Is another global food crisis in the offing?

Just a quick note that I noticed a news piece yesterday that struck fear into my heart for the vulnerable populations of the world: Corn rallies to two-year high after crop forecast

Corn and other grains futures shot up Friday after a U.S. Department of Agriculture report pointed to the tightest supply and demand balance for corn in 14 years.
The Agriculture Department on Friday forecast a 2010-11 corn crop 3.8% smaller than government expectations just a month ago, as a hot Midwest summer preceded by floods in June takes its toll.
The Agriculture Department said it now expects corn production to reach 12.66 billion bushels, from 13.16 billion forecast in September. September’s forecast itself had been a downgrade from August.
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The corn surplus by late next summer, the end of the 2010-11 corn crop season, is expected to fall below 1 billion bushels, the least since the 1995-96 crop. The ratio between stockpiles and demand for corn would be 6.7%.
“That means a very, very small margin of error for the 2010-11 crop,” said Darin Newsom, a senior commodities analyst at DTN Telvent in Omaha.
Following flooding in June, the Corn Belt suffered from a hot summer and, more importantly, warmer-than-usual nights that interfered with corn’s ability to pollinate as it normally would, he said.
The rally in corn, widely used as feed and biofuel, also pushed up prices for soybeans and wheat and drove up shares of fertilizer and agricultural-equipment companies. Livestock producer shares fell.

This prompted me to fear that widespread food shortages worldwide will result, just like what happened in 2007-8’s global food crisis.  This year we’ve already seen riots over food in Mozambique, and Russia’s weak wheat crop due to global warming abnormally high temperatures and drought that caused Russia to ban wheat exports, further driving up prices globally.  But this morning, even the Financial Times picked up on this theme, sounding an alarm: Soaring prices threaten new food crisis

In Chicago, the prices of agricultural commodities jumped so sharply that they hit limits imposed on daily movement by the city’s futures exchange, the biggest in the world.
Traders, unable to use futures contracts because of the limits on trading, bid indicative corn prices to $5.65 a bushel in the options market, a rise of 13.3 per cent on the day.
In Paris, European wheat prices rose 10 per cent, while the cost of other commodities including soyabeans, sugar, cotton, barley and oats soared.
The rise in prices sent the Reuters-Jefferies CRB commodities index to a two-year high.

Ah yes, the USDA’s estimate of lower corn yield lead directly to speculators rushing in to buy up commodity futures contracts and further exacerbating the rise in prices, which will, at some point in the not-too-distant future, lead to a rise in street prices for corn, soybeans, wheat, etc. worldwide.  When corn rose significantly in 2006-7, Mexico went through what was then called the “Tortilla Crisis” in which tight corn supplies (largely due to increased use of corn to produce ethanol in the Midwest US) led to, again, increased prices on the street:

There is almost universal consensus in Mexico that higher demand for ethanol is at the root of price increases for corn and tortillas.
Ethanol, which has become more popular as an alternative fuel in the United States and elsewhere because of high oil prices, is generally made with yellow corn. But the price of white corn, which is used to make tortillas, is indexed in Mexico to the international price of yellow corn, said Puente, the Mexico City economist.
A combination of tortilla-maker organizations, farming groups and members of the Mexican Congress are clamoring for an investigation into alleged monopolies, commodity speculation and price fixing.

Sound familiar?  The truly awful thing about corn ethanol (aside from the fact that it’s eco-friendliness is manifestly unclear) is that corn ethanol growers generally use corn that is specially bred to be non-edible by humans to produce the ethanol, so it’s not as though when corn prices rise and the prospect of a global food crisis appears on the horizon those corn stocks can just be released onto the market for consumption by starving humans; that corn field’s output is locked in for use as fuel through at least the next growing season.
But it’s the speculators that have me concerned, as it is truly a nefarious development of our modern world that food is being traded in the same way as any other stock or bond, decoupling the actual substantial item used for nourishment of living beings from the item being traded in the market in Chicago or other commodities markets.  Similar sentiments were expressed at a September 24th emergency meeting of the UN to discuss the impending food crisis:

Green MP Caroline Lucas called for tighter regulation of the food trade. "Food has become a commodity to be traded. The only thing that matters under the current system is profit. Trading in food must not be treated as simply another form of business as usual: for many people it is a matter of life and death. We must insist on the complete removal of agriculture from the remit of the World Trade Organisation," she said.

It’s simply a question of morals and concern for the most vulnerable members of world society triumphing over greed.   Economist Jayati Ghosh, whom I have written about before, continues to make the case that financial speculation is directly responsible for millions starving:

Ghosh argued that the “historic” rise in food prices was driven by speculation on commodity prices and deregulation by the U.S. Ghosh described the use of speculation as highly volatile.
According to Ghosh, the food crisis in developing countries is “intimately related” to the current financial crisis.
The deregulation resulted from the passing of the Commodity Futures Modernization Act in 2000. According to Ghosh, the act allowed financial companies into futures market which allowed banks to influence the prices of food.
According to Ghosh, a popular explanation for the increase in prices is increased demand from China and India. However, Ghosh added that India and China have consumed less, leading her to conclude that the increase in food prices was not caused by regular supply and demand. (emphasis mine)

When prices are not linked to supply and demand issues, there is financial manipulation occurring.  When those manipulations concern the basic staples needed for humans to live and prosper, something must change, lest millions more suffer needlessly.  Mother Nature has dealt us some heavy blows this summer (perhaps a warning of more human-induced climate destruction to come?) that are driving our global food system to the brink of failure, and yet we allow the richest and most powerful financiers among us to exacerbate, indeed to accelerate the level of misery of our poorest fellow humans?  This is just wrong, wrong, wrong, “economic efficiency” be damned.

The future of finance?

