Yesterday, Pres. Bush referred to the huge subsidies the US government gives to farmers to grow corn for conversion into ethanol, a car fuel, by saying:
- “the truth of the matter is it’s in our national interests that our farmers grow energy, as opposed to purchasing energy from parts of the world that are unstable or may not like us.”
For many years, those two words “national interest” have been widely used in US political discussions as a kind of conversation-stopping trump card. “Oh! The ‘national interest’ is at stake! Then I’d better stop criticizing the president!” — that was the kind of reaction past leaders sought, and too often won.
But who defines this slippery thing called the “national interest”, anyway? In Chap. 7 of my book Re-engage! America and the World After Bush, I write:
- [I]n line with the human security precept that true security is people-centered rather than state-centered, we can start thinking about our own country’s national interest in a new, more people-centered way, very different from the “big power” way it has generally been understood until now.
I then go on to ask some questions about how the adoption of this definition of the US “national interest” might actually change many aspects of our relationship with the rest of the world. (Posing queries intended to stimulate further discussion is a very Quaker thing to do. Anyway, I hope you find these queries in my book thought-provoking, when you read them.)
This current, mounting global food crisis is an instance in which we certainly need to adopt the people-centered rather than big-business-centered definition of “national interest”.
It is certainly not in our interest, as US citizens, that the activities of our country’s very well-funded Big Ag sector and the financial sectors that have been speculating heavily in foodstuffs– and fuel– over recent months should be allowed to continue to pursue policies that are driving hundreds of millions of our fellow-humans in poor countries into hunger, and towards outright, directly life-threatening starvation.
These big business sectors need to be effectively controlled and regulated by a political leadership that understands– finally!– that the greed of US car-owners should never be allowed to over-ride the right that all the world’s men, women, and children have to adequate and assured sources of nutrition. (Elsewhere in the book, by the way, I note that most “rights” activists in the US have focused far too tightly on issues of civil and political rights around the world, and have given short shrift to the frequently far more pressing issues of social and economic rights.)
The WaPo’s smart and thoughtful business columnist Steve Pearlstein has a good column in today’s paper on the role that speculators have been playing in the current food crisis. For those of you who are interested, the whole of the column is worth reading. As was his previous column, here.
Some highlights from today’s Pearlstein:
- Speculators have always played a prominent role in commodities markets, but in the past year, they have literally overwhelmed them, causing a dramatic increase in trading volume, volatility and prices and disrupting many of the normal relationships between producers and end-users.
Many of these were the same hedge funds and hot-money investors who had gorged on sovereign debt of developing countries, tech and telecom stocks, subprime mortgages and commercial real estate and now needed a new thing to focus on. Others — including, it is said, some sovereign wealth funds — looked to commodities as a hedge against the falling dollar. But perhaps the biggest push came from pension funds, foundations and university endowments whose managers had all gone to the same conferences and read the same academic papers, suggesting that a basket of commodity futures would provide a good hedge against stock and bond market declines.
…[T]he Bank for International Settlements estimates that the value of all the derivative contracts traded on the unregulated over-the-counter markets surged from about $3 trillion in the spring of 2005 to more than $8 trillion today.
Whatever the number, it’s hard to imagine that it wasn’t a significant factor in skyrocking prices…
… [T]he only people who don’t believe speculation is driving a commodities bubble are the big commodity traders and the commodities exchanges, which are profiting handsomely from the soaring prices and trading volumes, and the regulators at the Commodities Futures Trading Commission, whose economists cannot seem to find statistical evidence that financial investors have had much of an impact on commodity prices.
US citizens need to start acting responsibly and quickly to bring these devastating speculations in basic foodstuffs under some form of rational and accountable control. This is in our direct interest as a citizenry, since so many of our own citizens are being harmed by the food-price rises.
But in today’s irreversibly hyperconnected world it is always, also, in our interest to make sure that actions taken by our government and our fellow-citizens on Wall Street, in Big Ag, and other big-business sectors stop inflicting harm on the world’s poorest, most vulnerable people.
regarding Bush’s comment:
Policy in the United States has devolved into a presidential imperative, not only for war, but for almost everything of importance. The US is now under three ongoing national emergencies (WMD, Iran and terrorism) announced by presidential Executive Orders, unchallenged by the Congress. Three national emergencies! The domestic “Threat Level” is “elevated” by presidential decree. In foreign affairs the US will not talk to certain countries, declares the “commander-in-chief,” as he is often referred to.
