Getting to the Root of the Food Crisis

On top of having already pumped billions of dollars into markets for commodities like wheat, corn, and soybeans, some private investors are now making longer-term bets that the global demand for food will continue to grow, the New York Times reports. The investors are buying farmland, fertilizer, and other agricultural equipment with plans to combine small pieces of land to make larger more productive ones. On the one hand, these activities could boost food production at a time when it is desperately needed throughout the world. On the other hand, the article states, “by owning land and other parts of the agricultural business, these new investors are freed from rules aimed at curbing the number of speculative bets that they and other financial investors can make in commodity markets,” which creates the potential for prices to rise even further.

While investors claim their investments are to the advantage of the farming industry and consumers, some policymakers think otherwise. According to a recent article in the Washington Post, Senator Joe Lieberman is considering legislation "limiting large institutional investors in commodities markets... [that] would aim at speculators and other investors who use commodities to hedge against swings in investment instruments such as stocks and the dollar."
Under such pressure from Congress, the Commodity Futures Trading Commission has called for greater disclosure from investors in commodity futures markets and plans to tighten rules and limit exemptions on speculative activity to make sure agricultural and commodity markets aren’t being manipulated.

Martin Wolf, writing for the Financial Times, doesn’t share quite the same worries, arguing that “declining stocks undermine the widely shared belief that speculation has driven the rising prices, since stocks would be rising, not falling, if prices were above market-clearing levels.” The high price of oil, he says, has a bigger hand in the situation. He calls on policymakers to focus on providing humanitarian assistance to the poor and hardest hit by the food crisis; curbing protections and subsidies that distort the agricultural market; and developing plans to boost long-run supply.

Many, however, are still pointing fingers at investors. American Fuels quotes Michael W. Masters in his testimony to the Senate Committee on Homeland Security and Governmental Affairs:

You have asked the question ‘Are Institutional Investors contributing to food and energy price inflation?’ And my unequivocal answer is "YES."

For more information on how governments and institutions are reacting to these issues, check out the Financial Times’ in-depth coverage of the rising cost of food.