Looking for a sound investment? Maybe I could interest you in a cheese sandwich? Perhaps Sir or Madam would prefer a foie gras, washed down with champagne? The latter might be more to the taste of the directors of Glencore, the world’s biggest commodities company, which has just listed on the London Stock Exchange with an estimated value of $60 billion. Glencore’s valuation reflects the fact that the prices of commodities, including basic foods, have shot up dramatically in the last couple of years and now stand at 30-year highs in real terms. The consequences are hunger and social unrest in much of the world, but an opportunity for profit in others. What is causing the problem, and is it really a problem?
The Economist magazine suggests that rising prices are driven mainly by supply-side factors such as drought and wildfires. The increasing use of land for bio-fuels may also be a factor, together with demand side causes like population growth and the growing purchasing power of the Chinese. However, the Economist is deluded if it thinks that speculation is not the main factor in the current commodities bubble. Their argument is exactly like saying that speculation had nothing to do with the recent property bubbles around the world. They forget that every asset price bubble is driven by debt creation in banks and the flight of 'hot money' around the world. Right now, commodities are where it's at; they are literally the next big thing. There's nowhere else for the hot money to go: property prices are falling, shares are volatile, bond rates are rock bottom. Hot money always wants the hottest returns.
The bubble may have started with supply-side factors but it is now being driven by speculation, financed by banks (especially Goldman Sachs). This is driving up inflation and could plunge the global economy back into recession, all for the sake of further enriching a handful of 'top' bankers, who are still receiving state hand-outs after committing massive fraud over the past 10 years (see the Oscar-winning documentary film, Inside Job).
The Economist suggests that the solution is to increase food yields. Again, they miss the point entirely. There is more than enough fertile land and food in the world to feed everyone in abundance, without any need for increased yields. The real problem is its distribution and the distribution of the wealth required to buy it. If food were equitably distributed, there is enough to provide 2,720 calories every day to every single person on this planet (far more than most people need), which is 17% more than 30 years ago, despite population growth. Whilst Westerners stuff their faces on junk and succumb to diseases of obesity, hooked on sugar, meat, celebrity culture and advertising, the majority of the poor world starves, purely to sustain a bankrupt global capitalist system of institutionalised slavery and theft.
If you read textbooks on economics (sadly, I do - you should do yourself a favour and not bother), you will find that they say that commodities futures markets exist to provide price stability over the longer term and that the role of speculators is to smooth out the short term shocks and fluctuations. This is indeed exactly how it works in the fantasy world of free-market economic theorists, where the market is largely made by the primary producers and consumers, whilst speculators play only a minor role.
The real world situation is the opposite of this: Glencore controls around 10% of the entire world's wheat market and even larger chunks of several other vital markets. Together with other huge speculative players like Goldman Sachs, they are now the tail wagging the dog. When the speculative money absolutely dwarfs the money belonging to the actual producers and consumers, derivatives markets become weapons of mass destruction, whose purpose is simply to create a massive casino where real lives are nothing but chips to be gambled. The winners will get even more fabulously wealthy whilst the losers (if they're too big to fail) will get bankrolled again by the taxpayer (you). The biggest losers, as always, will be the poor, especially in the developing world.