Food riots - The lethal effects of commodity market speculation

May/Jun 2008

In Britain, it seemed that the rise in the price of basic foods and the credit crunch arrived more or less simultaneously. There is, of course, a connection between the two phenomena, in that they have the same cause: a speculative frenzy by massive volumes of capital in search of quick profits across the world.

But the housing bubble has burst by now, while the food bubble is still developing. In fact, it is growing even faster, since some of the speculators who were gambling on the housing and debt markets up to last year, have moved to gamble on commodities - that is, food, oil, metals, etc., thereby feeding the existing inflation in this market.

The impact of the commodity bubble has been uneven. In the industrialised countries it has manifested itself for some years mainly in the form of increasing petrol and gas prices. And it is only recently that food prices have begun to increase as well.

The poor countries, however, have been hurt by price increases for longer. They have been subjected to a rise in the cost of fuel for cooking and for transport for some time, while the food bubble has increased the price of basic foods in the context of populations already close to - or under - the bread line.

The food riots which have found their way onto the pages of the press are only the latest manifestation of this situation, at a time when spiralling food prices - up by more than 60% in some countries, in the last year alone - mean the difference between being able to eat or not to eat, to survive, or to die.

After all, at least 3 billion people - just under half of the world's population - live on less than £1 a day, which includes 1 billion living on less than half that. They would already be reliant on food aid to survive, if they are lucky enough to get it. So a doubling of the food price is going to drive millions more to starvation, since at the very most they can eat only half as much as before. And many were already having just one meal a day, often consisting of only of rice, or corn, or wheat bread. The poor in Haiti sometimes resort to "mud cakes" made of clay, plus salt or sugar and margarine to stop the pain of hunger.

In fact, the World Bank estimates that 100 million more people have been pushed into extreme poverty in the last 2 years. So much for the ending of world poverty by "cancelling the debt of the most indebted nations" as the now discredited G8-Live8 Summit at Gleneagles in 2005 promised to do!

Last month, UN Secretary General Ban Ki-Moon warned of "social unrest on an unprecedented scale". Apparently the situation is considered serious enough for the UN to have decided to devote its June summit to the food price crisis and no doubt, the question of how to avert further social explosions.

The enraged tsunami

It is ironic that the business weekly The Economist should have dubbed this food crisis "the silent tsunami". Because although hunger may well be like a tidal wave following in the wake of the worldwide spiral in food prices, it is anything but silent.

It was probably the scenes of angry protests in Haiti, hitting TV scenes in western countries, which eventually brought home the plight of people across the globe, now faced with the impossibility of buying even the few grains of rice they used to be able to afford. They went into the streets chanting "we are hungry" and took president Preval at his word, since he had said that he would "join the people" in their suffering.

They went to the presidential palace to fetch him. As a consequence, on 7 April, five, maybe more, Haitians were shot dead and many others wounded, while the so-called "peace-keeping" force of the UN used its now familiar and lethal tactics (shooting plastic and real bullets, plus teargas into the crowds) to intervene, in order to protect the presidential palace in the capital, Port-au-Prince. Four of these soldiers were also shot and one killed. Finally, on the 12th of April the prime minister, Jacques Edouard Alexis was removed from office by a no confidence vote, in an attempt to placate the population.

But these particular events in Haiti had been pre-dated by outbreaks of riots and protests over food prices both in Haiti itself and in many other countries in the under-developed world over the past months. In December 2007, there were riots in Mexico as a result of the huge rise in the price of tortillas, which rose fourfold in some parts of the country. In January this year there were protests in Indonesia over the rise in the price of soybeans. In February, the focus of angry food protests was Burkina Faso and this time crowds attacked government offices and raided shops.

In March, 400 protesters beat pots and pans outside the Central Bank of El Salvador against the rise in prices of staple foods - including a rise in the price of beans by 68% since January 2007. There have been riots and demonstrations in Egypt, Guinea, Mauritania, Morocco, Senegal, Bangladesh, the Philippines, Uzbekistan and Yemen, among many other countries, on a scale not seen for 30 years.

Speculators pull food into their vicious circle

The food price increase affects just about everything. The price of wheat, butter, milk have tripled since 2000; the prices of corn, rice, and chicken have doubled. It is a worldwide phenomenon. Even in the US, food staples like milk have increased 17%, rice, pasta and bread have risen 12% and eggs 25%. As job losses increase, an unprecedented 28m people are expected to receive food stamps to survive - in the world's richest country!

