How 'hot money' is causing a food prices commodity boom

By Nick Mathison

Chicago-based Ann Berg is a force-ten gale blowing through the Windy City of Chicago, 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 adviser to governments around the world on commodity futures markets, Berg is an influential poacher turned gamekeeper.

Rare among senior futures market operators, Berg blames huge surges of hot money for causing volatility in soft commodity markets.

A successful independent futures dealer for 18 years, Berg quit the market because she could not compete against the banking behemoths taking over food commodity markets.

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 are profiting.

A dramatic rise in the size of future contracts speculators are permitted to buy on exchanges made it too risky for independent traders like Berg to compete.

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 the limits have increased 37-fold to 2.79million tonnes – equivalent to 55 giant container vessels filled with corn. ‘I was a small player,’ Berg told an audience of hedge funds and private equity operators at a highlevel agriculture investment summit in London last week.

For giant banks, commodity markets have become a new playground. Financial deregulation allowed Goldman Sachs 20 years ago to create new style index-tracker funds focused on agricultural commodities.

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 almost $300bn.

But an increasing number of organisations have raised the alarm. The latest was the UN’s Trade and Development arm, in a hardhitting 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 causing ‘intentional herding’. The worry is that this has a destabilising effect on the global economy and people’s lives. Farmers, whether 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.

Goldman Sachs dismisses these fears as ‘misinformed’.

Its managing director and spokesman Lucas van Praag said: ‘Serious inquires, such as one conducted by the 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 destabilising 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.’

Unquestionably, food prices have been lifted by powerful global trends. Rising populations and a growing desire from China and India for meat are 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.

Bunge managing director Carl Hausmann estimates global grain production, currently at 2.5billion tonnes will have to increase another 1.5billion tonnes by 2050 to feed the world. 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 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 campaign group World Development Movement.

‘We want the UK government to tackle excessive food speculation to protect consumers, food producers and the wider economy.’

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 will intervene at this stage remains to be seen.

• Nick Mathiason is business correspondent for the Bureau of Investigative Journalism, a not-for-profit organisation based at City University in London.

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