The threat of rising food prices

by Deborah Doane 
from NewStatesman
11 January 2011

While inertia continues to define the coalition government's approach to banking regulation, the bankers are happily enjoying yet another free-for-all spending splurge – and fears are emerging of a new bubble. This time, it's a commodity bubble, similar to the one that led to food riots around the world in 2007 and 2008.

In case you hadn't noticed, food prices are at an all-time high: the latest figures show food price inflation at 5.5 per cent, outpacing the overall inflation figure of 3.3 per cent. You'll be paying as much as 25 per cent more for your regular cuppa as tea prices rise; and we already saw the cost of our Christmas turkey go up by more than £3 before Christmas, due to the doubling in feed costs in 2010.

World Bank: ‘Speculation in food behind price increases’

from Spectrezine
15 September 2010

A recent World Bank report reveals that speculation was a major cause of the huge increase in food prices during 2007 and 2008. While banks raked in huge profits, hundreds of millions of people, most but by no means all of them in developing countries, suffered hunger as a result of rising prices.

Jean Ziegler, special rapporteur for food rights for the UN, called the food crisis at the time 'silent mass murder', saying that it was entirely attributable to human activity.

As Dutch Socialist Party MP and development spokesman Ewout Irrgang says, “Human activity could also put an end to the hunger casino. Re-regulation of agriculture is therefore vital. Speculators must be banished from the food market. This could be achieved, for example, by a ban on speculative financial instruments in food commodities where there is no over-riding interest, or through limits on the amounts that speculators can gamble on food prices. Also worthy of consideration are the introduction of a tax to put a brake on speculative financial operations, and the regulation of the futures market.”

Destroying African Agriculture

A yound protestor in Jakarta, Indonesia, calling for the World Bank to be shutdown. All round the globe the World Bank and IMF have been responsible for destroying local food economies.

by Walden Bello

from Countercurrents

07 June, 2008

Biofuel production is certainly one of the culprits in the current global food crisis. But while the diversion of corn from food to biofuel feedstock has been a factor in food prices shooting up, the more primordial problem has been the conversion of economies that are largely food-self-sufficient into chronic food importers. Here the World Bank, International Monetary Fund (IMF), and the World Trade Organization (WTO) figure as much more important villains.

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Can the whole world be fed?

from US Socialist Worker 23 May, 2008 The depth of the global food crisis is best expressed by what poor people are eating to survive. In Burundi, it is farine noir, a mixture of black flour and moldy cassava. In Somalia, a thin gruel made from mashed thorn-tree branches called jerrin. In Haiti, it is a biscuit made of yellow dirt. Food inflation has sparked protests in Egypt, Haiti, Mexico and elsewhere. Tens of thousands protested earlier this month in Mogadishu, as the price of a corn meal rose twofold in four months. And while the crisis seemed to come out of nowhere, the reality of hunger is a regular feature of life for millions of people. The United Nations' Food and Agriculture Organization (FAO) estimates that 854 million people worldwide are undernourished. Hunger isn't simply the result of unpredictable incidents like the cyclone that struck Myanmar. In most cases, millions teeter on the edge of survival long before the natural disasters hit. According to UN Millennium Project Web site, of the 300 million children who go to bed hungry every day, only "8 percent are victims of famine or other emergency situations. More than 90 percent are suffering long-term malnourishment and micronutrient deficiency."

