The Reason Food Prices are Climbing- The Myth of a Shortage
William Czander
We witness a plethora of reasons for the rise of food commodities. Some have blamed transportation costs, others claim it's the money exchange rate, and there are even some who say its Bio-fuels. And of course the Chinese are on the blame list (they get blamed for almost everything). And, now the Middle East is being blamed.
Eric Pooley and Philip Revzin (2011) maintain that the rising food prices were the result of turbulent weather around the world. They state:
"The hunger that has roiled the Middle East was not caused by the whims of autocrats and cops. It began last year with crippling drought in Russia and later Argentina, and torrential rains in Australia and Canada. The deluges in Saskatchewan were so sustained and intense that farmers couldn't plant some 10 million acres of wheat, according to the Canadian Wheat Board. "What is typically the driest province was never wetter," said the governmental agency Environment Canada. Shrunken wheat harvests in those countries, along with cool, wet summer weather in the American Midwest that delayed the U.S. harvest, helped drive wheat prices at the Chicago Board of Trade up by 74 percent in the past year. Corn traded in Chicago rose by 87 percent during the same period. More recently, grain prices have spiked even higher because of yet another drought, this one threatening China's wheat crop, the worlds largest. In that country's eight major wheat-producing provinces, some 42 percent of winter wheat cropland has been hurt by a dry spell, according to Agriculture Minister Han Changfu."
In their article they briefly mention that the rising price of food may also be a result of corporations making extraordinary profits by pushing the price of basic seed and fertilizer high. But this does not surprise me considering their article appeared in Bloomberg Business Week where executives and their corporations are treated with "kid gloves."
Several have claimed that rising food prices are the result of rapidly growing consumption of food. They claim the industrial growth in China and India has increased consumption. They say there is not enough food to go around and we have a fertilizer shortage brought about by the need to increase food production. However a UN report debunks this theory by claiming by 2011/12 the supply of fertilizer will increase by 21.2 percent while total demand will only increase 11 percent (UN, 2008). The fact is we have is an oversupply of fertilizer and still the price continues to grow. What about basic foods? Despite claims of bad weather the New York Times maintains there is no worldwide wheat shortage (Bowley and Martin, 2011). This is confirmed by reports from the UN and others suggesting there is no worldwide shortage, but in fact an oversupply. What one learns in Eco 101 is if there is an oversupply of a commodity the price goes down. Not true with these commodities. Despite an oversupply the price goes up.
So what's causing the price to rise?
Perhaps the answer is not what but who is causing the price to rise.
Let me suggest that it's not the bad weather or all these other factors that is causing food prices to go through the roof it's the greed of corporate executives and commodity traders. I am suggesting there is a direct link between CEO greed and the pain and suffering food prices are causing around the world. Much has been made of CEOs who engage in mass firings, who outsource and offshore, who steal billions from retirement funds, who flip companies with LBO's and engage in what has become the new America way to manage called "take the money and run." We now have yet another way these marvels of creative investing found to obtain riches. They have entered the food industry with gusto and reaped extraordinary profits by engaging in food price inflation and in the process leaving the poor, the fastest growing segment of the world's population, unable to feed themselves. Many commentators and analysts have suggested that part of the reason people are taking to the streets in Egypt, Ethiopia, Yehman, Tajikistan, Tunisia, Libya, Morocco, Jordan and other Middle East countries is in response to the rising cost of food. They have joined the poor from West Africa, Mauritania, Burkina Faso and Cameroon, along with Haiti and Bangladesh to protest because they are no longer able to feed their families. We also witnessed food riots and protests in parts of China, India, Bangladesh, Khartoum, Sri Lanka, and even Hungry.
The crisis is particularly egregious in Egypt where wheat sold for 2.5 Egyptian pounds per kilogram in January 2011 and in May 2011 is 3.5 Egyptian pounds, the same for tomatoes at 2 pounds per kilogram then, and in May 2011, 4 Egyptian pounds. This is a disaster for a country where 40 percent of its 80 million people live on less than 2 dollars a day with an unemployment rate estimated by some to be as high as 20 percent. So they protest in the street and vent their collective rage by burning some Christian churches.
According to Brasher, (2011), some 44 million people have been driven into extreme poverty since June 2010 because of higher food costs, and another 10 percent increase in food costs would put 10 million more people into that category. Another 30 percent increase would lead to 34 million more poor. Extreme poverty is defined as living on less than $1.25 a day. Under these conditions the poor will not only engage in protests but also in waves of crime and gang violence to feed their families.