Over the past year, food prices in Britain have risen by an average of around 15%. Motorists are paying 20% more for petrol. Gas and electricity bills have gone even more. It is not for nothing that the prime minister announced, in the wake of the disastrous local election results, that he would offer "help" to home owners, food shoppers (everybody!) and motorists.

The UN Food and Agriculture Organisation (FAO) index for food prices went up 40% in 2007 alone. Over the six years to February 2008, an index compiled by US bank Goldman Sachs to measure changes in the average prices of commodities, has jumped by 288%. Components of this index, like the energy price index (including oil), increased by 358%, and the agricultural index by 220%. This is reflected in a real price increase for agricultural commodities (like animal feed and food) of 104% - a more than doubling.

What is the reason for this sharp rise in prices? The Economist's "tsunami" metaphor is actually quite appropriate - although this journal certainly did not mean it that way - because it also describes very well the speculative wave spreading across the world, which has caused the prices of commodities to shoot up sky-high and which precipitated the credit crunch.

Commodity exchanges, where all this frenzied activity has been taking place lately, are not new. They date back to the days of sailing ships in 18th century Europe and by the late 19th century were established in the US. At that time they allowed traders and producers to hedge themselves against risk - whether a bad harvest or a storm at sea. But since WW2, and even more so since the 1970s, these commodity markets have become playgrounds for floating capital - with markets for food in Chicago, and for metals and oil in New York and London. When there is a large supply of cash looking for quick ways to multiply itself, in the context of other bubbles deflating - as it happened after the stock market crash of 2000-2001 - commodities like oil, but also corn, wheat and rice become a reasonably good bet.

It is this speculation which has driven food prices up. And of course, the nature of this game is that it takes place regardless and to a large extent independently of the actual consumer demand for food or the extent of supply by producers. The more frantic the speculation, the more prices are driven up - even if there is a surplus of food and falling demand, which would normally result in a fall in prices, that is, if producers and consumers were the only ones involved.

Instead, the gambling of City whiz-kids intervenes, on behalf of those faceless wealthy owners of capital - behind which stand the banks and myriads of so-called "investment" funds which only "invest" in making a fast buck. It is this speculative orgy which has pushed up the price of commodities out of all proportion, with such obscene results.

There will be (expensive) oil

What happens in the case of speculation on oil provides a good example, since the mechanisms involved are not fundamentally different from those involved in the speculation on food. Besides, oil is also a factor in increasing the price of food, because of the energy used in its production and distribution.

There have been a number of so-called "oil shocks", when prices soared, in the past. Today's fuel price crisis is reminiscent of the price inflation which followed the 1970s "oil shock", when the oil price increased by 300%. What is more, it is the major oil companies who are again the main instigators of this price rise - since they control the greatest part of the oil market and have a monopoly over it. They played this game successfully in the 1970s and know all the tricks.

This latest "oil shock" actually started at the time of the invasion of Iraq, in 2003, but can hardly be said to be a result of the war. It was, in fact, due to carefully managed speculation on the oil futures markets - NYMEX in New York and ICE in London. For more than two years previously, large volumes of capital in search of profits had flocked to these markets to buy and sell future contracts - that is "paper barrels" of oil which have no material existence until the contract reaches its settlement date, which can be 7 years later.

The oil majors had every reason to take advantage of this speculative spree, using it as a lever to push oil prices up even further. For a long time these companies have had a policy of minimising their investment in new exploration, facilities for production and refineries (the last new oil refinery in the USA was built in the 1950s). As a result, they rely on the financial markets for their profits, while never risking oversupply from new production, which might bring the oil price down. To this end they all employ hundreds of their own traders who speculate on their behalf on the commodity markets, continuously manipulating the situation to fuel yet more speculation! It has proved highly successful, to say the least - judging by the super-profits announced every single year, without fail, by most oil companies.