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Destroying African Agriculture

by Walden Bello from Countercurrents 07 June, 2008 Biofuel production is certainly one of the culprits in the current global food crisis. But while the diversion of corn from food to biofuel feedstock has been a factor in food prices shooting up, the more primordial problem has been the conversion of economies that are largely food-self-sufficient into chronic food importers. Here the World Bank, International Monetary Fund (IMF), and the World Trade Organization (WTO) figure as much more important villains. Whether in Latin America, Asia, or Africa, the story has been the same: the destabilization of peasant producers by a one-two punch of IMF-World Bank structural adjustment programs that gutted government investment in the countryside followed by the massive influx of subsidized U.S. and European Union agricultural imports after the WTO’s Agreement on Agriculture pried open markets. African agriculture is a case study of how doctrinaire economics serving corporate interests can destroy a whole continent’s productive base. From Exporter to Importer At the time of decolonization in the 1960s, Africa was not just self-sufficient in food but was actually a net food exporter, its exports averaging 1.3 million tons a year between 1966-70. Today, the continent imports 25% of its food, with almost every country being a net food importer. Hunger and famine have become recurrent phenomena, with the last three years alone seeing food emergencies break out in the Horn of Africa, the Sahel, Southern Africa, and Central Africa. Agriculture is in deep crisis, and the causes are many, including civil wars and the spread of HIV-AIDS. However, a very important part of the explanation was the phasing out of government controls and support mechanisms under the structural adjustment programs to which most African countries were subjected as the price for getting IMF and World Bank assistance to service their external debt. Instead of triggering a virtuous spiral of growth and prosperity, structural adjustment saddled Africa with low investment, increased unemployment, reduced social spending, reduced consumption, and low output, all combining to create a vicious cycle of stagnation and decline. Lifting price controls on fertilizers while simultaneously cutting back on agricultural credit systems simply led to reduced applications, lower yields, and lower investment. One would have expected the non-economist to predict this outcome, which was screened out by the Bank and Fund’s free-market paradigm. Moreover, reality refused to conform to the doctrinal expectation that the withdrawal of the state would pave the way for the market and private sector to dynamize agriculture. Instead, the private sector believed that reducing state expenditures created more risk and failed to step into the breach. In country after country, the predictions of neoliberal doctrine yielded precisely the opposite: the departure of the state “crowded out” rather than “crowded in” private investment. In those instances where private traders did come in to replace the state, an Oxfam report noted, “they have sometimes done so on highly unfavorable terms for poor farmers,” leaving “farmers more food insecure, and governments reliant on unpredictable aid flows.” The usually pro-private sector Economist agreed, admitting that “many of the private firms brought in to replace state researchers turned out to be rent-seeking monopolists.” What support the government was allowed to muster was channeled by the Bank to export agriculture – to generate the foreign exchange earnings that the state needed to service its debt to the Bank and the Fund. But, as in Ethiopia during the famine of the early 1980s, this led to the dedication of good land to export crops, with food crops forced into more and more unsuitable soil, thus exacerbating food insecurity. Moreover, the Bank’s encouraging several economies undergoing adjustment to focus on export production of the same crops simultaneously often led to overproduction that then triggered a price collapse in international markets. For instance, the very success of Ghana’s program to expand cocoa production triggered a 48% drop in the international price of cocoa between 1986 and 1989, threatening, as one account put it, “to increase the vulnerability of the entire economy to the vagaries of the cocoa market.” 