Banks, Betting on Food and Hunger - Essay Example

Banks, Betting on Food and Hunger Insert Date Banks, Betting on Food and Hunger Introduction Doane of the World Development Movement could be right when she asserted that banks are making a killing from betting on food while people are dying from hunger (Vidal 2011). One could argue that hunger is caused by a number of reasons droughts being top on the list especially in the third world nations. The United Nations on the other hand, holds an otherwise position; they aver that a ‘perfect storm’ of human and natural factors have merged to hyper-inflate food prices (United Nations 2012). In addition, they further argue that traders and economists have claimed that the same banks that hedge out finances and the financiers whose suppositions on the global money markets led to the sub-prime mortgage crisis, are the ones causing food prices to increase. According to (Vidal 2011) these institutions have taken advantage of the deregulation of global commodity markets and are making billions from betting or speculating on food prises causing hunger and misery around the world. This paper discusses this assertion that banks are making a killing from betting on food while people are dying from hunger. Banks and Betting on Food Banks in essence are the avenues through which the economy of a nation is moderated given that central banks often makes use of them to regulate inflation through manipulation of interest rates and borrowing patterns (Armendariz & Beatriz 2010). Banks have also been vital in carrying out speculative functions by making use of a number of investment derivatives as a way to hedge risks and make profits through forecasting future economic events. Unfortunately, in 2011 a new form of speculation was introduced in the banking arena known as the ‘food derivative’ speculation (Bramhall 2012). This ‘food derivative’ speculation has replaced the common financial derivatives being employed by banks as the hot new investment supported by major investment banks in the world like Goldman Sachs, Barclays and JP Morgan (Bramhall 2012). New research conducted by the World Development Movement shows that the same banks that caused the economic crash experienced in 2008 are also responsible for the skyrocketing of food prices (World Development Movement website 2012). The Ecologist estimates that in 2010 alone Goldman Sachs made one billion dollars in profits from food speculation alone (Bjerga 2011). In addition to the heavy speculation, private investment firms are purchasing huge tracts of land in the third world countries. Investors have always possessed the ability to trade in commodities futures; like buying a bushel of corn early in 2010 at a certain fixed price before it is actually produced then delivering it at higher price later. Despite of this ability, the commodities market has always been perceived as volatile by serious investors who have compared it to games like horse racing. However, investment banks like Goldman Sachs, JP Morgan, Barclays and other key players have made use of factors that seem to threaten food security like extreme weather conditions, water shortages, and increasing food demand due to Asian economic boom to aggressively pitch their ‘agri’ funds to investors. The effect of this massive trading in food futures is the driving up of the current cost of food in the same way the subprime mortgage bubble massively drove up the cost of real estates just before the 2008 economic crash. The difference that this trading on future prices of food has brought is a life and death issue for billions of people around the world due to the high prices of it brought. The betting on food by these large investors is pushing up the food prices for the poorest category of people in the world and almost tipping millions of them into poverty and hunger. According to Livingstone (2012), banks and hedge funds involvement in food commodities has risen from sixty-five billion to one hundred and twenty six billion dollars within the past five years. This has only helped to push the prices to thirty-year highs and caused sharp fluctuations in prices that have little to do with the actual food supply. Investment banks like Barclays Capital and Goldman Sachs presently dominate the food commodities market suppressing the amounts that the actual food buyers and producers make. Livingstone argues that speculative investment in agricultural and other food commodities in 2011 happened to be twenty times the amount all countries spend on agricultural aid. Initially, the agricultural commodities futures markets or contacts were used by food buyers and farmers who sought to insure themselves against changes in prices of food items like sugar, maize and wheat. These future contracts meant that farmers could sell their crops at a future date at a certain set price. These contracts could also be purchased and sold by speculators who had no interest in the food commodity being traded. These speculators by buying and selling the future contracts could gain profits from the changes in price over time, and thus betting on food prices (Bannock 2003). According to Eichengreen (2011), the markets for future contracts worked out well until the 1990s when bankers’ aggressive lobbying led to the rolling back of legislations. Consequently, in 2000, this market was deregulated in the United States by the passing of the Modernization Act (Eichengreen 2006). This Act led to an influx of purely financial players like banks who had no interest in buying food but only sought to profit from the changes in the food prices. Similar experiences followed in Europe leading to the emergence of novel and complicated financial products that paved way for more mechanisms of making money from betting on food. Relationship between Betting on food and Hunger It is a fact that the excessive speculation of food prices is a key factor in increasing global food prices and exposing so many people to hunger. According to World Development Movement website (2012) the massive increase in food prices is catastrophic for the people who live in poverty and spend most of their incomes on food. This is because it results into the following; Increased hunger levels given that food has become unaffordable, Increased malnutrition levels among adults and children since