How Wall Street Gives Us Our Daily Bread
I spoke to food writer Fred Kaufman about how the larger financial forces that control our food prices work, and why they exist.
In March, the European Union rejected a draft of the largest overhaul to its financial securities rules in ten years, citing concerns that the proposed regulations failed to adequately restrict food speculation. After the 2009 financial crisis, food prices reached an all-time high, and lawmakers in the EU blamed hedge funds, speculators, and traders for driving up the rates of necessities like sugar and grain. The European Commission finally decided to pay attention. Frederick Kaufman, a food journalist, has long been aware of the adverse relationship between financial markets and the cost of what nourishes us. In his 2012 book, Bet the Farm, he describes the connection between the global food-pricing system and what lands on our plates. We discussed the complex financial system that controls what we eat and how much we pay for it.
MUNCHIES: Tell me a little bit about the history of food-commodities trading. Frederick Kaufman: Some of the earliest relics of human accounting are commodities contracts—the ways in which people agreed to get bread from farmers. Look at early Japan and rice, or even Mesopotamia and wheat. Farmers were out in the fields, and twice a year, they went to the market with all their crops. Since there was so much, the price would go down. The more farmers produced every year, the more money they lost. They would end up not making a living, and it jeopardized the entire system. That's when people created "forward contracts," agreements that would say, "I promise to buy this much wheat from you for this price six months down the line, and I will promise to tell you I want this much wheat." Today's "futures contract" is the modern equivalent. All financial derivatives originate from these contracts for food commodities that were used to stabilize the price of bread thousands of years ago.
So what happens when factors like disease and climate change come into play? Today, we don't expect a loaf of bread's price to change every week or year to year. That's the real use of "futures markets": You've imagined that wheat's coming out of the ground in six months. It's not real until it happens. The buying and sell- ing of that promise of future wheat stabilizes the price of real wheat. So when the locusts hit, those futures contracts are already in place. A problem arises when Wall Street wagers too much on imaginary wheat. Let's say the supply looks high; suddenly, everyone sells his or her promises to buy that imaginary wheat, and the futures price goes down. The contract that was meant to stabilize the price increases the volatility of real wheat, and farmers go broke. That's why the European legislation calls for "position limits."
The larger financial forces in the derivatives and futures markets are deciding food prices on a global scale.
For the average eater, how do futures contracts impact a fast-food meal or a cup of coffee? The larger financial forces in the derivatives and futures markets are deciding food prices on a global scale. When the price of wheat skyrocketed back in 2008 and 2011, we saw more than sixty food riots across the world, regime changes, and the Arab Spring. If we had $10 quarts of milk and $20 pounds of hamburger meat, we'd head into the streets and say, "What the hell is going on here?" The military and CIA understand this, and when they want regime change, the most effective way to get there is food inflation. In 2008 and 2011, when com- modities went through the roof, the price for a box of Wheaties didn't go up much, but the box got smaller. Fast-forward to 2016, and com- modity prices have tanked, but the price of that retail product has stayed the same. The retailer of those products is making boatloads of money.
Will the new regulations passed in Europe change commodities trading in the US? These are long-awaited reforms and a step in the right direction. But the problem with food commodities is that they are traded globally, so European restrictions regarding speculation in financial derivatives based on global food are easy to evade. A German or a French or a Dutch bank may simply open an office in New York or Chicago—and guess what? American rules apply.
How should consumers look at the food system and its relationship to the commodities market today? We need to focus on local food systems and get to know who the farmers are. We now have a system where, half the time, we don't know where our food comes from or if it's a monoculture from a single company such as Monsanto. A lot of people are trying to find alternative ways to regulate the price of food by not using the commodities approach in order to make the food system more human, rather than it controlling us.
This article appears in the June issue of VICE Magazine. Click HERE to subscribe.