1 In 2002-2003, a collapse in coffee prices contributed to another food emergency in Ethiopia. As in many other regions, structural adjustment in Africa was not simply underinvestment but state divestment. But there was one major difference. In Latin America and Asia, the Bank and Fund confined themselves for the most part to macromanagement, or supervising the dismantling of the state’s economic role from above. These institutions left the dirty details of implementation to the state bureaucracies. In Africa, where they dealt with much weaker governments, the Bank and Fund micromanaged such decisions as how fast subsidies should be phased out, how many civil servants had to be fired, or even, as in the case of Malawi, how much of the country’s grain reserve should be sold and to whom. In other words, Bank and IMF resident proconsuls reached into the very innards of the state’s involvement in the agricultural economy to rip it up. The Role of Trade Compounding the negative impact of adjustment were unfair trade practices on the part of the EU and the United States. Trade liberalization allowed low-priced subsidized EU beef to enter and drive many West African and South African cattle raisers to ruin. With their subsidies legitimized by the WTO’s Agreement on Agriculture, U.S. cotton growers offloaded their cotton on world markets at 20-55% of the cost of production, bankrupting West African and Central African cotton farmers in the process.2 These dismal outcomes were not accidental. As then-U.S. Agriculture Secretary John Block put it at the start of the Uruguay Round of trade negotiations in 1986, “the idea that developing countries should feed themselves is an anachronism from a bygone era. They could better ensure their food security by relying on U.S. agricultural products, which are available, in most cases at lower cost.”3 What Block did not say was that the lower cost of U.S. products stemmed from subsidies that were becoming more massive each year, despite the fact that the WTO was supposed to phase out all forms of subsidy. From $367 billion in 1995, the first year of the WTO, the total amount of agricultural subsidies provided by developed country governments rose to $388 billion in 2004. Subsidies now account for 40% of the value of agricultural production in the European Union (EU) and 25% in the United States. The social consequences of structural adjustment cum agricultural dumping were predictable. According to Oxfam, the number of Africans living on less than a dollar a day more than doubled to 313 million people between 1981 and 2001 – or 46% of the whole continent. The role of structural adjustment in creating poverty, as well as severely weakening the continent’s agricultural base and consolidating import dependency, was hard to deny. As the World Bank’s chief economist for Africa admitted, “We did not think that the human costs of these programs could be so great, and the economic gains would be so slow in coming.”4 That was, however, a rare moment of candor. What was especially disturbing was that, as Oxford University political economist Ngaire Woods pointed out, the “seeming blindness of the Fund and Bank to the failure of their approach to sub-Saharan Africa persisted even as the studies of the IMF and the World Bank themselves failed to elicit positive investment effects.”5 The Case of Malawi This stubbornness led to tragedy in Malawi. It was a tragedy preceded by success. In 1998 and 1999, the government initiated a program to give each smallholder family a “starter pack” of free fertilizers and seeds. This followed several years of successful experimentation in which the packs were provided only to the poorest families. The result was a national surplus of corn. What came after, however, is a story that will be enshrined as a classic case study in a future book on the 10 greatest blunders of neoliberal economics. The World Bank and other aid donors forced the drastic scaling down and eventual scrapping of the program, arguing that the subsidy distorted trade. Without the free packs, food output plummeted. In the meantime, the IMF insisted that the government sell off a large portion of its strategic grain reserves to enable the food reserve agency to settle its commercial debts. The government complied. When the crisis in food production turned into a famine in 2001-2002, there were hardly any reserves left to rush to the countryside. About 1,500 people perished. The IMF, however, was unrepentant; in fact, it suspended its disbursements on an adjustment program with the government on the grounds that “the parastatal sector will continue to pose risks to the successful implementation of the 2002/03 budget. Government interventions in the food and other agricultural markets…crowd out more productive spending.” When an even worse food crisis developed in 2005, the government finally had enough of the Bank and IMF’s institutionalized stupidity. A new president reintroduced the fertilizer subsidy program, enabling two million households to buy fertilizer at a third of the retail price and seeds at a discount. The results: bumper harvests for two years in a row, a surplus of one million tons of maize, and the country transformed into a supplier of corn to other countries in Southern Africa. But the World Bank, like its sister agency, still