordinary car owners who would be
forced to buy new cars to accommodate the new fuel.

In addition to the rapidly rising price of basic commodities as a
result of the decreased production of grains for food purposes, the
switch to crop production of biofuels has served to orient food
prices to the high price of fuel. An equivalence is emerging between
the price of food and the price of oil.

According to Josette Sheeran of the World Food Programme: We are
seeing food in many places in the world priced at fuel levels, with
increasing quantities of food being bought by energy markets for
biofuels.

With oil topping $100 a barrel, the biofuel sector is currently
regarded as a potential source of huge returns for investors. The
drive for maximum profits by the biofuels sector was summed up in the
advertisement for a congress held in 2006, which declared:

Biofuels Finance and Investment World is Europes definitive
investor congress focusing exclusively on the value chain evolving
around the new biofuels economy. Investors and financial institutions
will gather with key industry stakeholders to discuss future
investment opportunities, the risks and areas with huge potential for
profit.

The April 22 edition of Money Week recommends that investors stung by
the subprime crisis switch their funds to the lucrative biofuels
market. Money Week sides with Fortune magazine in identifying the oil
multinational Royal Dutch Shell group as a guarantor of good returns:
We love it because it makes huge profits and is very cheap, but
apparently it also has a large stake in Iogen, a Canadian firm with
an exciting-sounding potential breakthrough in ethanol technology.