Plain as parritch

Today is World Porridge Day – 10/10 every year.

Mary's Meals: A cold volunteer Along at the east end of Princes Street this cold morning, determined to stay till the porridge runs out, were three volunteers for Mary’s Meals, celebrating World Porridge Day and collecting to feed children going to school in Malawi.

Porridge or parritch is a variant pronounciation of pottage – both soup and porridge are, in Scots, plural nouns. The porridge I ate (with raisins and guilt-free for-a-good-cause golden syrup) was probably not the halesome parritch of the Cottar’s Saturday Night. But it was tasty.

Mary's Meals - free porridge

In the 1970s, Western banks and governments wanted to lend large amounts of money to countries like Malawi, to cement them as allies in the Cold War and simply as a locus of investment when Western countries were offering low returns. In 1976, the interest on Malawi’s debt was 1.9%. The price of Malawi’s imports, such as oil, rose: the price of Malawi’s exports, cash crops such as tobacco and tea, fell. By 1981 the interest rate on Malawi’s debt was over 9%.

In 1980, the national debt of Malawi was 70% of national income. Every year through the 1980s and 1980s over $100 million (on average) of debt repayments left Malawi: but by 2000, their debt was 150% of national income. Mozambique Malawi map From 1976 to 1992 their neighbouring country Mozambique was riven by civil war and over a million refugees came to Malawi: droughts, floods, the price of oil, all contributed to Malawi’s poverty, but overwhelmingly, that huge debt which national payments could not keep under control:

Despite being burdened by external debt, the debt relief Malawi sorely needed was not attained easily. In the 1990s creditor governments through the IMF and World Bank launched the Heavily Indebted Poor Countries (HIPC) initiative with the promise of reducing debts. Malawi entered the HIPC-initiative in December 2000 but only had debts cancelled in 2006. In this time, the Southern African country paid $440 million in debt repayments, money which could have been spent on development. In 2005, the year before it had some debt cancelled, Malawi was spending 9.6% of national income on debt servicing and only 4.6% on public health care. This was scandalous for a country like Malawi, where 74% of the population were living on under $1 dollar a day.

One reason Malawi took so long to get debt relief was due to the strict conditions for getting debt cancellation. Malawi was forced to privatise state owned enterprises. This included ADMARC, the agricultural marketing board, which had stored crops and provided subsidised fertiliser to small farmers.

The IMF and World Bank pushed the Malawian government to privatise ADMARC, end agricultural subsidies and sell grain stocks in order to reduce fiscal deficits and because they were seen as a ‘distortion of trade’. In 2001/02, and again in 2004/05, the removal of support for farmers and selling of grain stocks combined with drought to create serious food crises. Thousands of people died and millions suffered.

But this isn’t the only reason Malawi, and other developing countries, are going hungry. Predatory investment by Wall Street corporations such as Goldman Sachs are driving up the price of food.

For about sixty years the US did not permit the stock market to gamble on the price of staple foodstuffs. This is because the effect of stock market speculation on any commodity tends to be to drive up prices, such as we saw in the dot-com bubble or historically in the tulip bubble. This form of gambling is called speculating on commodity derivatives.

While involvement in the market may cause ruin or riches to failed or successful investors, when the price of food is driven up, a handful of people profit and a huge number of people go hungry. Goldman Sachs began speculating in staple foods in 1991, and others followed.

In The Great Hunger Lottery, the World Development Movement has compiled extensive evidence establishing the role of food commodity derivatives in destabilising and driving up food prices around the world. This in turn, has led to food prices becoming unaffordable for low-income families around the world, particularly in developing countries highly reliant on food imports.

Nowhere was this more clearly seen than during the astonishing surge in staple food prices over the course of 2007-2008, when millions went hungry and food riots swept major cities around the world. The great hunger lottery shows how this alarming episode was fueled by the behaviour of financial speculators, and describes the terrible immediate impacts on vulnerable families around the world, as well as the long term damage to the fight against global poverty.