stubbornly clung to the discredited doctrine. As the Bank’s country director told the Toronto Globe and Mail, “All those farmers who begged, borrowed, and stole to buy extra fertilizer last year are now looking at that decision and rethinking it. The lower the maize price, the better for food security but worse for market development.” Fleeing Failure Malawi’s defiance of the World Bank would probably have been an act of heroic but futile resistance a decade ago. The environment is different today. Owing to the absence of any clear case of success, structural adjustment has been widely discredited throughout Africa. Even some donor governments that once subscribed to it have distanced themselves from the Bank, the most prominent case being the official British aid agency that co-funded the latest subsidized fertilizer program in Malawi. Perhaps the motivation of these institutions is to prevent the further erosion of their diminishing influence in the continent through association with a failed approach and unpopular institutions. At the same time, they are certainly aware that Chinese aid is emerging as an alternative to the conditionalities of the World Bank, IMF, and Western government aid programs. Beyond Africa, even former supporters of adjustment, like the International Food Policy Research Institute (IFPRI) in Washington and the rabidly neoliberal Economist acknowledged that the state’s abdication from agriculture was a mistake. In a recent commentary on the rise of food prices, for instance, IFPRI asserted that “rural investments have been sorely neglected in recent decades,” and says that it is time for “developing country governments [to] increase their medium- and long-term investments in agricultural research and extension, rural infrastructure, and market access for small farmers.” At the same time, the Bank and IMF’s espousal of free trade came under attack from the heart of the economics establishment itself, with a panel of luminaries headed by Princeton’s Angus Deaton accusing the Bank’s research department of being biased and “selective” in its research and presentation of data. As the old saying goes, success has a thousand parents and failure is an orphan. Unable to deny the obvious, the Bank has finally acknowledged that the whole structural adjustment enterprise was a mistake, though it smuggled this concession into the middle of the 2008 World Development Report, perhaps in the hope that it would not attract too much attention. Nevertheless, it was a damning admission: Structural adjustment in the 1980’s dismantled the elaborate system of public agencies that provided farmers with access to land, credit, insurance inputs, and cooperative organization. The expectation was that removing the state would free the market for private actors to take over these functions—reducing their costs, improving their quality, and eliminating their regressive bias. Too often, that didn’t happen. In some places, the state’s withdrawal was tentative at best, limiting private entry. Elsewhere, the private sector emerged only slowly and partially—mainly serving commercial farmers but leaving smallholders exposed to extensive market failures, high transaction costs and risks, and service gaps. Incomplete markets and institutional gaps impose huge costs in forgone growth and welfare losses for smallholders, threatening their competitiveness and, in many cases, their survival. In sum, biofuel production did not create but only exacerbated the global food crisis. The crisis had been building up for years, as policies promoted by the World Bank, IMF, and WTO systematically discouraged food self-sufficiency and encouraged food importation by destroying the local productive base of smallholder agriculture. Throughout Africa and the global South, these institutions and the policies they promoted are today thoroughly discredited. But whether the damage they have caused can be undone in time to avert more catastrophic consequences than we are now experiencing remains to be seen. Walden Bello is a senior analyst at Focus on the Global South, a program of Chulalongkorn University's Social Research Institute, and a columnist for Foreign Policy In Focus (www.fpif.org). Sources 1. Charles Abugre, “Behind Crowded Shelves: as Assessment of Ghana’s Structural Adjustment Experiences, 1983-1991,” (San Francisco: food First, 1993), p. 87. 2. “Trade Talks Round Going Nowhere sans Progress in Farm Reform,” Business World (Phil), Sept. 8, 2003, p. 15 3. Quoted in “Cakes and Caviar: the Dunkel Draft and Third World Agriculture,” Ecologist, Vol. 23, No. 6 (Nov-Dec 1993), p. 220 4. Morris Miller, Debt and the Environment: Converging Crisis (New York: UN, 1991), p. 70. 5. Ngaire Woods, The Globalizers: the IMF, the World Bank, and their Borrowers (Thaca: Cornell University Press, 2006), p. 158. Copyright © 2008, Institute for Policy Studies.