So now we have the “CINC” declaring what US food and energy policy will be, most probably without a peep from Congress. So how can US citizens start to act responsibly and quickly to take control of these wrongful policies, as you suggest? Your book is on order.
Meanwhile the interminable presidential campaigns roll onward, with commentators speculating on what the new Decider might decide, if we can only fathom their deepest thoughts. What a mess. Democracy is a dead duck.
Our government is slipping toward autocracy. Another eight years of Bush or neo-Bush might do it. It seems that the real problem is the spineless Congress. They seem to have lost all interest in the common good and spend all of their time and energy working on their reelection or preparing their post Congressional future on K Street. Nancy Pelosi and Harry Reid may be masters of manipulating the inner game of congressional power, but they must rank among the least effective leaders in US history. In every instance they have given in to Bush when push came to shove. Hopefully Cindy Sheehan can give these people the wake up call they need.
..[T]he Bank for International Settlements estimates that the value of all the derivative contracts traded on the unregulated over-the-counter markets surged from about $3 trillion in the spring of 2005 to more than $8 trillion today.
Unfortunately for Pearlstein’s thesis, most of those exposures go in opposite directions. And the overwhelming majority are unrelated to commodities altogether but linked to LIBOR or currencies.
Pearlstein would know this if he had spent a day working in any financial market.
On many commodities markets these days, the cash or spot market are often below that of futures market — a condition known as “contango” that usually signals that something other than market fundamentals are at play.
Deeply confused. ‘Contango’ has been around as long as futures themselves (400 years!) It’s the normal state for markets (gold is in contango every day of every year) and reflects the very easy-to-grasp principle that cash today is worth more than cash tomorrow. Perhaps Pearlstein is against charging interest?
Fun trivia: coal in S. Africa is worth 40% more than coal in the USA! This market is hardly dominated by speculators. Ditto for gasoil in Asia? Is this the doing of hedge funds? Which ones? Can we not discuss the dozens that go bust every year? Surely that would be fun too!
I have not noticed any reticence to criticize President Bush. The effect of corn ethanol on World food prices pales in comparison with the effects of World oil prices on food costs.
Allan, a good point. Do you have any figures or estimates on this? Obviously oil prices factor in in at least two ways: fertilizer costs for farmers and transportation costs for their products…
from the web:
The vast majority of energy used in the U.S. food system (around 80 percent) goes to processing, packaging, transporting, storing, and preparing food.
Produce in the U.S. travels, on average, 1300 – 2000 miles from farm to consumer. Since 1970, truck shipping has dramatically increased, replacing more energy efficient transportation by rail and water.
from the web:
Last year the US burned 138 million tons of maize and transformed it into bioethanol and biodiesel.
Don maybe you can explain how the US, still a massive grain exporter is responsible for “driving hundreds of millions of our fellow-humans in poor countries into hunger.” Unlike the EU (the world’s largest biofuels consumer and by way of Brazil, producer) the US doesn’t import its biofuel from developing countries, or outsource the harvesting of cereal-displacing biofuel crops (itself a product of UN climate-change policy).
US fuel costs are lower across the board -coal, gasoline, crude oil and electricity- than those of most developed nations and can therefore no longer be said to drive global energy costs. Might not vendors of fuel to developing world bear more responsibility than the “all powerful” USA of our imagination?
ttp://seekingalpha.com/article/65482-are-speculators-driving-the-agriculture-market
Here’s a “reality-based” analysis that makes mincemeat out of Pearlstein’s silly and uninformed editorial. Warning: it contains numbers!
The gist is: if speculators, index funds etc are driving prices higher, we’d see evidence of this in the CFTC-reported statistics called “commitment of traders”. And of course, the numbers show the opposite: legitimate commercial hedgers are growing in number, not speculators.
But couldn’t these shady speculators be operating from offshore, using unreported swaps to escape the CFTC radar? Not if they cater to US investors or funds. In any case, should these cartoon villains hope to corner any physically settled future, they would have to find commercial sellers to take the other side, or they’d just be buying paper from one another. Every seller needs a buyer.
