Spikes in grain prices are regularly blamed on oil shocks, droughts and emerging markets’ hunger for meat. The real culprit in the three bubbles-and-busts of the last five years, however, isn’t the weather. It’s financial speculation.
The Midwest drought this summer, the worst in a half-century, produced a bumper crop of profits for derivatives traders like Chris Mahoney, the director of agricultural products for Glencore, the world’s largest commodities trading firm. Mahoney noted during one August conference call that tight grain supplies and the resulting arbitrage opportunities “should be good for Glencore.”
They’ve been a disaster, however, for the world’s poor.
More than 40 percent of grain futures can now be traced to financial institutions, which nearly doubled their commodity bets over the last five years — from $65 billion to $126 billion.
During that time, food prices have bubbled and burst twice — leaving millions of people to go hungry and stoking global unrest — before climbing to new heights this summer. Corn prices soared 65 percent between June and July alone, the same month the World Bank’s food price index recorded its highest rise ever, breaking the previous record set in February 2011.
What’s fueling this stunning price fluctuation is financial speculation. Our research team at the New England Complex Systems Institute built mathematical models to test possible explanations for the price spikes of 2007-2008 and 2010-2011 — including all the above, in addition to the rise of ethanol production. We could replicate a rise in prices but couldn’t explain the bubbles and crashes. When we added speculation, the model fit precisely.