Can the whole world be fed?

from US Socialist Worker 23 May, 2008

The depth of the global food crisis is best expressed by what poor people are eating to survive. In Burundi, it is farine noir, a mixture of black flour and moldy cassava. In Somalia, a thin gruel made from mashed thorn-tree branches called jerrin. In Haiti, it is a biscuit made of yellow dirt. Food inflation has sparked protests in Egypt, Haiti, Mexico and elsewhere. Tens of thousands protested earlier this month in Mogadishu, as the price of a corn meal rose twofold in four months.

And while the crisis seemed to come out of nowhere, the reality of hunger is a regular feature of life for millions of people. The United Nations' Food and Agriculture Organization (FAO) estimates that 854 million people worldwide are undernourished.

Hunger isn't simply the result of unpredictable incidents like the cyclone that struck Myanmar. In most cases, millions teeter on the edge of survival long before the natural disasters hit. According to UN Millennium Project Web site, of the 300 million children who go to bed hungry every day, only "8 percent are victims of famine or other emergency situations. More than 90 percent are suffering long-term malnourishment and micronutrient deficiency."

The technology and know - how exist to make our capacity to produce food even greater - if this were made a priority. As part of a recent series on the global food crisis, the Washington Post described the damage being done by gnat-sized insects called "brown plant hoppers." Billions of them are destroying rice crops in East Asia and putting millions of poor people at risk of going hungry.

The threat could easily be eliminated with the creation of rice strains resistant to this pest, but that hasn't happened -because funding for research projects has been cut. The International Rice Research Institute used to have five entomologists, or insect experts, overseeing a staff of 200 in the 1980s. Now it has one entomologist, with a staff of eight.

The world's wealthiest countries and their international loan organizations, like the World Bank, have cut money for agricultural research programs. According to the Post, "Adjusting for inflation and exchange rates, the wealthy countries, as a group, cut such donations roughly in half from 1980 to 2006, to $2.8 billion a year from $6 billion. The United States cut its support for agriculture in poor countries to $624 million from $2.3 billion in that period."

Searching for answers to the crisis, some people argue that "there simply isn't enough to go around," or that there are "too many" people to feed in a world of limited resources. This argument has been around for many decades. In effect, it tries to blame starvation on the starving themselves. And it simply isn't true.

"The food crisis appeared to explode overnight, reinforcing fears that there are just too many people in the world," wrote Eric Holt-Giménez and Loren Peabody of Food First. "But according to the FAO, with record grain harvests in 2007, there is more than enough food in the world to feed everyone--at least 1.5 times current demand. In fact, over the last 20 years, food production has risen steadily at over 2.0 percent a year, while the rate of population growth has dropped to 1.14 percent a year. Population is not outstripping food supply."

The problem isn't that there isn't enough food. The problem is that the people who need it are too poor to buy it. This is the case around the globe, including some of the wealthiest countries in the world.

In the U.S., food pantries report being stretched to the breaking point because more working people are turning to them when their paycheck doesn't make it. Demand is up 15 to 20 percent over last year, and the pantries are serving "folks who get up and go to work every day," Bill Bolling, founder of the Atlanta Community Food Bank, told USA Today. "That's remarkably different than the profile of who we've served through the years.

This flies in the face of the commonly held idea that average Americans and a culture of overconsumption and waste are eating up the world's resources.

Of course, examples abound of people who get much more than their fill, in elite hotels and restaurants around the globe -but they are a small fraction of the population. And when these parasites gorge themselves, they steal from the mouths of poor people everywhere -in less developed countries, but also in wealthy nations like the U.S.

The potential exists to eliminate hunger and malnutrition anywhere in the world. What stands in the way of our ability to feed each and every person is really the system we live under -capitalism.

The drive for profit at the heart of the system -where things like food, which should be viewed as a fundamental right, are seen as commodities to be bought and sold - is really the source of the problem. No amount of technology can overcome this fundamental fact.

Thus, during the Great Depression, while millions of poor and unemployed Americans went hungry, U.S. farmers were facing the exact opposite problem: They were producing too much food to keep prices from falling. So at the same time that millions of poor and unemployed people stood in breadlines for food assistance, food crops were being destroyed, because no profit could be made from giving it away.

As the author John Steinbeck wrote in the Grapes of Wrath:

The works of the roots of the vines, of the trees, must be destroyed to keep up the price, and this is the saddest, bitterest thing of all. Carloads of oranges dumped on the ground. The people came for miles to take the fruit, but this could not be. How would they buy oranges at 20 cents a dozen if they could drive out and pick them up?...A million people hungry, needing the fruit–and kerosene sprayed over the golden mountains...