My schedule has not permitted me to post anything fully-developed for quite a while, but tonight I have a few multimedia treats for you, building off of the news themes of recent weeks.

First off, "Quants, The Alchemists of Wall Street."  A film made about the mathematical geniuses who created the models that have been largely running the financial world for a number of years now.  While that may not sound like the most interesting subject matter, I highly recommend taking 45 minutes and watching the film, there's lots to learn:

I thought this was an interesting little film as it stood, however the second half takes a surprisingly prescient turn in that the interviewees (or "quants," short for "quantitative thinkers," I assume) begin to discuss "high frequency trading," a term that sprang into the wider international consciousness following last Thursday's as-yet-unexplained 1,000 point drop in the Dow.  The idea of high frequency trading (or HFT) is that arrays of computers are set up to catch any variations in a stock's price that exceed or fall below certain parameters, or that follow Google search terms and will buy or sell stocks based on what's "hot" on Google at that moment.  Those parameters are set by mathematical models created by quants.

There are a host of scary implications that result from high frequency trading (not least of which is that these computers essentially set up parallel market structures that operate outside of public scrutiny) however there is a somewhat more mundane detail that the film raised that I'd like to focus on.

One of the quants notes that the NYSE is going to be (or perhaps already has by this point) setting up a warehouse in New Jersey that will house huge arrays of computers, each belonging to the various financial firms, where they will engage in further HFT.  The idea is that the computers will be closer to the NYSE than before, and therefore they will have a faster data connection to the stock market.  A further implication is that certain firms will get "privileged" connections that will afford them a tenth of a second advantage over the other firms; how those firms are chosen, be it through lottery or through financial transactions with the NYSE (read: bribes), is unclear.

There are certain industries in the world that are capital-intensive, in the sense that those industries required a large amount of resources, be it money, physical inputs, or large areas of land, to operate.  Steel is a capital-intensive industry, as is telecommunications, which requires the development of a significant amount of infrastructure to operate.  Clearly the world of finance is a capital-intensive industry, as a firm generally requires large amounts of money to operate, however "boutique firms" have always existed that were able to operate with smaller amounts of cash.  With this impending shift to a computer- and geographically-dominated business model, I wonder if finance is becoming more capital-intensive too?

Consider that if you're a small player, you're going to be forever outmaneuvered by the big firms who have prime locations for the fastest connections for their computer servers in New Jersey, plus offices full of top-quality quants figuring out the most accurate (or at least, the least wrong) algorithms that are then fed into the computer systems constantly.  How is a small firm supposed to compete against that?  This sort of situation can only lead to further consolidation of the financial sector into fewer firms controlling more of the wealth in this country.  As I discussed in my previous post, further consolidation of wealth is a very bad thing indeed.
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And now for something only slightly different...

A further interesting implication of the film was the concept put forth by a couple of the quants that economists in recent years have begun to regard themselves as "scientists;" that their models predicting financial market movements and concepts were "laws" that would be proven correct no matter the circumstances.  This, despite the fact that economics has, since its inception, been considered to be one of the social sciences, these economists who were running the world of finance believed themselves to be masters of the financial universe.

There is a small problem with the underpinnings of these economists' views of the world, however: humans are messy.  To the extent that any sort of "science" is based on looking at human behavior in the aggregate there will always be room for inputs that simply break one's perfectly-calibrated model of the world.  So to the extent that finance is based off of the actions of many individual stock traders and firms run by financiers, perhaps it, too, should be considered a social science?  At least the world of theoretical finance, such as the world in which these quants operated should be, as they're modeling human actions in the aggregate, much in the same way that economists do.  Therefore, as even the quants recognize in the film, their models may not have failed, but the ways that the models were used and manipulated by the non-quant stock traders to make money is at least one part of what contributed to the financial meltdown in 2008.  Humans are unpredictable, and while it's a valiant effort to try to model human behavior, the more I read and the more I learn, the more futile, ultimately, I think it may be.  Just a small observation...

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Finally tonight, the terrible, terrible story of what happens when the financial markets run out of subprime mortgages to invest in: they turn to "commodities."  Commodities markets trade derivatives of actual, physical goods, such as corn/maize futures, oil futures, or gold.  I don't wish to get into how the derivatives contracts work (partly because this post is already long enough and partly due to the fact that they're bloody complicated) but suffice it to say that firms betting on the futures markets can drive the prices of commodities up in a way that is completely unrelated to the underlying supply and demand fundamentals of that commodity.  Witness the continued high price of oil despite the fact that oil consumption is the lowest its been in years (see the link above for more on that).

These effects can be devastating for the poor and middle classes around the world, and sadly, the financial reform bills currently being debated in the Senate may do little to nothing to halt the devastation.

For Rounds 2 and 3 of the feature films tonight, I bring you an interview with Indian economist Jayati Ghosh, who explains to us that when finance gets its hands on the very food you seek to feed your family with, prices often will go up, to everyone's detriment.  This interview will infuriate you, and you'll want to yell at your computer screen "how can humans be so immoral as to create food bubbles and starve the poor???"  Well having seen "Quants" now, and gaining a bit of access into the mind of the modern financial mathematician, I can see, to an extent, how that might happen.  When you're dealing only in abstract numbers, looking for the most promising market to invest in, with no concept of the fact that your actions will increase the price of corn to be used for tortillas in the slums of Mexico, then it's very easy to buy into that bubble.  Does modern finance add any social value to our society?  It's really hard to tell these days, but I guarantee I'll come back to that theme.

Part 1:


Part 2:


I have been working on more complex postings having to do with the nature of the financial/political nexus that has developed and subsumed our political life in this country, and I hope to post those soon.  Furthermore, the oil spill in the Gulf of Mexico and the Greek debt crisis are all fodder for future postings, if there's time...