Shell smashed an all-time company record in January 2008, posting a profit of £13.9bn; and this was when the price of oil was averaging $100/barrel. This April the price went up to a record $120/barrel and there are rumours it could soon hit $200. At this level, BP has finally decided that it is "worth" it to actually invest to get more oil out of the earth "to improve earnings"! And just to prove the point still further, Exxon announced at the beginning of May that it was struggling to increase oil production and squeeze profit out of its refining business, while at the same time it registered record first quarter profits of £5.5bn. And this despite a 10% reduction in production! They are wringing their hands because if they had only invested a bit more, they would be making even more money!

The myth of shortages

Under capitalism, food is not produced to cater for the actual needs of society, of course. It is produced for the market, be it that of a local village or the world market. As a result, unless there are natural or man-made disasters, it more or less meets solvable demand - that is, people who can pay get just about enough - but no more than that.

In the case of the rich countries, this is the result of Malthusian policies, whereby the state makes the political choice to limit agricultural production in order to keep prices high for the benefit of the big landlords and agribusiness. In the poor countries, on the other hand, the production of staple food is limited by the looting of multinational companies, which utilise available land and manpower in order to produce the raw materials required by western agribusiness - which are in general useless to the local population.

So really there is no such thing as a food "shortage". In fact there would be general abundance, if the capitalist market was abolished and production based purely on need was allowed to take place.

Even when there are surpluses, they are not permitted to go to where they are needed, despite the fact that this may spell hunger and death. This is the obscenity of this system where the terms of trade and distribution are dictated by a handful of big trusts which exert a monopoly over both rich and poor countries' small producers.

Rice, for instance, should today be plentiful and cheap due to bumper crops in most parts of Asia (with the exception of flooded Bangladesh). Yet rice is scarce and expensive.

Between November 2007 and February 2008, rice exports from Thailand - which happens to be the world's biggest rice exporter - were running at 1m tonnes a month. This is an unprecedented bounty. Or should have been. But millers in Thailand tried to keep supplies back because the price for them was so low on the real market. This was not the case on the unreal markets - of commodity futures! Last year the price of rice increased 16%. Since January it has shot up by 141%!

The Washington Times recently reported as follows: "Farmers and food executives appealed fruitlessly to federal officials yesterday for regulatory steps to limit speculative buying that is helping to drive food prices higher. Meanwhile some Americans are stocking up on staples such as rice, flour and oil in anticipation of higher prices and shortages spreading from overseas."

The newspaper also mentioned that Filipinos in Canada had been buying rice and shipping it to their relatives back home in the Philippines where people can no longer find rice in the shops due to hoarding. In fact the Filipino government has begun to impose severe penalties for anyone caught hoarding supplies of rice in order to cash in.

In April this year, the "Commodity Futures Trading Commission" began a series of hearings in Washington in order to investigate the current speculative "popularity" of agricultural futures - given this arena used to be dominated only by big producers and buyers and their banks in order to "manage" (not fix!) prices. Grain buyers had been blaming speculators' big bets on relatively small grain purchases for pushing prices up. Needless to say, the Agency already let it be known that it does not really believe such accusations...

Emergency export controls

So, it is clear that today's food crisis is not the result of food scarcity. In fact, there has also been a bumper crop of rice in parts of Indonesia and rice production is increasing, overall, albeit slowly in Asia. It is 0.5% higher in 2007 than in 2006. But nevertheless, the local price of rice rose by 68% since the start of 2008 and as a result, the UN food programme announced that it would be reducing its food aid and rationing the amount of rice it gives to the poor.

The consequences are dire. In East Timor, for instance, where 40% of the population lives on less than 27p per day, the World Food Programme says it can only afford to feed 20% of the population, which means at least 20% - 250,000 people - will go hungry. This, in a country where 46% of children are stunted in growth and 42% of children under 5 years are underweight. If food aid is cut, the further consequences are obvious.

Because of the huge price increase, many Third World governments have intervened to stop export of rice and other home-produced staples in an attempt to keep domestic prices lower. But this in turn has boosted the impact of speculation on international prices.

Kazakhstan, which is one of the world's biggest wheat exporters banned foreign sales of grain. In fact restrictions on exports in Russia, the Ukraine and Argentina have closed one third of the world's wheat market. Indonesia, whose population is one of the world's biggest rice consumers, banned virtually all exports of rice in April this year. Vietnam, Egypt, China, Cambodia and India have all banned rice exports. This apparently had the unfortunate effect of contributing to the price rise on the Chicago rice futures market, where it reached an all-time high of $443 per ton, up 63% since January.

