Chicago trading floor – Flickr/Daniel Hernandez
Chicago-based Ann Berg is a force-ten gale blowing through the windy city of Chicago, the place where tens of millions of tonnes of grain, coffee and meat are bought and sold every day.
As the world’s first female grain exporter, the first woman elected director to the Chicago Board of Trade, a veteran trader and latterly advisor to governments around the world on commodity futures markets, Berg is an increasingly influential poacher turned gatekeeper.
‘Allowing risky financial gambling on a basic human need is a recipe for disaster.’
Deborah Doane, World Development Movement
Rare among senior futures market operators, Berg blames huge surges of hot money – money that trades on bets, futures and derivatives – for causing volatility in soft commodity markets.
A successful independent futures dealer for 18 years, Berg quit the market not because her bets bombed. Rather, the stakes became too high. Berg was a victim of banking behemoths taking over food commodity markets.
Profiting from food
As rising food prices force up inflation and compound poverty and hunger for billions of people, today it is the likes of Goldman Sachs, JP Morgan as well as the giant publicity shy trading houses such as Bunge, Cargill, Dreyfuss and Glencore who have taken over and are profiting from food.
A dramatic rise in the size of future contracts that speculators are permitted to buy on exchanges made it too risky for independent traders like Berg to compete.
Facts about hunger
925 million people in the world are chronically hungry according to the latest UN Food and Agriculture Organisation figures.
A child dies every six seconds because of health problems related to undernourishment said FAO Director-General Jacques Diouf last September.
The world produces 2.5 billion tonnes of grain each year. It is projected that this will have to increase by 1.5 billion tones by 2050 to meet global demand.
When she started in 1982, the limit on the amount of maize any one futures trader could buy was 600 contracts or 75,000 tonnes. Today so-called position limits have increased 37-fold to 2.79 million tonnes – equivalent to 55 giant container vessels filled with corn.
‘One of the main reasons why I left was because of positions limits. I was a small player,’ Berg told an audience of hedge fund and private equity operators at a high-level agriculture investment summit in London last week. ‘I could not compete… Managed money bought or sold huge amounts when they entered the market.’
As the Food and Agriculture Organization’s (FAO) annual meeting in Rome this week places rising commodity prices at the top of the agenda, for giant banks, commodity markets have become the new playground following the demise of financial securities caused by the global financial meltdown.
The effects of deregulation and the ‘financialisation’ of commodity markets
Financial deregulation allowed Goldman Sachs 20 years ago to create new style index tracker funds focused on agricultural commodity markets. Other banks followed and in ten years, investor cash in these food markets – widely seen as a one-way bet providing easy money for financiers – rose from $15bn to close to $300bn.
‘Estimated global grain production, currently at 2.5 billion tonnes will have to increase another 1.5 billion tonnes by 2050 to feed the world’.
Carl Hausmann, Bunge
But increased cash has alarmed not just Berg. An increasing number of organisations have raised alarm. The latest was the UN’s Trade and Development arm, in a hard-hitting report earlier this month, which suggested the ‘financialisation’ of commodity markets has introduced new forces that affect prices. Traders, it said, increasingly follow other participants trading decisions causing ‘intentional herding’.
The destabilising effect this has on the global economy and people’s lives are increasingly clear. And farmers, whether they are living in East Anglia or East Kenya, find it hard to make long-term business decisions when prices balloon and then burst. Though arable farmers are now benefiting from higher grain prices after decades of decline, all suffer, particularly livestock farmers, from higher transport, fertilizer and increased grain-based feed costs.
But Goldman Sachs dismissed these fears as ‘misinformed’. Its managing director, Lucas van Praag, said: ‘Serious inquires, such as one conducted by the Organisation for Economic Co-operation and Development (OECD) in the wake of the 2008 price spike, have concluded that ‘index funds did not cause a bubble in commodity futures prices.’ Rather than destabilizing futures markets, commodity index funds provide them with a stable pool of capital, improving farmers’ ability to insure themselves against the risks inherent in agricultural prices.’
Demand increasing with rising populations and urbanisation
Unquestionably, food prices have been lifted by powerful global trends. Rising populations and a growing desire from China and India for meat is increasing demand for grain based animal feed. Rapid urbanisation means fewer people are growing food in the developing world. And increasing use of corn and sugar for fuel has forced up prices.
This is playing into the hands of global trading houses. Publicity-shy giants like Bunge, Cargill, Dreyfus and Glencore will be the chief beneficiaries of the anticipated increased demand for food.
Bunge managing director, Carl Hausmann estimates global grain production, currently at 2.5 billion tonnes will have to increase another 1.5 billion tonnes by 2050 to feed the world.
The ‘financialisation’ of commodity markets has introduced new forces that affect prices. Traders increasingly follow other participants trading decisions causing ‘intentional herding.’
UN Conference on Trade and Development
Recent Russian and Australian droughts combined with floods in Asia have affected prices. And European grain silos are at record lows because of unusually low rainfall across the continent.
But the huge surge of speculative cash from hedge funds, banks and trading companies operating under the cloak of anonymity is causing increasing alarm among organisations as diverse as the National Farmers Union and anti-poverty campaign groups.
‘Allowing risky financial gambling on a basic human need is a recipe for disaster,’ said Deborah Doane, director of the World Development Movement. ‘We want the UK government to tackle excessive food speculation to protect consumers, food producers and the wider economy from unnecessary food inflation.’
Speaking to the Bureau of Investigative Journalism at an Agriculture Investment Summit in London attended by private equity and hedge funds last week, agriculture minister James Paice admitted he was concerned at the lack of transparency in commodity markets. But whether the Treasury, which has ultimate responsibility to enforce tighter regulations in this area, will take on the banks and use its powers to intervene at this stage seems unlikely.