I maintain it is not the shortage or scarcity of fertilizer that is contributing to the high cost of basic foods around the world. It is the blatant greed of executives, bankers, and the hedge fund guys. Let's look at fertilizer.
Fertilizer
Let's begin by taking a look at the Potash Corporation in Saskatchewan, Canada. In August 2010 this company was on the auction block and was offered $38.6 billion from BHP Billiton the world's largest mining company. Also the Chinese want a piece of Potash and so do other mining companies and of course the hedge fund managers. The stumbling block seems to be the Canadian government. Why so much interest? According to Murray Fulton, an economist at the University of Saskatchewan "What you have in the potash industry are a set of players that are able to control supply and price." (Austen and de la Merced, 2010).
Whoever buys the company for this outrageous price will incur heavy debt, and how will this debt be paid? By increasing the price of fertilizer and this is easily done when one is one of the "big players" who can "corner" the fertilizer market. These spreadsheet executives along with their hedge fund supporters will simply raise prices. Maybe that's why the Canadian government is resisting the sale.
Why is the Potash Corporation valued so high and worth more than $38 billion to these executives and hedge fund managers? The money that can be made is alluring. The CEO of Potash, William Doyle, has stock options worth $600 Million, up from a meager $7 Million at the end of 2003. Doyle's windfall reflects soaring potash fertilizer prices, up from $100 to $600 per ton. On October 23, 2008, Potash reported that it earned more in its third quarter of 2008 ($1.24 billion) than it did in the entire record setting year of 2007 ($1.1 billion). Doyle's total compensation in 2007 was $17,188,621 (up from $8,943,757 in 2006), including a $2.19-million bonus based on the company's performance. This works out to $47,092.11 a day. According to Ebner (2008) "The soaring price of potash has made the top three executives who run Potash " fantastically wealthy, with stock options worth a total of $846-million." To make this even more absurd if Potash is taken over by another company Doyle will get a $400 million golden parachute and Potash will pay his taxes. These executives actually run the company from their offices in Chicago. There job is simple; pay miners peanuts to take the Potash out of Saskatchewan, put a price on it and ship it around the world and they get paid millions for this.
The actions of Doyle and his executives have contributed to the mounting worldwide food crisis by keeping fertilizer expensive. The higher prices for all Potash Corp products, including potash, nitrogen and phosphate fertilizers, have contributed to the massive increase of some the most basic international food commodities. For example, consider the international market price of wheat: Between February 2007 and February 2008 the price of a bushel of wheat doubled hitting a record high of over $10 a bushel and according to the Labor Dept. between October 10th and January 1st of 2011 a bushel of wheat rose 15 percent. In July 2010 a metric ton of wheat cost $190 and over a period of six months that same ton cost $327.
Another contributor to the high price of food is MOSAIC. It is a publically traded arm of Cargill the world's largest privately held company. Because it is privately held Cargill's profits and how they are obtained are not public but it's safe to say that Cargill controls much of the world's potash and phosphate two of the main ingredients of chemical fertilizer. Associated Press (2011) reported that Cargill's net earnings in the first quarter of 2011 was up 23 percent from a year ago and the company is on a buying spree and is planning to sell its shares of the highly profitable MOSAIC.
MOSAIC's CEO Jim Prokopanko earned $3,263,890 for the fiscal year ending May 31, 2008. In 2008 Prokopanko got a non-equity incentive bump 96 percent higher than in fiscal 2007 (Kennedy, 2008). In 2009 Prokopanko received a 40 percent increase in compensation. In January, 2010 Prokopanko sold 52,000 shares of MOSAIC for almost $4 million. In 2010 Prokopanko earned $6.26 million in salary, stock and other compensation. MOSAIC has quickly become the darling of Wall Street.
MOSIAC like the Potash Company is largely responsible for the tremendous spike in the price of basic foods. In April 2008, the joint offshore trading arm for Mosaic and Potash hiked the price of its potash by 40 percent for buyers from Southeast Asia and by 85 percent for those from Latin American. India had to pay 130 percent more than the year before and China was up an astounding 227 percent. (Patridge and Hoffman, 2008).