In mid-April, rice prices hit the $1,000 a ton level for the first time ever. This was because importers were trying to secure supplies after the export bans. The Philippines failed for the fourth time to secure the amount of rice it needs. Bangladesh was in a similar situation, unable to meet the escalating price - by now up threefold compared to one year ago.

As a result of the artificially imposed scarcity on the world market, governments of rice importing countries have been trying to build up their supplies, by buying more than usual - thus exacerbating the situation still further. The question now is, where will this stop?

The case of Africa

In Africa, as everybody knows, starvation is no stranger. But when people do suffer starvation, it is usually due to drought or civil war. However today's riots in Niger, Senegal, Cameroon and Burkina Faso, Ivory Coast and the outbreaks of violence even in Egypt, were triggered by the steep rise in food prices.

This has a far bigger effect in Africa than in the Asian countries because people are so much poorer and so much closer to starvation in the first place. Domestic production in many African countries has declined, to become almost negligible, over the past three decades, meaning that Africa, more than any other region depends on food imports. The cereal imports bill for Africa's poor countries is forecast to increase by 49% in 2008, but it has already doubled over the past five years. As a result the continent also suffers disproportionately from the export bans placed on staples by the Asian producing countries.

In Egypt, food crises have normally been alleviated by the fact that there is still a system of substantial food subsidies. But government subsidies, like import and export controls are anathema to the free marketeers of the rich countries who want the whole world to be their playground. So they have, over the years used all kinds of means to force their ex-colonies to cut subsidies, even when these subsidies are a matter of life or death for substantial sections of the population.

In fact today, Egypt still spends more on petrol and bread subsidies, than on education and health combined. But in spite of this, last year the World Bank estimated that one in five Egyptians was living in poverty without the basic means for survival and at least 40% received less than £1 a day. So, recently, when the government decided to replace some subsidies with reduced cash hand-outs to some families, it was faced by strikes and protests demanding not only the shelving of this reform but wage increases and an increase in subsidies. The problem was that food prices had doubled in the previous 2 months.

The International Herald Tribune quoted one protester saying that "If the people rise, then the government will resolve this... But everyone has to rise together. People get scared. But we will all have to rise together." The Tribune went on to say "It is this kind of talk that has prompted the government to treat its economic woes as a security threat, dispatching riot forces with a strict warning that anyone who takes to the streets will be dealt with harshly." Of course, strikes and demonstrations have always been illegal, but neither this nor the "riot forces" prevented these from taking place and even taking place with some success. On 6-7 April, thousands of textile workers and supporters in Mahalla el-Kobra protested against high food prices and low wages. Police occupied the state-owned Misr Spinning and Weaving plant overnight to stop workers from going on strike as they had planned, but the workers responded by setting the building on fire and throwing bricks at the police who were tear-gassing them. On 8 April the Prime Minister Ahmed Nazif rushed to Mahallah to announce that he would grant the workers a 30-day salary bonus and will address their demands on wages and healthcare.

In other words, the Mubarak government has had to cave in. In fact President Mubarak even ordered his soldiers to bake bread for the poor - to increase the production of bread at the many state-controlled bakeries (usually used to bake for the army) to cope with lengthening bread queues and try to avert further strikes and riots.

The green-buck revolution from biofuel

The Financial Times published a cartoon in its 19/20 April weekend edition which showed 4X4 filling up with fuel from a large hourglass containing poor emaciated black people, being funnelled down through the waist of the hourglass, amid sacks of rice. This illustrates one of the arguments being used these days to put the growing market in biofuels into question, by claiming that the switch of land and crops from food to biofuel is fuelling world hunger. Or, quite simply that biofuel production takes corn and soya out of the mouths of the hungry. Of course rice is not one of the sources of biofuel, but corn, wheat and sugar cane are made into ethanol which is used as a petrol substitute and oil palm, rapeseed and soya are used to make biodiesel. The switch to these alternative fuels is meant to cut carbon emissions and is done in the name of tackling climate change, even if the real reason has little to do with that.