There is a crime here that goes beyond denunciation. There is a sorrow here that weeping cannot symbolize. There is a failure here that topples all our success. The fertile earth, the straight tree rows, the sturdy trunks and the ripe fruit. And children dying of pellagra must die because a profit cannot be taken from an orange. And coroners must fill in the certificate - died of malnutrition -because the food must rot, must be forced to rot.

Capitalism is a chaotic system, where starvation can exist amid plenty, and where a disaster seems to loom around every corner. In Mexico, for example, the price of tortillas went up 60 percent last year. Increased demand for American farmers to divert corn for use in ethanol as opposed to corn for food was largely to blame for the skyrocketing prices of this Mexican stapl

But Walden Bello of Focus on the Global South asked an important question in a recent article: "How on earth did Mexicans, who live in the land where corn was domesticated, become dependent on U.S. imports in the first place?"

During the 1980s, in return for bailouts from the IMF and World Bank, Mexico was forced "liberalize" its trade policies, and this accelerated under the North American Free Trade Agreement. U.S. farm products flooded the Mexican market, and agribusiness giants like Cargill reaped huge profits. Mexican farmers couldn't possibly compete.

International "aid" is organized around the principle not of solving poverty but of making profits--and in the process, it usually leads to more suffering. In Ethiopia, the poverty "experts" at the World Bank forced the country to devote good land not to food crops, but to export crops to sell on the world market. As a result, the famine of the 1980s were made even worse.

These crises aren't aberrations, but are built into the system. A recent Time magazine article grudgingly commented, "The social theories of Karl Marx were long ago discarded as of little value, even to revolutionaries. But he did warn that capitalism had a tendency to generate its own crises." The Time article was titled "How Hunger Could Topple Regimes."

The current system and its warped priorities can't possibly accomplish something as important as feeding the world's people. It will take a society organized on a completely different basis to achieve this. If we could harness the resources wasted on the pursuit of profit--including the wars that our government funds around the globe -we could feed the world many times over.

For updated statistics on world hunger, visit the United Nations' Food and Agriculture Organization Web site. The FAO's report "State of Food Insecurity in the World" is available online. The Food First Web site also has useful articles and analyses.

World Hunger: Twelve Myths by Frances Moore Lappe, Joseph Collins, Peter Rosset and Luis Esparza is an authoritative examination of the policies and politics that cause hunger, as well as the misconceptions about "humanitarian" aid from advanced countries.