Then there’s the issue of warehousing the corn, oil, etc. at the time of delivery (ie, NOW – the relevant time frame, since the world’s poor can’t eat futures contracts.) Unless George Soros is secretly warehousing physical infrastructure as well as futures, grain elevators and crude storage owners would squeeze him out in short order, the way funds are routinely squeezed out of any market with onerous carry cost.
The whole argument is conceptual nonsense, driven entirely by prejudice against wealth itself. I have no love for hedge funds or their investors. But you don’t seem to grasp how limited their power really is.
vadim,
I know nothing about grain and very little about economics, and I didn’t say what you infer that I said. Probably you need to direct your question elsewhere.
…should these cartoon villains hope to corner any physically settled future, they would have to find commercial sellers to take the other side, or they’d just be buying paper from one another. Every seller needs a buyer.
Thanks for pointing that out. I have too been confused as to how people think trading in futures can have any more than a marginal effect on food prices. I think that’s why they call them derivatives.
I also find it odd that we don’t see the same criticism leveled at Lula da Silva, who is leading the second-largest ethanol effort in the world. I mean shouldn’t Brazil be producing food instead of alcohol?
Hi Don,
I’m sorry for misreading your posts. I’m sure as a curious, intelligent and fair-minded person you’re capable of knowing more about the issue than Steven Pearlstein (a smug dilettante w/ no background in trade or finance, who somehow isn’t shy about slandering its practitioners)
I doubt US corn production for ethanol has much to do with food shortages halfway around the world. Food is less geographically fungible than energy (oil doesn’t rot and is cheaper to transport between continents.) And as noted the US doesn’t import or subsidize offshore biofuel. It certainly doesnt import them from Africa where the greatest shortages are occurring.
Perhaps we should discuss how exports of US food aid could be made more efficient. This WaPo piece (http://www.washingtonpost.com/wp-dyn/content/article/2008/03/13/AR2008031303347.html ) considers using aid dollars to ship food between production and famine areas of Africa, since transportation accounts for 2/3 of cost and outright food *donation* undercuts local development.
Curiously this proposal seems to have been rejected not only by Congress but also the largest coalition of food NGOs (‘Alliance for Food Aid’) For all its groovy “people centered” ideals AFA would rather we continued shipping US grain at staggering cost across the ocean.
“Every seller indeed needs a buyer.” Sometimes that truism can be a little obscured of course, even by accident.
For example, vast numbers of Pakistani and Phllipino villagers have of late decided to donate their kidneys to visiting doctors from overseas. Selling kidneys would be illegal. So where is the seller and the buyer?
In Hong Kong, a difficulty in staunching the flow of “Free Tibet” flags used in protests has been that they have difficulty stopping the import of things maunufactured on mainland China. China, the producer and seller of the free tibet flags, still strongly objects to the flags it makes in its own sweatshops being used to oppose its military occupation of Tibet.
Anyway via CNN:
“Many factors pushing up the price of food
Dr. Joseph Glauber, chief economist for the U.S. Department of Agriculture, said the price increase in 2007 for all food was the largest annual jump since 1990. He blamed it on worldwide economic growth, weather factors in parts of the world, restrictions on food exports and the relatively new biofuel industry.
In particular, he said the two-year drought in Australia has pushed up wheat prices, and said there have also been poor crops in Canada, Europe and the Ukraine.”
Or the BBC website synopsis:
So why have food prices soared?
“The rises are due to a lethal combination of high fuel costs, bad weather in key food producing countries, the increase in land allocated to bio-fuels, and a surge in demand – much of it from the rising middle classes of China and India.
The problem is that once the price of rice or wheat has risen, other factors kick in which make things worse.
There is panic and people start hoarding, speculators buy up supply, and food producing countries impose export controls to try and preserve food for their own people.”
Pretty charts can be found here:
http://news.bbc.co.uk/2/hi/7284196.stm
They identify that the main cost and supply issues are in wheat, rice, and corn, in that distinct order. Of course this lack of food is in the end bought about by people not being able to pay the sellers price, through being too lazy to want to have food enough to survive. Well maybe that is an idiotic position? Almost as idiotic as being opposed to “wealth” would be, if by “wealth” ” you mean wealth enough to feed the hungry.
And here is a fresh analysis from a country where many are starving. The Times of India has a number of excellent articles on this “meaty” issue (see related stories at the bottom of the linked page)