The truth is that the introduction of biofuels represents huge savings for the influential car industry, since it allows the antiquated combustion engine to be dressed up in environmentally-friendly clothes without having to make the huge investment required to design a new, really non-polluting engine. Best of all, biofuels come with huge state subsidies for all interested capitalists to share. Indeed, the Financial Times estimates that OECD country subsidies for agrifuels amount already to £7.5bn a year. Besides, the biofuel market is expected to grow from £10.25bn in 2006 to £40.4bn in 2016. This means big money for agribusiness - the likes of Monsanto, Syngenta, Cargill, Con Agra, ADM, who will cash in directly.

Biofuels were also a good excuse for EU governments to hand over subsidies to big farmers for "helping to save the planet" at a time when they are under pressure to revoke their old subsidies.

The International Food Policy Research Institute claims that biofuel demand is responsible for about 30% of recent food price inflation. The EU itself has estimated that the 10% target for biofuels by 2020 would raise cereal prices by 6%.

To increase the use of biofuels from the current 1% to 10% by 2020, as required by existing EU regulations, will mean that at least 55% of EU biofuels will have to be imported from Third World producing countries. And there is, indeed, something rather shocking in the idea that, in the poor countries, large tracts of land which could potentially produce staple foods for the population, should be growing fuel crops to power gas guzzling SUVs and 4X4s in the rich countries.

But some of those opposing biofuels do it because they would rather blame high food prices on biofuels than on capitalism itself. However, they should be just as shocked that large tracts of land in countries where malnutrition is rife, like Kenya for instance, are used to grow flowers and other inedible crops (including tea and coffee, for that matter), when they could be used to farm edible crops or animal feed. Where this happened for generations, like in Senegal, it destroyed the land completely. Many of those who oppose biofuels have nothing to say against this decades long distorting and ruining of poor countries' agriculture.

Ultimately, the issue of biofuels provides an illustration of the criminal absurdity of a system which, faced with the problem of CO2 pollution and climate change, only manages to produce a "solution" which spells disaster for the poorest half of the world population. But this issue can also serve as a diversion as far as the food price crisis is concerned. Because, in this case, it is the destructive chaos created on the world market by profit-seeking speculation and the international division of labour which subjects the poor countries to the greed of the rich countries' capitalist classes, which is the real issue.

A structural problem - intrinsic to the system

The consequences of the credit and commodity crisis are not bad for everyone. For the agricultural industry in the rich countries and the agribusinesses which exploit the poor countries, the current record food prices are a bonanza. The US Department of Agriculture forecasts that US farmers this year will plant the highest acreage since 1984. Net farm income in the US is set to hit a record of £46.8bn which is 4.1% more than last year. Farmers in the US are apparently looking forward to "one of the most remarkable years agriculture has ever seen", according to the agricultural department.

Of course, unlike the farmers in the poor countries, these farmers enjoy direct government subsidies, and indirect ones which allow them to insure their crops against drought, pests and floods.

The new market for biofuels is likely to reduce the production of corn for food by 25% in the US - thus triggering a man-made shortage - and a rise in corn prices. And local speculators have apparently already been hoarding crops on the expectation that prices will rise further.

Compare this to the situation of farmers in Kenya and in Ethiopia, who had to make the decision to plant less this year or not to plant at all. This is not just because the price of fertiliser has gone up but because they cannot get credit to finance their purchases. The credit crunch has its own ramifications in the Third World at every level in this respect. And not least at the level of governments which will be looking for the means to pay the much higher interest rates in order to service their debts to the international financial institutions like the World Bank. They will make their populations pay, including by cutting whatever food subsidies remain. Just where will that leave a country like Haiti?

Haiti was excluded from debt relief in 1996 and 2005, and finally qualified in October 2006. But the government is still forced to send almost £0.5m per week in debt service to the "donor" banks which are supposedly helping to fight poverty. Yet this is a country where 76% live on less than £1 a day and one in five children suffers from malnutrition.

What is the solution? To answer this, one can only go back to the analogy of the "tsunami". What the price hikes precipitated was a tidal wave of anger among the poor. Their protests were perhaps the most effective, when they were together with workers on strike or in the streets - as was the case in Egypt. But they cannot solve the problem, even if they can get their own governments to back down. A large scale workers' tsunami - a tidal wave across the world to sweep away the casino economy of the rich - would need the workers of the rich countries in its front ranks. That is what is missing.