Healthy soil and sustainable growing

["Tradingpost" <tradingpost@lobo.net>]

answer is always the same: CYA by growing your own.

paul tradingpost@lobo.net
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Bankers, hedge funds and sovereign wealth funds are gambling on hunger by 
speculating on food supply. Global regulators should step in to stop them
http://www.guardian.co.uk/global-development/poverty-matters/2011/dec/20/speculative-scrum-driving-food-prices

Last year, the price of global food floated high as ever. That's bad news for 
most of us, but not for those who trade commodities. In fact, 2011 was a 
great year for the traders, who thrive on bad news, currency woes, drought, 
flood, freeze, fire and all other manifestations of imminent apocalypse.

2011 was a wild ride. One spring morning, cocoa futures dropped 12% in less 
than a minute. Corn ascended to all-time peaks and sugar fluctuated more in 
one day than it used to in a month. Howard Schultz, CEO of Starbucks, railed 
against speculators in coffee, while PepsiCo forecast its own medium-term 
commodity cost increases to exceed $1bn. All of which meant a bumper crop for 
the world's commodity exchanges – even those that used to be backwaters, like 
the Kansas City Board of Trade and the Minneapolis Grain Exchange, both of 
which recorded their highest electronic trading volumes in history.

It was a volatile year, and the volatility posed problems for the food 
industry. