Pete Larson on the financialization of agricultural commodities

    One of our regular contributors, my old friend Pete Larson, who many of you had the pleasure of seeing perform at this site’s 10th anniversary party a few weeks ago, is going to be speaking in Ann Arbor on Thursday about the financialization of agricultural commodities. I took the occasion to ask him a few questions.

    MARK: So, you’re presenting on the subject of agricultural commodities markets?

    PETE: Sort of. Specifically, I will be speaking on the financialization of agricultural commodities and how it relates to the unprecedented rise in worldwide food prices since the early 2000s. People tend to assume that prices for food are set using basic supply and demand criteria. In part, it is the case, though the real story is much more complex. Wall Street plays an important role in creating conditions that lead to high volatility and rapid increases in food prices.

    MARK: What’s the group that you’ll be presenting too?

    PETE: NWEAG (New World Ecology and Agriculture Group). They are a loose group of scientists concerned with all topics regarding agriculture. They meet weekly to discuss topics including sustainable agriculture, GMOs, corporate food production, farmers’ social movements, and others. The group erupted out of Science For the People, another left leaning group that was active in the 1970′s. They have done a lot of work in Latin America (including Cuba), setting up extension services and building local research infrastructure.

    MARK: And there are chapters of this organization across the globe?

    PETE: Cornell has to only other active NWEAG group that I know of. I’m not sure if Harvard’s is still going, though Richard Levins, the group’s unofficial godfather is certainly still pursuing relevant topics in his lectures.

    MARK: As the University of Michigan doesn’t have an agriculture program, I’m curious as to who attends these meetings.

    PETE: Communists! It’s really a small group. There are a few faculty from the Ecology and Evolutionary Biology Department, a few retired facultly and students from a variety of departments including Public Health, Social Work, SNRE and the EEB.

    The group is inherently political. Though all of the participants are scientists of one kind or another, the group isn’t afraid to inject leftist political topics into the discussion.

    MARK: And is this open to the public?

    PETE: Yes, anyone can come. It is going to be in the Nat Sci Building on the 27th of this month.

    MARK: I don’t want for you to give too much away, but what do you expect will be the main take-aways from the presentation?

    PETE: As I said before, people tend to view food prices as being supply driven. They instantly think that a drought, for example, will reduce supply and drive costs up. For much of human history, this has been true. In an increasingly globalized and financialized world, the prices we pay for non-manufactured goods are at the mercy of speculators and hedge fund managers.

    To me, this is a human rights issue. All humans have a right to food. Without food there cannot be health. Here in the States, most households can absorb even a 100% increase in the cost of food. We can eat out less, drink less, buy in bulk or just suck it up. We can also do things like widen access to food stamps. We already seem to be doing this, though I’m not sure it’s a response to increasing food prices.

    To a Malawian living on less than $1.00 a day, even a 10% increase could be devastating. If prices go up, people in Malawi have no choice but to eat less. They already don’t eat enough. I don’t see how any retirement package is worth that cost.

    MARK: What do you make of the headlines today attributing rising pork prices to the global drought? Surely there’s some connection, right?

    PETE: Of course there is some connection. The point is that these instantaneous events do not explain the trend of rapid increases in the price of all foods over the past decade. We need to look at the bigger picture here.

    Think about how critics frame climate change. While snow today in Oklahoma City might bring down the global mean slightly, it doesn’t say anything about long term rises in world temperatures.

    MARK: Can you explain how it is, in simple English, that speculators are driving up the costs?

    PETE: Unlike gold, agricultural products cannot be purchased today at a low price, and stored until the price goes up. They rot. People do, however, buy contracts, promising to pay a fixed price for something that hasn’t even been grown yet. Farmers like this, as it gives them stability. There is nothing wrong with this practice.

    The problem is that these contracts can now be bought and sold, a practice that was once illegal. Traders will buy and sell these contracts over and over so that the price increases every time it changes hands. Contracts are rolled into derivative packages and continually sold and resold like mortgages were before the economic crash.

