Author Fred Pearce discovers what’s really behind the fluctuating price tags on some of our favorite foods.
In The Land Grabbers (Beacon Press, 2012), Fred Pearce travels across the globe to investigate the growing trend of land grabbing, detailing how foreign investors are purchasing or leasing substantial plots of land in developing countries in order to produce and secure goods (such as food and biofuels) for their own uses. In doing so, Pearce uncovers some of the most profound ethical, environmental, economic, and social issues in the world today. This book explores how the world’s richest countries, corporations, and individuals are buying up our hungry, crowded world. The following excerpt is from Chapter 2, “Chicago, U.S.A.: The Price of Food.”
In the visitors’ center of the Chicago Board of Trade, you can play the markets. Nominate yourself as a trader, and for two minutes you buy and sell a commodity. Mine was timber, but it could as well have been corn, pork bellies, or soy. The idea is to make your trades, as a moving graph on the display in front of you rolls out price changes, in response to news headlines broadcast from a speaker.
I was mesmerized. I didn’t give a thought to the logged landscapes and dislocated lives I was causing as I bought and sold. I didn’t even listen much to the news of bumper harvests, consumer booms, or natural disasters. I only knew dimly how these events might influence prices. It was the chase I loved. I just looked at the price graph. I bought as prices bounced off a bottom and looked like they were recovering. I sold as they came off a peak. It worked. After my two minutes of trading, the screen said I had come out $180 up. I felt like a successful speculator.
The Chicago Board of Trade’s 600-foot-tall art deco building at the foot of LaSalle Street, with its marble floors and gleaming mirrors, is a monument to markets and what they can achieve. Before playing the trading game, I had been reading the PR. Since its establishment in 1848 to serve the prairies of the American Midwest, the institution has been the world’s premier trading house for corn and the other grains that feed the world. This is where they invented the futures market. In 1851, the first “forward contract” for 3,000 bushels of corn was made. The idea was to allow farmers to sell their crops ahead of time, ensuring their income whatever the weather. The forward contracts also gave them collateral to invest in seeds, fertilizer, or equipment.
CBOT prospered. It had the largest trading floor in the world, covering 60,000 square feet. Ticker tape was invented here to speed news of price changes around the world. The first skyscrapers were built in Chicago in the 1880s, and ticker-tape parades were held in the LaSalle Street “canyon.” Overseeing it all today is a 30-foot aluminum statue of Ceres, the Roman goddess of grain crops, perched on the roof of the CBOT building, waving a sheaf of wheat and a bag of corn.
Some trades, like rye and potato futures, have disappeared. Others, like soybeans and ethanol, have replaced them. CBOT has a derivatives exchange, where they even buy and sell weather futures. On the trading floor, boards with chalked-up prices have been replaced by electronic flashing numbers in red and yellow and green. The traditional hand signals of the traders (palms out for sellers and palms in for buyers) are augmented, but not replaced, by headsets and microphones.
The exchange retains its noble ambitions. “The CBOT is committed to operating a global marketplace for risk management and price discovery,” its mission statement says. Or as the display boards in the visitors’ center put it, “to bringing buyers and sellers together to ensure a fair price, create a more stable market, and ultimately a better price for your morning bowl of corn flakes.” Books in the foyer have titles like My Word Is My Bond—Voices from inside the Chicago Board of Trade.
A more stable market? A lower price for consumers? Was that what I was creating as I played the trading game? Did my buying and selling bring down prices, reduce risk, and keep a box of cornflakes cheap? Placing my bets in the visitors’ center felt the way it looked on the trading floor—like speculating in a market to make a profit. It also felt more like what has been going on in the real world in the past five years, as market prices for corn and rice, vegetable oil and coffee, wheat and sugar have yo-yoed like the stakes in some demented game. Perhaps I had misunderstood the hidden hand of the market, and my own hidden altruism? I hoped to find out more in the displays about the illustrious history of CBOT. But, strange to say, the timeline stopped just before some of the biggest events in this place’s history—the 2008 food price spike, the subsequent crash following the credit crunch, and the new surge in prices that was roaring as I toured the exchange in late 2010.
