By Stefan Steinberg, from the World Socialist Web Site wsws.org

24 April 2008

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 commodities—in 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 hunger—the 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 can’t afford feedstocks. It’s the credit crisis.”

The article states that the food crisis has developed over
“an incredibly short space of time—essentially 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. It’s 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 world’s 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 Grünewald started up his Münchner 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 Grünewald, “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,”
Grünewald 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 weeks—a 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 Europe’s
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.’”

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