The Food Bubble
How Wall Street starved millions and got away with it
By Frederick Kaufman
HARPER’S MAGAZINE / JULY 2010
The global speculative frenzy sparked riots in more than thirty countries and drove the number of the world’s “food insecure” to more than a billion. In 2008, for the first time since such statistics have been kept, the proportion of the world’s population without enough to eat ratcheted upward. The ranks of the hungry had increased by 250 million in a single year, the most abysmal increase in all of human history.
The gratuitous damage of the food bubble struck me as not merely a disgrace but a disgrace that might easily be repeated. And so I traveled to Minneapolis—where the reality of hard red spring and the price of hard red spring first went their separate ways—to discover how such a thing could have happened, and if and when it would happen again.
I told him that at least one analyst had estimated that investments in commodity index funds could easily increase to as much as $1 trillion, which would result in yet another global food catastrophe, much worse than the one before.
The worldwide price of food had risen by 80 percent between 2005 and 2008, and unlike other food catastrophes of the past half century or so, the United States was not insulated from this one, as 49 million Americans found themselves unable to put a full meal on the table. Across the country demand for food stamps reached an all-time high, and one in !ve kids came to depend on food kitchens.
Unlike the wheat producers and the wheat speculators, or even Goldman’s own customers, Goldman had no vested interest in a stable commodities market. As one index trader told me, “Commodity funds have historically made money—and kept most of it for themselves.”
Goldman and all the other banks that followed them into commodity index funds had figured out how to safeguard themselves, but there was a lot more money to be made if the banks could somehow convince everyone else that an inherently risky product designed to protect the banks—and only the banks—was in fact also safe for investors. Good news came on February 28, 2005, when Gary Gorton, of the University of Pennsylvania, and K. Geert Rouwenhorst, of the Yale School of Management, published a working paper called “Facts and Fantasies About Commodities Futures.” In forty graph-and-equation filled pages, the authors demonstrated that between 1959 and 2004, a hypothetical investment in a broad range of commodities—such as an index—would have been no more risky than an investment in a broad range of stocks. What’s more, commodities showed a negative correlation with equities and a positive correlation with inflation. Food was always a good investment, and even better in bad times. Money managers could hardly wait to spread the news.
As I left the office, I remembered the rumors I’d heard at a grain-crisis conference in Washington, D.C., a few months earlier. Between interminable speeches about price ceilings and grain reserves, more than one wheat expert had confided, strictly on background, that at the height of the bubble, Minneapolis wheat had been cornered. No one could say whether the culprit had been Cargill or the Canadian Wheat Board or any other party, but the consensus was that as the world had cried for food, someone, somewhere, had been hoarding wheat.
Truly evil, the whole thing can be found here in PDF form, the-food-bubble.