I left confused and decided to go for a McDonald’s. I figured that, even more than the bowl of corn flakes, a Big Mac was now the ultimate modern consumer expression of the trading I had just watched. But, outside the exchange, my eye was caught by Harper’s magazine on a newsstand. The cover story was titled “The Food Bubble—How Goldman Sachs and Wall Street Starved Millions and Got Away with It.” I read it over my burger. This was food for the brain. I was filled with a sense of recognition. This, perhaps, was what I had really been doing when I played the commodities game.
They first noticed the food price bubble in early 2007 in Mexico. The price of tortillas, the staple food of the Mexican poor, quadrupled in two months. Around seventy thousand Mexicans marched through the capital in protest, waving the corn flatbreads as they went. Angry mobs of housewives besieged President Felipe Calderón.
In subsequent months, there were food riots across North and West Africa—in Cameroon, where forty people died; in Burkina Faso, Senegal, Guinea, Mozambique, Mauritania, Morocco, and Ivory Coast. For the world’s poorest people in the poorest countries, food is by far the biggest household expense, taking up to 80 percent of income. Those who ate rice, or bread made from wheat, or tortillas made from corn, seemed equally affected. They were hungry, and angry.
In Egypt, the world’s largest wheat importer, bread prices tripled. There were all-night queues outside bakeries. As we shall see later, some Arab analysts say this was the beginning of the anger that brought down Hosni Mubarak three years later. In the Philippines, the world’s largest rice importer, rice prices doubled. In Bangladesh, hundreds of thousands of women working for a dollar a day in the garment sweatshops of Dhaka put aside their sewing machines to protest.
In those panicky months, fears of long-term food shortages returned for the first time in almost half a century. It was the moment when people realized that markets might not always deliver their daily bread. In the Gulf, the authorities began hoarding food. Oman bought up two years’ rice reserves and put them into warehouses. Even rich European countries began to wonder whether they would always be able to buy the food their people needed. British food secretary Hilary Benn said that “with rising prices and increasing demand across the globe, we cannot take our food supply for granted.” In a call for food self-sufficiency not seen since the Second World War, when besieged Britons were urged to “dig for victory,” his government proposed encouraging consumption of more homegrown food.
The UN began to talk about a new kind of famine—urban famine. In the past, it was people in the countryside who died when their crops failed. Now, in the cities, “we are seeing more urban hunger than ever before. We are seeing food on the shelves but people unable to afford it,” said Josette Sheeran, the director of the World Food Programme. When rural people starve, they head for relief stations. But when urban people starve, they start riots. In April 2008, UN peacekeepers in Haiti fired at people looting shops in Port au Prince. Four died. Days later, the prime minister was toppled. The UN’s emergency relief coordinator John Holmes warned that the rising price of food threatened global security.
What had happened? What had caused the simultaneous surges in prices of corn, wheat, and rice, the world’s three major grains? Some said the population bomb was finally exploding. In the 1960s, with world population doubling in a generation, mega-famines seemed inevitable. “The battle to feed the world is over,” said Paul Ehrlich in his book The Population Bomb. “Billions will die in the 1980s.” This Malthusian nightmare was prevented by the green revolution. A major investment in new high-yield varieties of all the major grain crops doubled food production even faster than human numbers. But that led to complacency. As granaries filled, world grain prices slumped for a generation, agricultural research slackened, and foreign aid spent on agriculture slumped from a fifth of total aid to less than 3 percent. The price spike looked like the reckoning.
There were other long-term drivers, as well, such as the growing diversion of grain to feed livestock and supply the rising demand for meat in developing countries like China. A cow needs to consume eight calories of grain to produce one calorie of meat. By the start of the twenty-first century, more than a third of the world’s grain was feeding livestock rather than people. Rising demand, low prices, and slackening investment eventually brought down world grain reserves. Rice stores were emptier than at any time since 1976. Wheat stocks were the lowest in twenty years—and half of the world’s wheat stocks turned out to be in China.
But these long-term trends were accentuated by more immediate market influences. Corn stocks were being consumed by a boom in biofuels. In 2007, the United States earmarked more than a third of its corn harvest to making ethanol for the nation’s automobiles, diverting surpluses from export markets. Wheat was hit by droughts. Maybe this was climate change kicking in. In any event, poor rains hit two major wheat-exporting countries. Shipments from Australia fell by 60 percent, from Ukraine by 75 percent, pushing up demand for U.S. wheat in particular.