Seeds
It's not only the cost of fertilizer that is contributing to the high cost of basic foods, it's also the rising price of seeds. Consider agricultural biotech giant Monsanto. They expect to see their profits double by 2012. Monsanto has been buying agriculture companies expecting a so-called worldwide food shortage to continue. But in fact they are planning to profit off soaring prices (Hiralal, 2008) . Monsanto is another darling of Wall Street and in 2010 "Chief Executive Magazine" named CEO Hugh Grant the "Chief Executive of the Year" (Donlon, 2011). Chief Executive Magazine seems to have lost its ethical moorings. Monsanto makes its profits selling genetically engineered seeds to farming industries and farmers around the world. Many worry that genetically engineered food will wind up destroying natural or organic foods and some consider it potentially the most harmful invention since the atom bomb. It is the cost of Monsanto's seed that has contributed to the growing price of food. Farmers know that these engineered seeds of corn, wheat, cotton and soybeans stand a better chance of maintaining profitability because they tend to produce more crops per acre and survive under the most difficult weather conditions including drought. So they need these seeds to stay in business. Monsanto refuses to allow farmers to reuse the seed so every year they must purchase new seeds, this plays havoc with farmers in third world countries and significantly contributes to the price of food. (Donlon, 2011).
Other darlings of Wall Street are Archer Daniels Midland and Bunge. Their stocks are soaring as the w orldwide demand for food grows and the price of grain prices continues to remain high.
The Real Reason the Price of Basic Food is Rising
We have already established the price of fertilizer and seeds are major contributors, but what about hoarding? There is widespread belief that hording of wheat, corn, grain and other commodities are occurring but who is doing the hording? Again we need to look at the villains of Main Street and the poor. Of course hording is just another method executives, hedge fund operatives, and their Wall Street colleagues use to benefit and you can bet their doing it. While it is difficult to actually catch investors actually hording the question is raised because investment funds are pouring billions into food commodity markets. The capacity to make millions is clearly an incentive to bet but to ensure they do not lose requires them to engage in price control. This is clearly not the first time investment managers have tried to control the price of a commodity and make a killing. These investors would like Federal regulators to believe that they are speculators and they merely invest of price movement of a commodity and they do not buy or sell a physical commodity. But they do not disclose how they influence price and how they are guaranteed they will make that killing. The truth of the matter is contrary to their claims they do control the physical commodity it's called "hoarding."
How does one hoard? It's surprisingly easy. Get a silo purchase a commodity before it is seeded. Then at harvest fill the silo with several million tons. If that does not work then load millions of tons of the food commodity onto a giant tanker ship and leave it anchored in a local harbor, keep it there until the price climbs and sell for a major profit. Take some of your profits and build two or three more silos or rent more tankers and do it over again. Of course they do not call it hoarding it's called "controlled inventories." If enough do this they effectively control the price and the price moves in one direction. How much is being taken off the market and hoarded is unknown without federal oversight. This terrifies commodity hoarders so to keep the Feds off their tail they make certain the price for food in the US rises in small increments and Main Street is kept quite with stories of drought, bio-fuel, population growth and other fabrications.
Why is hording occurring? Look to the Wall Street bankers
Commodity speculators is a rapidly growing investment field and hedge fund managers disillusioned with the Wall Street market have flocked to trading commodity futures. According to Steward and Waldie (2008) ""hedge funds and other sources of hot money are pouring billions of dollars into commodities to escape sliding stock markets and the credit crunch, putting food stocks further out of poor people's reach." Steward and Waldies, (2008a) maintain that investment funds now control 50--60% of the wheat traded in the world commodity markets and that the amount of speculative money in commodities futures like rice or wheat has ballooned from $5 billion in 2000 to $175 billion to 2007 (Stewart and Waldie, 2008). At this rate by 2014, $350 million will be bet on prices of food commodities. Food will become a commodity treated by speculators the same as gold and precious metals where hoarding is increasingly common.
As we have witnessed with precious metals hording; price inflation results and the investors get rich but this sets off a vicious cycle. Consider copper: If you walk around the Bronx NY you will notice that anything made of copper has disappeared: Drain pipes, gutters, siding, decorations, cupola's, doors, and even wiring. In some areas of the country rising copper prices has prompted thieves to climb poles and cut down live telephone and electrical lines for the valuable copper inside. Throughout the Industrial Midwest abandoned homes are gutted of cooper pipe, not by addicts but by people trying to feed their families. Furthermore we see ample evidence of destruction around the world as antiquities made of precious metals are destroyed. In Egypt men have raided museums looking for metal to melt so they can buy food for their families. We also witness food reaching the level of a precious commodity, thieves are stealing food. According to Neuman (2011) in April 2011 a gang of thieves stole six tractor-loads of tomatoes, one truck of cucumbers and a truckload of frozen meat. Total value: about $300,000.
