Speculators have moved en masse into commodities as investments in other sectors look increasingly shaky. The result, combined with predicted harvest shortfalls, has led to a surge in food prices and growing concerns about the impacts of financialization on the staples of life.
As Resources Research summarizes:
International prices of most agricultural commodities have increased in recent months, some sharply. The FAO Food Price index has gained 34 points since the previous Food Outlook report in June, averaging 197 points in October, only 16 points short from its peak in June 2008. The upward movements of prices were connected with several factors, the most important of which were a worsening of the outlook for crops in key producing countries, which is likely to require large draw downs of stocks and result in tighter global supply and demand balances in 2010-11.
Another leading factor has been the weakening of the United States Dollar (US Dollar) from mid-September, which continues to sustain the prices of nearly all agricultural and non-agricultural traded commodities. The increase in international prices of food commodities, all of which accruing in the second half of 2010, is boosting the overall food import bill in 2010 closer to the peak reached in 2008.
Here’s the graphic evidence from the latest World Food Situation report from the UN’s Food and Agriculture Organization:
As one of our readers notes, the numbers
are self-explanatory, self-evident. Although I have been fearing this for a few months with hopes of being wrong, my reading now is that it is too late to avoid a crushing, probably enduring rise in food prices leading to a re-run, with a vengeance, of the food scarcity of 2008 by March of 2011.
More from this Indian report from The Hindu [New Delhi]:
The food import bill of the global community could surpass the $1 trillion mark in 2010, with prices of most commodities going up sharply compared to the previous year, the Food and Agriculture Organisation has said.
In the latest edition of its ‘Food Outlook’ report, the U.N. agency asked the world community to be prepared for harder times ahead unless production of major food crops increases significantly in 2011.
The food import bills of the world’s poorest countries are predicted to rise by 11 per cent in 2010, the U.N. body said, adding that low-income, food-deficit countries would witness a 20 per cent jump in their food import bills.
By crossing the $1 trillion mark, the world food import bill this year will be higher than the peak achieved in 2008.
In its report, the FAO said that contrary to earlier predictions, world cereal production is now forecast to contract by 2 per cent in June, in contrast to its earlier prediction of 1.2 per cent expansion during the month. Unexpected supply shortfalls due to unfavourable weather events are responsible for the revision, the statement added.
Another report from Money Morning’s Don Miller [via the Nasdaq website] summarizes the growing concern about the role of speculators and increasingly arcane speculative investments are playing in the food crisis:
U.S. and European Union (( EU )) regulators are vowing to step up scrutiny on the size and volume of commodity market bets as debate continues to rage about whether excessive speculation is driving up prices on energy, metals and agricultural products.
In an unprecedented rush, investors have pushed a total of $121.2 billion into commodities since the beginning of 2009, according to Barclays Capital. Hedge funds, pension funds and mutual funds in the United States have boosted their positions on oil, silver, corn and wheat to record highs in 2010.
In some commodities, the number of futures contracts outstanding now far outpaces the numbers traded in mid-2008, when commodity-market prices shattered records. As a result, regulators in the United States and Europe are considering proposals on how to prevent the so-called speculators from manipulating the markets.
Contracts held by investors rose 12% this year through October, and are 17% higher than in June 2008.
Now for more of the details from the FAO’s Food Outlook report for November [pdf warning]:
International prices of most agricultural commodities have increased in recent months, some sharply. The FAO Food Price index has gained 34 points since the previous Food Outlook report in June, averaging 197 points in October, only 16 points short from its peak in June 2008. The upward movements of prices were connected with several factors, the most important of which were a worsening of the outlook for crops in key producing countries, which is likely to require large draw downs of stocks and result in tighter global supply and demand balances in 2010/11. Another leading factor has been the weakening of the United States Dollar (US Dollar) from mid-September, which continues to sustain the prices of nearly all agricultural and non-agricultural traded commodities. The increase in international prices of food commodities, all of which accruing in the second half of 2010, is boosting the overall food import bill in 2010 closer to the peak reached in 2008.
The pressure on prices to rise was first felt in the cereal market, most notably for wheat and barley, in August. This prompted FAO to call for an extraordinary meeting on 24 September 2010 to discuss the underlying causes and possible remedies. The meeting clearly identified the importance of reliable and up-to-date information on crop supply and demand to cope with unexpected developments in world markets. More transparency and a better understanding of the role of commodity futures markets and government responses were also viewed as necessary to address price volatility.
Of the three CBOT [Chiicago Board of Trade] markets considered, maize and soybean futures and options experienced the most noteworthy increases in the long open interest of “non-traditional”, investment-driven participants in the past 6 and 12 months. The data show a low, and often falling, share of long open interest held by “traditional” participants, but much of their activity is on the short side, hedging against price declines.
Going forward, it can be expected that investors seeking portfolio diversification will continue to watch for opportunities in futures and options. As recovery from the financial crisis proceeds, investors’ risk tolerances are likely to change, impacting the flow of investment funds into these markets. Returns in the stock and bond markets, and the impact of the US Dollar’s value on commodity prices are among the considerations that will influence investors’ decisions on market positioning.
It is important to note that this descriptive examination of the composition of open interest in the maize, wheat and soybean markets at the CBOT says nothing about the impact of the changes in market participation on prices. More rigorous analysis would be required before statements of cause and effect could be made.
And, as we’ve noted before, the soaring commodity prices are driving another inflationary sector, with farmland prices soaring in the U.S.
From Marc Schober of AgWeb.com:
The Midwest Fed Districts released their farmland value reports this month for the third quarter of 2010 and the overall trend was increasing values driven by increased demand and rising farm income.
The last six months have seen higher volume of farmland sales due to the early harvest, high grain prices, and potential change in tax legislation. Landowners will also be making up for the lack of farmland sales last year due to the late harvest.
The Chicago Fed reported that farmland values rose 10% year-over-year and 3% quarter-over-quarter in the Seventh Federal Reserve District. Farmland values are expected to be up in the fourth quarter again due to high demand for agricultural land among farmers. Farmland values rose 13% in Iowa, 11% in Indiana, 10% in Michigan, 8% in Illinois, and only 3% in Wisconsin.
This was also consistent with the Minneapolis and Kansas City Federal Reserve’s, which reported a 9% and 9.6% increase, respectively. Creighton University’s farmland price index also rose to 68.1 in November from 60.0 in October. This is the tenth straight month the index has been above growth neutral.
Subverting the numbers game
Just what inmpact is the soaring food market having on the cost of loiving in the United States? Well, therein lies rub.
Turns out that food and energy prices, two key sectors of the increasingly financialized commodity sector, are now excluded from the Consumer Price Index.
This political exclusion is deeply subversive for two reasons:
- First, the reconfigured CPI distorts salary cost-of-living increases, which are based on the CPI.
- Second, and more critically, it serves to conceal the true impacts of the capture of every last segment of our lives by the speculators.
For a devastating and revealing account of the corruption of the CPI and its impacts, see this report by Frederick Sheehan at Au Contrarian.