Gambling with the futures

by Petrino DiLeo from US Socialist Worker 19 May, 2008 A GLOBAL food crisis is taking place because of the skyrocketing cost of foodstuffs--sparking protests and rioting around the world. There are many causes of this crisis. One obvious one is the rising price of oil, which is increasing transportation and other costs for agricultural products. Another is profiteering on the part of the heavily subsidized agribusiness sector. Other causes include the increased use of corn in ethanol production, rather than for food, as well as the damaging effects of free trade on small farmers and changing consumption patterns. There is another force is at play, as well: speculators are driving up the prices of all commodities, including wheat, corn, soy, etc., because of intense trading on what are known as futures markets. Such markets were originally designed to help producers and users of commodities manage the risk of price fluctuations. But another aspect of futures trading has taken on greater prominence in recent years. Futures are also traded by individual investors and financial institutions, based on a gamble as to whether the price of the goods will rise or fall. Today, traders of exchange-traded funds, hedge funds and other speculators far outstrip the actual buyers and sellers of commodities. As a result, these speculators have generated a big demand for futures contracts, therefore helping send the prices of underlying commodities upward. Furthermore, futures markets, once heavily monitored by governments, have been--like most of the rest of the financial markets--systematically deregulated to the point that trading is going virtually unchecked. How do we understand what's going on with the futures market today? Here are some answers to questions about how futures function--specifically, futures in basic commodities--and what role they are playing in the current food crisis. What are futures? FUTURES ARE contracts in which one party agrees to buy or sell a certain commodity, such as a bushel of wheat or a barrel of oil, at a certain price at an agreed upon date in the future. Everything is spelled out in the contracts, including the quantity and quality of the commodity, the price per unit, and the date and method of delivery. The futures market is different from the "spot market," where buyers and sellers trade the same commodities, but in the present time. It helps to think of this as traders buying a service up front. In practice, people complete these sorts of transactions every day. For example, when you purchase an airline ticket, you are paying the company today for the right to travel on an agreed upon time in the future. Futures contracts are the same thing, except they typically involve companies buying and selling commodities in the future--oil, wheat, corn, soybeans, pork, cattle, butter, milk, gold, silver, etc. The practical benefit of futures contracts is that they help firms to lock in the prices of what they are buying or selling in advance. For example, airlines use futures contracts when buying jet fuel, rather than buying it on the so-called spot market. It helps both buyers and sellers to more accurately predict their operating costs and incomes. How are the prices determined? THIS IS where futures exchanges come into the picture. The largest futures exchange is the Chicago Board of Trade, which has been in operation since 1848. All futures contracts are registered at such exchanges, which then create the benchmarks for further contracts. For example, if a company agrees to buy 1,000 barrels of oil from another firm for delivery in June at $125 a barrel, the two parties report the contract to a futures exchange. This becomes a new standard price for oil futures. Another supplier could decide if they thought that price was too high (or too low) and make an offer to deliver 1,000 barrels at $125.50. If a buyer steps forward and accepts, this sets a new benchmark. Then another supplier could enter the picture and make the same calculation, or a different one. These trades happen over and over throughout the course of the day. Demands for futures contracts sends prices up. When demand falters, prices drop. What happens next is that at the end of every day, the two parties must settle up based on where the futures price of that commodity ended the day. Let's say Buyer A (known as the "long" position) and Seller B (known as the "short" position) agree to a futures contract in which Buyer A would buy 1,000 barrels of oil from Seller B on July 1 for $125 a barrel. On the next day, say the futures price increases to $130 a barrel. The Seller B has lost $5 per barrel because he is now obligated to sell at a price below the market. Buyer A has made $5 per barrel because the price he is obligated to pay is below the market. The Seller must pay the Buyer $5,000 ($5 times 1,000 barrels) to settle the account. These adjustments are made daily, depending on how the price of futures changes, until the contract expires, the goods are delivered and the final settlements are made. Therein lies another benefit for the actual traders in commodities. The futures markets enable buyers and sellers to hedge against--or cushion the impact of--pricing changes. Buyers and sellers could set up trades to minimize potential losses from rising and falling prices on spot markets through these hedges in the futures market. If prices fall after a contract is signed, a seller would be protected from lower prices on the spot market because he would be collecting income on existing futures contract. If prices rise, the seller would lose money on the futures contract, but could try to sell more in the spot market to make up the difference. In theory, futures contracts are meant to be a zero-sum hedge to protect against changes in prices. What's wrong with this picture? HISTORICALLY, FUTURES contracts were traded primarily between producers of commodities and consumers of commodities at large, regulated