Speculation And The Engineering Of The Food Crisis

Speculation And The Engineering Of The Food Crisis

Frederick Kaufman discovers Goldman Sachs' pivotal role in the rising food prices that have led to a global problem.

Timothy Ryan, PSFK Labs
  • 3 may 2011

Among the reasons cited for the increasing cost of food are American appetites, rising oil prices, and genetically modified crops. Frederick Kaufman believes there is just one main culprit: Wall-Street.

Speculation is a sullied term in light of a worldwide recession. But the basic convention of buying low and selling high plays its part in the functioning of any healthy market economy. And it used to play a welcomed role in the commodities market (food, fuel, and labor), insulating farmers from the natural volatility of the industry as the price of grain was agreed upon even before the wheat was grown. The ‘future’ of a commodity allowed farmers to hedge against lean times and at other times invest in their businesses. As a result, the real price of wheat decreased over the course of the 20th century and America became a model for successful agribusiness.

But in 1999, the Commodities Futures Trading Commission deregulated future’s markets. Kaufman notes that all of a sudden, bankers could take as large a position in grains as they liked, an opportunity that had, since the Great Depression, only been available to those who actually had something to do with the production of our food. Meanwhile, investment bank Goldman Sachs had developed a derivative back in 1991 that tracked raw materials including wheat and soy, before reducing what had been a complicated collection of commodities into a single mathematical manifestation known as the Goldman Sachs Commodity Index (GSCI).

Once deregulation came into play, the derivative had real, and ghastly consequences:

But Goldman’s index perverted the symmetry of this system. The structure of the GSCI paid no heed to the centuries-old buy-sell/sell-buy patterns. This newfangled derivative product was “long only,” which meant the product was constructed to buy commodities, and only buy. At the bottom of this “long-only” strategy lay an intent to transform an investment in commodities (previously the purview of specialists) into something that looked a great deal like an investment in a stock — the kind of asset class wherein anyone could park their money and let it accrue for decades (along the lines of General Electric or Apple). Once the commodity market had been made to look more like the stock market, bankers could expect new influxes of ready cash. But the long-only strategy possessed a flaw, at least for those of us who eat. The GSCI did not include a mechanism to sell or “short” a commodity.

This imbalance undermined the innate structure of the commodities markets, requiring bankers to buy and keep buying — no matter what the price. Every time the due date of a long-only commodity index futures contract neared, bankers were required to “roll” their multi-billion dollar backlog of buy orders over into the next futures contract, two or three months down the line. And since the deflationary impact of shorting a position simply wasn’t part of the GSCI, professional grain traders could make a killing by anticipating the market fluctuations these “rolls” would inevitably cause. “I make a living off the dumb money,” commodity trader Emil van Essen told Businessweek last year. Commodity traders employed by the banks that had created the commodity index funds in the first place rode the tides of profit.

Kaufman’s well rounded summary:

Volatility in the food markets has also trashed what might have been a great opportunity for global cooperation. The higher the cost of corn, soy, rice, and wheat, the more the grain producing-nations of the world should cooperate in order to ensure that panicked (and generally poorer) grain-importing nations do not spark ever more dramatic contagions of food inflation and political upheaval. Instead, nervous countries have responded instead with me-first policies, from export bans to grain hoarding to neo-mercantilist land grabs in Africa. And efforts by concerned activists or international agencies to curb grain speculation have gone nowhere. All the while, the index funds continue to prosper, the bankers pocket the profits, and the world’s poor teeter on the brink of starvation.

Foreign Policy: “How Goldman Sachs Created The Food Crisis”

[via BoingBoing]


Dubai And The Future Of Humanitarian Design

Design & Architecture
Technology Yesterday

Concept Camera Designed To Only Take Unique Photos

Camera Restricta is tool that prompts photographers to only capture one-of-a-kind images

Design & Architecture Yesterday

Fragrance Will Release The Smell Of Data If Your Private Information Is Being Leaked

The device is designed to create a physical cue for the potential dangers lurking online


Get PSFK's Related Report: Future of Automotive

See All
Retail Yesterday

LYNK & CO Is A New Auto Brand That Promises Mobile Connectivity On Wheels

Online access and mobility sharing are driving the company to disrupt the auto industry

Travel Yesterday

Become A Citizen Of The First Nation In Space

Asgardia is a new concept for a floating society above Earth

Entertainment Yesterday

Speaker Displays Song Lyrics As Music Is Played

The device is able to generate the graphics on a translucent screen and retrieve the words from a connected database

AI Yesterday

Travel Assistant Scans Your Emails To Make Planning Easier

This AI add-on will sync with your inbox and sends reminders to make sure you don't miss anything important


Future Of Automotive
Scenarios Driving The Digital Transformation Of An Industry

PSFK Op-Ed october 17, 2016

Home Depot Green Energy Expert: Americans Are Taking Control Of Their Power Use

Green tech expert Jennifer Tuohy discusses new home energy tech and developments for renewables in the US

PSFK Labs Yesterday

PSFK Picks: Top 5 Performance-Enhancing Wearables

Our new report looks at innovations pioneering the future of performance through intelligent activewear and predictive analytics

Millennials Yesterday

FOMO Survival Kit Helps Millennials Cope With Social Anxieties

The satirical product is meant to be a playful diversion for people who feel like they are missing out

Food Yesterday

New York Restaurant Uses Tomato Sushi As Its Newest Meat Alternative

fresh&co is using sous vide Roma tomatoes to create a vegan option that has the texture and taste of tuna

Advertising Yesterday

Red Bull Converts Sao Paulo Payphones Into Data-Driven Bus Schedules

The booths allow city residents to check local transit times through a simple toll-free phone call

Work Yesterday

Health Expert: Nutritional Meal Replacements Are A Solution To Corporate Wellness

Ample Foods Founder Connor Young explains why supplements are the next food trend coming to the workplace

Retail Yesterday

Why Experiential Events Could Replace Trade Shows

Marketers are seeking creative and impactful new ways to connect with influencers

Children Yesterday

Modular Kit Teaches Kids How To Make Their Own Robots

MODI features magnetic modules and a platform for programming to encourage experimentation

Infants Yesterday

Work Table Doubles As A Baby Seat

Designer Kunsik Choi created the furniture to facilitate emotional communication between between parents and their children

Technology Yesterday

Album Turns Into Something New Each Time It’s Streamed

Bill Baird's new album explores the relationship between time and music through a website crafted by design team, One Pixel Wide

No search results found.