they will resort to consume less expensive foods like vegetables and fruits so as to afford staple foods Women will be increasingly burdened to earn more money to the extent of taking up life-threatening employments like, commercial sex to take care of their young ones Households consuming their savings, selling their assets to buy food or even going into debt in order to get food. Families being incapable of affording minimum healthcare and education given that most of their incomes are used to purchase food. World Development movement website (2012) further argues that the last six months of 2010 has seen more than forty-four million people being driven into extreme poverty levels due to the rising food prices. Majority of the people in the world today are poor and a large number of them live in Asia, Africa, the Middle East, the Caribbean and Latin America. According to Eichengreen (2012), these people spend almost seventy to eighty percent of their incomes on food. The recent driving up of food prices has further tipped millions of people into poverty and hunger. This increase has become disastrous for most people across the world given that it has increased the statistics of hungry and malnourished people from forty million in 2008 to over one billion in 2009 (Food and Agriculture Organisation [FAO] website 2012). This increase in food prices coupled with the recent global economic slowdown has increased the number of people living in poverty by one hundred to two hundred million. Additionally, the impacts of reduced food availability, lower access to food, and higher food prices has pushed nearly 110 million people into poverty and added 44 million into the undernourished ranks (World Bank 2008). There are a number of factors that could have brought this increase in price of food commodities. These factors according to Yergin and Stanislaw (2002) and Ajanovic (2009) are; Climatic and weather changes like drought, flooding, and change in rainfall patterns among others, Utilisation of million of acres of land by international firms which could have been used in food production for growing bio-fuels for vehicles, Rise in oil and fertilizer prizes, The shift by Chinese from a vegetarian to a meat eating culture and diet, and Speculation by banks, financiers and hedge funds which caused the sub-prime mortgage crisis could also have caused the inflation of food prices. Increased demand for food due to rise in population Low stocks of cereals and restriction of their export in key countries, Findings from FAO (2012) indicates that prices of basic food staples is rising and will soon exceed the 2008 peaks despite the fact that food is in plenty in the markets. Additionally, no evidence exists that local merchants have been hoarding food. This viewpoint cancels out the possibility that the inflated price of food commodities; that has pushed many to starvation, could be caused by climatic or weather changes. The pushing of many people to starvation levels could only have been caused by; speculations by banks, financiers and hedge funds or by the utilisation of large chunks of land for the manufacture of bio-fuels instead of food production. How Banks are Making a Killing from Betting on Food A new theory is emerging among economist and traders concerning the probable cause of the increase in food prices that has pushed many to starvation. According to Vidal (2011), the banks and financiers whose speculation about the global money market resulted into sub-prime mortgage crisis, are the ones causing the prices of food to inflate and yo-yo. This author argues that, these institutions have taken advantage of the deregulation of the global commodity markets and are making billions from speculating on prices of food. Consequently, they are causing misery to many around the world by exposing them to hunger and starvation. World Food Programme (2009) on the other hand argues that whenever a phenomenon like the high food price becomes difficult to explain and affects majority of the people negatively, it is the speculators, the financiers and the banks who will be blamed. These institutions were blamed for the soar in onion prices in 1958, in the 1970s and now in 2008’s yo-yo in staple-food prices. According to the World Food Programme (2009), what the media and politicians label as special is a critical market function which enables farmers to reduce risks. In most instances, the time lag between spending on inputs like fertilizers, seeds, and the receipt of revenues never lacks risks. Speculation has been viewed by economists as the method through which the farmers can hedge themselves against these risks. This process has been defined as the process of buying and selling to make profits from the changes in price as compared to buying and selling for use, to generate income as an investment or to add value through transportation or transformation (Itoh & Lapavitsas 1999). These future contracts guarantee that the price to their holders; who in most instances are the farmers, will be paid for the products at a specified delivery date. Whenever a farmer decides what to grow, he or she would like to know or at sometimes lock in the price he or she will receive for his produce. If the actual price of the produce in the market is higher at the delivery date, the farmer will lose on the future contract, but gain if he or she sold the produce at a higher than expected price. According to Mitchell (2008), the future contract only acts like an avenue of transferring the price risk from the farmer to the speculator despite the fact that the commodities underlying the future contracts are seldom delivered. The numbers of future contracts are often unlimited given that contracts are never related to actual deliveries. Future markets have two types of participants: the hedgers who are the; farmers, processors, and commercial traders who want to hedge against price risks, and the speculators who are the banks or non-commercial traders who seek profit through speculation (Hallwood & Ronald 2000). Banks just like the other speculators can not be taken as responsible for the high market prices since for prices to increase a number of factors have to prevail. According to Westholf (2011), people will always blame market speculators for every rise in prices of commodities in the market. This