What of rice? Its prices rose more than either corn or wheat. Rice production around the world had flatlined for a decade, but so had consumption, because many Asians had been eating less rice and more bread and meat. However, when bread prices surged at the end of 2007, many Asians switched back to rice, pushing up demand in a tight market. Then oil prices soared to almost $150 a barrel during mid-2008, feeding into food prices through the cost of everything from chemical fertilizer to fueling tractors to getting food to market.
The world food summit met in June 2008 at the UN Food and Agriculture Organization’s Rome headquarters. By then, the International Monetary Fund had recorded an 80 percent rise in the world’s food prices since the start of 2007. Nations agreed with the World Bank that biofuels were mostly to blame, that the disruption it caused to the corn market had spilled over into the wider grain market. But there were doubts. For while biofuels certainly pushed up international demand for grains, overall the global harvest for the big three grains also broke records in 2007. At 2.1 billion tons, it was 5 percent up on the previous year.
It didn’t seem obvious that supply and demand in the grain markets could have caused the price surge. So did something else trigger it, by amplifying modest price signals into a full-blown crisis?
World Bank president Robert Zoellick pointed the finger at old-fashioned protectionism. As prices rose, major food-exporting countries such as Brazil, Thailand, Vietnam, Pakistan, and India had been understandably anxious to keep feeding their own people, and to maintain low prices at home. So they shut their ports and banned some food exports—pushing international prices yet higher. This was the worst possible response, Zoellick said. What was needed was freer markets.
For a while it looked like Zoellick was right. The 2008 grain harvest turned out to set a record. In the second half of 2008, food prices fell back. Longtime observers of commodity markets swiftly concluded that 2007–08 was a once-in-a-generation blip. Don’t worry, they said. High prices encourage more planting, the market is correcting itself, and all will be well. At a conference on the future of world agriculture I attended in London in June 2010, Ron Trostle of the U.S. Department of Agriculture echoed the common view of experts that “this kind of price spike happens only once in every three decades or so. It’s highly unlikely a price spike will be repeated especially in the next four to five years.” Around the same time, the UN’s food trade guru Hafez Ghanem insisted that “the market fundamentals are sound and very different from 2007–2008 . . . We don’t believe we are headed for a new food crisis.”
But by the end of the year, prices were surging all over again.
So if the “market fundamentals” were sound, what was the problem? Perhaps it was the markets themselves. For a while, some economists had been arguing that the freer markets that Zoellick saw as the solution to high food prices were in fact part of the problem. They were saying that speculation had played a big role in the price spikes of 2008. A group of eighteen leading U.S. economists wrote to the U.S. Congress saying that deregulation of financial markets had “encouraged hyper-speculative activities by market players who had no interest in the underlying physical commodities being traded. This produced severe price swings.”
This talk was sacrilege, and remains so in many quarters. But read the words of the traders themselves rather than the economic theorists, and there is a lot of support for the view that it was speculators that turned a supply-and-demand problem into a full-blown crisis, one in which—as the UN’s special rapporteur on the right to food, Olivier De Schutter, noted in 2011—an extra 40 million people have been made chronically hungry.
The investment bank Goldman Sachs concluded in a research report in 2008 that “without question, increased fund flow into commodities has boosted prices.” Its take was that the speculators were simply anticipating events in the real world. But to many it looked more like the speculators were creating those events. And to some that looked unacceptable. In the summer of 2008, financier George Soros told the German magazine Stern that speculators were distorting prices in a way that “is like hoarding food in the midst of a famine.” At U.S. Senate hearings around the same time, hedge fund manager Michael Masters said: “It’s not like real estate and stocks—when food prices double, people starve.”
There was a new narrative emerging. It said that food futures—previously a rather humdrum business that helped fund farmers and keep prices stable—had been taken over by speculators in the finance markets, and in the process it had turned into a dangerous beast that bankrupted farmers and caused worsening price volatility. It said that the same kinds of forces that had overwhelmed the world’s banks in 2008 were disrupting food markets too. And there was an extra wrinkle. It appeared that, as the banking crisis escalated, investors seeking a safe haven were buying into commodities and, by 2010, were driving up food prices once more.
Excerpted from The Land Grabbers: The New Fight Over Who Owns the Earth, by Fred Pearce (Beacon Press, 2012). Reprinted with permission from Beacon Press.