To some people this is merely of academic interest: to others a cold-blooded calculation of profits to be made in “futures markets” – betting that the price will go up still further, which may be merely absurd in the dot-com bubble, but means that many people cannot afford to eat when it’s speculation on food.

Financial advisor sites will blame the price of oil or lack of new developments in agriculture or that old standby, population growth, but gambling on food futures would seem to be the simplest, most direct explanation: Big investment banks are betting on the price of staple foods such as wheat, maize and soya. An experienced commodities trader is in no doubt that these commodity funds, including a special Goldman Sachs financial device called a Booster, are pushing up prices:

‘Of course,’ he says, ‘because it’s pushing demand, and that pulls supply out of the chain.’

A closer look at the small print on my Booster tells me that before my futures contracts expire, they will be ‘rolled’ over into a ‘longer dated contract’. This is key to understanding the artificial pull on prices.

It means that the index is structured to buy futures automatically, on the assumption that prices will rise.

When a flood of investors keep on buying, experts say, it creates a ‘demand shock’ in the commodities exchanges, pushing up the cost of futures.13

Taking their price signals from the exchange, traders on physical markets delay sales and hoard reserves in anticipation of higher prices. Panic buying starts and countries impose export bans.

The index fund manager is effectively hoarding futures contracts, triggering real-life hoarding that makes the bet on rising prices a self-fulfilling prophecy. Even when the commodities crash comes – as it did in 2008 – the process simply begins all over again.

The Independent blasted Barclays for this at the beginning of September, but the problem is not confined to one bank:

Oxfam’s private sector adviser, Rob Nash, said: “The food market is becoming a playground for investors rather than a market place for farmers. The trend of big investors betting on food prices is transforming food into a financial asset while exacerbating the risk of price spikes that hit the poor hardest.”

The World Development Movement report estimates that Barclays made as much as £529m from its “food speculative activities” in 2010 and 2011. Barclays made up to £340m from food speculation in 2010, as the prices of agricultural commodities such as corn, wheat and soya were rising. The following year, the bank made a smaller sum – of up to £189m – as prices fell, WDM said.

The revenues that Barclays and other banks make from trading in everything from wheat and corn to coffee and cocoa, are expected to increase this year, with prices once again on the rise. Corn prices have risen by 45 per cent since the start of June, with wheat jumping by 30 per cent.

And this year:

World Bank records show that worldwide food prices reached an all-time high in July. Droughts and high temperatures caused disappointing US and Eastern European harvests forcing the average worldwide cost of basic food items to spike 10 per cent in a month. The news report states that “from June to July, maize and wheat rose by 25 percent each and soybeans by 17 percent”.

Regulation on gambling on food prices must happen in both Europe and in the US. Wall Street is lobbying the federal government but banks are earning huge profits from

betting on food prices in unregulated financial markets. This creates instability and pushes up global food prices, making poor families around the world go hungry and forcing millions into deeper poverty. It’s time to stop bankers from gambling on hunger. WDM: Betting on Hunger

We tend to think of debt relief and food shortages as problems found in developing countries. But the price of food rising affects us all, and it must stop.

Update, 12th October

While the UN warns that this year’s extreme weather will lead to further price rises (but does not mention the gambling on the price of food), the UK supermarkets are looking to help with initiatives like “selling cosmetically-imperfect vegetables”.

New research by the consumer group Which? found that the average cost of a shopping bill is now £76.83 a week – an increase of £5.66 in a year. Richard Lloyd, the group’s executive director, said: “The rising price of food is one of consumers’ top financial worries and is changing the way we shop. Recent Which? research found more of us are shopping at discount supermarkets and four in 10 people told us they planned to cut back on their food shopping. We want retailers to be clearer about food pricing and offer responsible price promotions that give the consumer the best possible value for money.”

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3 Comments

Filed under About Food, Sustainable Politics

3 responses to “Plain as parritch

  1. Pingback: Raising awareness – Scottish Roundup

  2. Jane, thanks for directing me here. I have to admit that was naïve to investment banks gambling on food futures. How utterly abhorrent. I’m off to read more. Thank you for opening my eyes!

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