commodities exchanges. Most futures contracts eventually resulted in the actual delivery of a commodity on a set date. That's all changed in recent years. Now, the bulk of firms trading on futures exchanges are speculators with no intention of ever receiving delivery of the commodities they are trading. For example, for some crops, it might take only 10,000 contracts to satisfy the needs of buyers and sellers to hedge prices. However, the volume of wheat contracts from the beginning of the year through March 2008 was 5.7 million contracts. As well, contracts are usually wound down or rolled over without commodities ever being exchanged. Instead, traders make their profits simply through creating and exchanging contracts, and timing those moves to make the most of day-to-day price fluctuations on the futures markets. Plus, new, unregulated exchanges have emerged, so traders don't even have to report all of their activity. Thus, traders could make a trade on a public market and then make another on an unregulated market to balance or heighten the first trade. It used to be that all futures trading was monitored by the U.S. Commodities and Futures Trading Commission (CFTC). Created in 1974, the CFTC was built upon legislation passed in the 1920s and 1930s in response to speculation on grain futures prior to the Great Depression. However, the CFTC lost some of its oversight ability in 2000, thanks to legislation passed that makes it easier to trade in futures outside monitored exchanges (such as the Chicago Board of Trade and the New York Mercantile Exchange). How is this affecting food prices? THE PRICE of futures contracts is affected to some degree by prices in the present. For example, when the cyclone hit Myanmar, it wiped out some of the country's anticipated rice production and thus sent the price of rice and rice futures up. Similarly, when Nigerian rebels disrupt oil pipelines, this sends the price of oil futures up as it raises concerns about future deliveries. At the same time, if futures prices are going up and a gap develops with current spot market prices, this could lead buyers of commodities to hoard in the present--to take advantage of the lower current prices and avoid paying higher prices in the future. If, say, the price of oil futures is $125, but the price of oil on the spot market is only $115, more firms will buy oil today, thus putting upward pressure on the current price of oil. On the flip side, rising oil prices in the present can help push futures prices upwards. Thus, rising prices in either the spot market or the futures market could end up reinforcing each other and further exacerbate inflation. And there's more. There is mounting evidence that prices on futures markets are out of whack with what's happening in the real-world supply of the commodities being traded. All other things being equal, the prices of expiring futures contracts should converge with the pricing on spot markets on the date of expiration--that is, the price of oil in June should be pretty close to the price of oil futures contracts trading today that expire in June. But there are huge divergences developing. Why? Because there are too many investors chasing too few futures contracts, and this is creating demand for the underlying commodity that drives up the price of the commodity to be delivered in the future. Thus, according to AgResource Co., total index fund investment in corn, soybeans, wheat, cattle and hogs amounts to $47 billion, up from $10 billion just two years ago. Some of this is increase is to rising demand based on the boom in the world economy in the middle of this decade, as rising incomes in China, India and other developing countries spur greater consumption of foodstuffs. But the rising prices have encouraged speculators to move in as well. The situation has grown all the worse as other financial markets falter. With interest rates low, inflation on the increase and stock markets in turbulence, growing numbers of investors are turning to commodities futures market in search of returns. "There is a shortage of futures for sale amid an index fund business model for carrying long positions for extended periods," Richard J. Feltes, senior vice president and director of MF Global Research, wrote in a recent note. "Wall Street money flows in the long side of market exceed influence of short hedgers by many multiples... "The answer to the 'mystery' is that grain futures contracts for some have become investment securities--not hedging instruments that offset either cash inventories or future usage." What's the outcome of all of this? IN INDIA, the imbalances became so bad that the country last week moved to suspend futures trading in soybean oil, rubber, chickpeas and potatoes. This is an attempt by the government to reign in inflation. Chickpea futures jumped 89 percent in the past 12 months, while rubber rose 41 percent and soybean oil 21 percent. The Indian government already suspended trading on rice and wheat futures last year. It's possible that other nations could follow suit with similar measures. It's also possible that in the U.S., regulators could try to limit the amount of over-the-counter trading occurring on unregulated markets or expand the powers of the CFTC. There have been hearings before the CFTC in recent weeks exploring the link between futures markets and the skyrocketing costs of fuel and food. However, none of that is likely to happen very quickly, since there is little agreement as to how big a role futures markets are playing in the overall crisis. Meanwhile, this factor in the global food crisis will continue to have an effect. For more background on the worsening state of the economy, including the roots of the crisis in the financial markets, see Joel Geier's "More than a recession: An economic model unravels," published in the International Socialist Review. In a previous ISR article, "Housing bubble deflates," Petrino DiLeo analyzed the housing and mortgage crisis.