Ethical Question
This raises the question: Should governments allow food be treated as a commodity? Should speculators be allowed to engage in making money off the price movement of food? Given the absence of transparency it is impossible to know the quantity of food harvested or needed in the global marketplace. We do not know who is producing what, and how it is being shipped, stored, priced or consumed. What we do know is millions are starving and suffering has increased throughout the world. And, we do know that commodity speculators, hedge fund managers and executives and their stockholders are in the game and getting rich. And, we know that Goldman Sachs is right in the middle of this (Kaufman, 2011). It's one thing to get rich closing US factories, sending jobs overseas, fudging derivatives and getting bailed out, but it's quite another to get rich making food so expensive hundreds of millions of adults and their children no longer have adequate food.
References
Associated Press (2011) Cargill profits rise amid food-price swings. Retrieved 4/13/11 from:http://www.businessweek.com/ap/financialnews/D9MISJJG2.htm
Austen, I. and de la Merced, M.J. (2010) Potash Producer Rejects Bid by BHP Billiton
NY Times Business day. Retrieved from: http://www.nytimes.com/2010/08/18/business/18potash.html
Bowley, G. and Martin, A. (2010) No Wheat Shortage, but Prices May Rise. Published: August 6, 2010 NY Times . Brasher, P. (2011) Food prices pushing world to poverty's 'danger zone'. Retrieved from:
Donlon, J.P. (2011) Monsanto's Hugh Grant, CEO of the Year 2010. Chief Executive Magazine. Retrieved from: http://chiefexecutive.net/ME2/Audiences/dirmod.asp?sid=&nm=&type=Publishing&mod=Publications::Article&mid=8F3A7027421841978F18BE895F87F791&tier=4&id=7EA0D0757ECB49E895AC5EFE2948BE77&AudID=F242408EE36A4B18AABCEB1289960A07
Ebner, B. (2008) " Saskatchewan: A lot more than wheat " Globe and Mail , Toronto, 11 April 2008 . Hiralal, B. (2008) Monsanto raises CEO pat: Expects huge Profits Retrieved from http://www.thedeal.com/corporatedealmaker/2008/12/monsanto_raises_ceo_pay_predic.php
Kennedy, P. (2008) . CEO Paywatch: Mosaic's Prokopanko, $3.26 million. StarTribune. 8/25/08. Retrieved from:
http://www.startribune.com/business/27410754.html?elr=KArks:DCiU1OiP:DiiUiD3aPc:_Yyc:aUU
Kaufman, F. (2011) How Goldman Sachs Created the Food Crisis retrieved from agriculture corner. Retrieved from: http://www.agricorner.com/how-goldman-sachs-created-the-food-crisis/#comment-293
Neuman,W. ( 2011) Price of tomatoes has a lot to do with these thefts. Retrieved from:
http://www.nytimes.com/2011/04/15/business/15bandits.html?_r=2&hp
Partridge, J. and Hoffman, A. (2008) "China deal sends Potash soaring" Globe and Mail , Toronto, 17 April 2008.
Pooley, E. and Revzin, P. (2011) World Feeding Itself Spurs Search for Answers. Retrieved from: http://www.bloomberg.com/news/2011-02-17/world-feeding-itself-spurs-search-for-answers-eric-pooley-and-phil-revzin.html
Is there a shortage and have supplies dropped according to FAO of the UN (2008) http://www.opednews.com/populum/ftp://ftp.fao.org/agl/agll/docs/cwfto11.pdf
Steward, S. and Waldie, P. (2008) "U.S. food producers, speculators square off", Globe and Mail , Toronto, 23 April 2008,
Steward, S. and Waldie,P. (2008a) "Why grocery prices are set to soar", Globe and Mail , Toronto, 24 April 2008a,
Author's Bio: He has taught in MBA programs for almost 35 years in 2002 he left academe to work for Home Depot where he witnessed the absurdity of corporate life. He is now semiretired and serves on the faculty as an adjunct professor at several institutions. He holds a doctorate in psychology from NYU and completed two postdoc's: The Institute for Social and Policy Studies at Yale, and the Post Graduate Center for Mental Health in psychoanalysis. He is a member of a unique group of scholars and consultants who apply psychoanalytic thinking to organizations. He has written two books and is writing his third, an attempt to understand executive greed and self-destruction.
May 22, 2011