rise often results into a speculative bubble which will often burst whenever the prices fall sharply, as it was experienced in the final months of 2008. Westholf (2011) argues that even if price speculation of food had a short-run effect on the food markets, it is difficult for the prices to remain too high or too low for extended time durations as indicated in one of speculation rules of thumb. This rule of thumb asserts that market speculators may push prices of commodities higher or lower but eventually, the fundamentals will rule (Clark 2002). This means that even though the prices may hike, they would not remain high for a long time implying that banks are not responsible for high prices of food communities which has exposed a large number of people to starvation. Despite being a minor party among the speculators, banks like Barclays and JP Morgan have made millions of pounds in profits from speculations. According to World Development Movements (2012), Barclays bank made nearly 189 million pounds from 2011 speculation of food prices. This bank is the largest participant in the commodity markets and boasts of being among the world’s top three players in this market. Doane had asserted that this bank is making millions in profit by speculating and consequently driving prices of food commodities up, squeezing the budgets of households in the United Kingdom, and pushing millions of people into hunger and poverty (Vidal 2011). Funny enough, not a penny of this amount gained from speculation is ever invested in developing agriculture but only benefits the few wealth investment bankers. Barclays bank has itself admitted that the speculation of food prices affects food and other important commodity prices. Lee (2012), additionally claims that Barclays bank had been adjudged the worst company in the world at the annually held Public Eye ‘shame award’ for speculating on the prices of food which resulted in about forty-four million people being pushed into hunger and poverty towards the end of 2010. World Development Movement (2012) claims that this bank’s activities are fuelling poverty and hunger in the world in addition to gambling with the price of food and with the lives of people. These speculations only benefited an insignificant minority in the financial sector while fuelling food price spikes. These spikes only worked to force millions of people in the world to go without food. The major commodities affected were; soy, maize, and wheat in the United Kingdom where the average annual food bill of majority of the households rose by 188 pounds within one year. The last six months of 2010 saw over forty-four million people pushed to unbearable poverty levels by the rise in prices. Financial speculations have also overpowered the agricultural derivative markets, inflated prices, raised the price volatility, and formed bubbles totally unrelated to demand and supply. According to Saunders and Cornett (2009) in well-functioning market the prices of commodities should be influenced by the changes in demand and supply. Unfortunately, global data on supply and demand for food commodities like maize and wheat show that there has never occurred a significant change that could have led to the massive rise in prices tat has been seen in the recent years. Despite the fact that other factors like the increased demand for bio-fuels, export bans, increased food consumption in India and China and climatic change have led to long-term rise in prices, they cannot effectively explain the recently experienced short-term fluctuations in prices. According to Headey and Fan (2008) it is only speculation that can explain this problem better. The effect that banks have in inflating food prices and denying most people food; which is a basic human right is so serious that legislations have already been introduced in the United States to prevent speculation on prices of foods. Furthermore similar proposals have been tabled in the European Union, and it’s only the United Kingdom government that is lagging behind in effective regulation (Piesse & Thirtle 2009). Reports by the Barun (2008) claims that more children today; about 2.6 million are dying each year from malnutrition. Additionally, this author estimates that a half a billion more will grow up mentally and physically stunted; nearly a quarter of the young population in the world today. These shocking statistics can only be blamed on the rising global prices of food commodities and not on shortage of food supply as others think it is. In this respect calls have been made by humanitarian aid organizations on governments to implement strict regulations to rein in the destructive activities carried out by banks of food speculation. Ghosh (2009) asserts that what banks are doing is simply gambling with the lives of people whilst obtaining huge profits. This act has catastrophic effects like causing unimaginable instability in the global food prices and pushing millions into hunger and poverty. Conclusion In conclusion the increase in food prices that pushed millions of people into hunger and poverty was caused by a number of factors. Some among these factors are; climatic changes, shift from vegetarian to meat-eating diet by the Chinese, utilisation of land for the production of bio-fuels instead of food production, and the speculation on food prices by banks. Among these factors, speculation on food prices has been singled out as the main factor causing the exorbitant increase in prices that has been experienced of late. This issue has been so serious that some banks like Barclays have been ranked as the most shameful banks that have made profits by exposing many people to hunger and poverty. Majority of the governments are pushing for legislations to stop banks from carrying out this inhuman practice. Despite the fact that other investors may have had a hand in these increase in prices, banks played the major role in betting on food prices. Word Count: 3000 words References Ajanovic, A 2009, ‘Bio fuels versus food production: Does bio fuels production increase food prices?’ vol. 36, no. 4, pp. 2070-2076. Armendariz, dA & Beatriz, R 2010, The Economics of Microfinance, MIT Press, Cambridge, MA. Bannock, G 2003, The Penguin International Dictionary of Finance, 4th edn, Penguin, London. 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