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The root of the problem
The global food crisis stems from a confluence of events: diversion of corn for use in ethanol and other
biofuels, low grain supplies due to drought conditions in Australia and higher demand for food from developing
countries, to name a few.
Market prices for grains and other agricultural products are set in futures and other
markets, and some farmers believe that investment activity in these "soft" commodities has pushed up grain
prices to a higher level than they would otherwise have reached based on the fundamentals. Index fund investments in
corn, soybeans, wheat and livestock futures have risen to some $42 billion, from about $10 billion in 2006,
according to The Wall Street Journal.
Could wild speculation in food commodities be blamed for distortions in food prices? Several
news articles in recent weeks hinted of the possibility.
Loretta Napoleoni, author of "Rogue Economics," contends the world is ruled by rogue forces
and gives dozens of examples throughout her book. Among the subjects of her ire are hedge funds.
"Aggressive
and unethical groups of hedge funds are today among the most powerful of globalization's outlaws. They are the
bullies of finance, using the size of their portfolio to crush industries and circumvent legislation," she
says in her book.
Structural imbalances
But hedge funds have not hammered the food industry directly -- at least, not yet, she says. The causes of
the crisis are far more complicated than speculation in food commodities. Yes, hedge fund investments in oil
futures can be blamed for the rise in oil prices, says Napoleoni. But the food crisis is a problem of structural
imbalances, and several factors are behind these imbalances.
For one, developing countries have focused on export crops and so have become more dependent
on food imports for their own needs. Meanwhile the two largest exporters of agricultural products -- the
European Union and the United States -- subsidize their farmers, an action that protects these advanced
economies from disruptions in food prices. But economies of developing nations have no such protections.
"In the rest of the world, countries were not in competition with the products of these two
countries because the prices in these countries were far too low," she says. "So the problem is attributable
to rogue economics because the free market model was applied to Third World countries, but it was not applied
in our countries," she explains.
Napoleoni says biofuel has had minimal impact on food prices -- 10 percent -- and speculation in
futures, maybe a 15 percent impact. "But the true impact is the price of transportation, which has gone up 65
percent. So 65 percent of the increase in the price of food is due to the higher costs of transporting the food.
And on top of that, of course, we had the increase in prices due to wheat shortages" because of the drought in
recent years in Australia, she says.
The crisis will not go away overnight. Napoleoni predicts it will go on for at least a year.
Rising food prices benefit a few
people but cause suffering for millions of others.
Because we live in a global society, the cry of
the poor is audible. Those of us who can respond
to these cries should find a way to do so.
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