Pension funds that invest in the commodities market are pushing up food prices with catastrophic consequences for the poorest
Hunger is a scourge that has many causes. Some are natural, the cyclones and tsunamis, volcanic eruptions and earthquakes that devastate communities and destroy crops.
Others are entirely our own fault. They include wars – the spectre of hunger is never far away when fighting starts – and the hapless economic policies foisted on poor countries by richer nations in recent years as the price for trade and aid. Tax-dodging by some unscrupulous multinationals, which deprives developing countries of badly-needed revenues, is another problem.
Today, hunger is growing as food prices reach record levels, and a further 44 million people, according to the World Bank, have found themselves reduced to conditions of extreme poverty since the middle of last year. The figures are imprecise but, according to the UN's Food and Agriculture Organisation, about a billion people now live in chronic hunger – a scandal in what should be an age of plenty.
As the numbers increase, suspicion has mounted that a new factor has been helping to push food prices beyond the pockets of the poor – the vast amounts of money poured into the commodities market in recent years.
In a new report, Hungry for Justice, Fighting Starvation in an Age of Plenty (pdf), Christian Aid says it is not primarily the hedge funds that are behind this trend. More pertinent are the activities of institutional investors such as pension funds looking for a safe place in which to grow their money following the burst of the dotcom bubble and collapse of the property boom.
The scene was set for their entry into the commodities market in 1991, when Goldman Sachs created an index of 18 commodities, including various foods, in which people were invited to invest. As well as providing diversity in the form of different types of commodities, from oil to metals to foodstuffs, that would perform differently, the index would offer diversity at a broader level to those with investments in traditional assets such as shares and bonds.
Business built up quickly, becoming an avalanche once the Commodity Futures Modernisation Act was passed in the US in 2000. That allowed banks, brokers and other financial institutions to develop, market and trade a variety of unregulated financial products.
Crucially, it also allowed more heavily regulated investors to enter the commodities market. Pension funds, for instance, are banned in the US from speculating on commodities futures themselves because that involves leverage, or the use of borrowed money. However, the Act gave them access to the index funds. And they have money – lots of it. An indication of the funds at their disposal is the fact that the combined value of the world's 13 largest pension markets is around $US26.5trn, higher than the combined GDP of China and the US.
The bets they make on commodity indices, however, have a knock-on effect. While they are not allowed to invest in commodities futures directly, every index-linked investment they make tends to produce a related investment in the "futures" of the individual commodities on the index by whichever bank or finance house is managing their business.
The index-fund managers make such bets to cover themselves in terms of prices moving up and down. And they too, particularly with extra money flooding into the system through quantitative easing, have a lot of money to invest.
It is these underlying trades in the commodities futures that are now thought to be distorting prices. This is because the money is invested with little regard to factors such as consumer demand and whether harvests have been good or bad. "Price discovery", the process by which the market sets the real price of a commodity through assessing such factors, has been eclipsed, so the argument goes, by the huge amounts of money sloshing around in the system.
As a result, the signals that producers receive about whether to increase or reduce production are unclear. In the short term (most of the past 10 years) the prices of major foodstuffs have been driven unnecessarily high, with consequences for world hunger. In the longer term, we are at risk of locking in inefficiencies that will prevent the planet from providing for its growing population.
Research into the links between food price rises and commodity investment is at an early stage. However, policymakers must investigate as a matter of urgency the way in which the former now mirrors the latter.