    Buyers and sellers really don’t care what’s in the package, only whether it will yield instantaneous profit. Basically, people are gambling with ag contracts (often mechanically), increasing prices and inducing unprecedented levels of volatility. The farmer, of course, only gets what he’s initially promised.

    Now, understand that I’m an Epidemiologist/Statistician, not an Economist, though this has become a major interest of mine as of late.

    MARK: Do you have evidence that his is happening?

    PETE: Yes. There is ample evidence out there. If one looks at food commodity prices, one can see that the pattern follows that of the stock market. The NASDAQ and the FAO’s food price index have mirrored one another for the past decade.

    There is plenty of advice out there from brokers recommending that everyone get into ag commodity investments as it is guaranteeing an increasing, and very good, rate of return. Of course, this fuels the demand for contracts, increasing the price.

    MARK: Is there a movement afoot to change this? If so, who’s leading it? What economists and political leaders are addressing this?

    PETE: People are very concerned. Joe Stiglitz has written on it. Howard Stein, an economist here at the University of Michigan, has also written extensively on the problem. The United Nations has raised several flags. Pegging the world’s food to the stock market is just about the worst idea ever and it’s got many, many people worried.

    MARK: Would I be the biggest douche in the world if I blew off your lecture to go and experience Herman Cain’s College Truth Tour instead?

    PETE: Oh man. I guess that’s the price of comedy.

    [note: If you're interested in this topic, but can't make it out tomorrow to hear Pete speak, he's got a lot of the data up on his website.]

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      12 Comments

      1. Lorie
        Posted September 27, 2012 at 5:30 am | Permalink

        Great subject and right on Pete!

        The more people know and understand this the better because farmers are getting less for better products and the futures gamblers are getting more…in a parasitic way. And nobody understands it enough to complain about it.

      2. Posted September 27, 2012 at 6:15 am | Permalink

        Mark,

        I definitely should have mentioned that reigning in commodity derivatives is part of Dodd-Frank but has yet to be implemented.

      3. Posted September 27, 2012 at 6:16 am | Permalink

        Thanks, Lorie!

      4. Sarah Smith
        Posted September 27, 2012 at 8:11 am | Permalink

        I’m hoping that Herman Cain will pinch my butt.

      5. Eel
        Posted September 27, 2012 at 9:07 am | Permalink

        I’m hoping that Peter Larson pinches mine.

      6. KKT
        Posted September 27, 2012 at 2:28 pm | Permalink

        What time is this happening?

      7. Posted September 27, 2012 at 2:44 pm | Permalink

        5:30 nat sci 2111

      8. Caveboy
        Posted September 27, 2012 at 2:49 pm | Permalink

        What about farm subsidies? According the Environmental Working Groups website, in the US 10% of recipients collect 75% of subsidies. So if I were a huge corporate Agribusiness could I not sell at a lesser price, knowing that the difference would be made up by subsidies. Then according to Mr. Larson purchase the commodity futures at a slightly elevated price and resell at slightly more than my purchase price. It just appears that this system is ripe for pilfering by huge agribusiness at the expense of the taxpayers and consumers.

      9. Posted September 29, 2012 at 7:56 am | Permalink

        I have it on good authority that it is not just communist who attend these regular Thursday night discussions, but also socialist, anarchist and even an occasional worker syndicalist.

      10. Posted September 29, 2012 at 2:00 pm | Permalink

        I can only really think of two communists that regularly attend.

        I was joking.

      11. Posted September 29, 2012 at 4:22 pm | Permalink

        Again, I was joking about the two communists.

      12. KKT
        Posted October 4, 2012 at 3:06 pm | Permalink

        An interesting graphic showing how much money farmers actually make on the food products they produce.

        http://imgur.com/dhZGI

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      2. [...] at length on the issue of the issue of financialization of food and price volatilities. Yet, when I bark about the subject, few around me seem convinced (and that’s [...]

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