High food prices make people go hungry

If people have to spend 80 percent of their income on food – not just 10 to 20 percent as in wealthy industrialized countries – then an increase in the price of grains, bread and other staples poses an existential threat. In 2011, global average prices for wheat, corn and rice were 150 percent higher (after adjustment for inflation) than they had been in 2000.

In 2010 alone, higher prices for foodstuffs caused 40 million people to go hungry and live in abject poverty. Speculation on commodity exchanges with food products such as corn, soybeans and wheat is strongly suspected to contribute to poverty and hunger. This concerns us all.

If we are paying into a pension fund or life insurance plan, then we may be financing our retirement by speculating on rising food prices. Even though banks and insurance companies reject accusations of wrongdoing, there is growing evidence that investments on markets for raw materials and food are making people go hungry.

Commodity trading as a capital investment strategy

Since the beginning of the last decade, the commodity markets – for metals, crude oil, wheat, corn and soybeans, among others – have been a favored target of investors. Financial institutions promise in their advertising that a growing global population and economic expansion will create steady demand for commodities and therefore turn the purchase of raw materials into a
profitable business. At any rate, this is what is said, and investors have this expectation. As a consequence, pension funds, insurance companies, foundations and a large number of individualinvestors have invested more than 600 billion dollars at commodity exchanges.

Exchanges need speculators

These investments are not being made however to participate in the production of commodities or in farming operations. Instead, investors buy futures that are traded on commodity exchanges. Futures are contracts for raw material purchases or sales which are transacted on a date in the future. These contracts originally served to hedge prices in future business transactions by the producers and processors of commodities. In this way, the parties concerned could reliably
calculate the cost of raw materials otherwise subject to sharp price fluctuations. A baked goods manufacturer, for example, could reserve a supply of wheat six months in advance at a fixed price and therefore didn’t need to be concerned about losses in bread production. To make sure that buyers and sellers always find their counterpart for these future transactions, there have to be enough market participants present who trade only with these futures, looking to earn money in this way. This activity has nothing to do with the actual physical business. It is the traditional role of speculators who, in a certain number, are indispensable for the functioning of commodity exchanges.

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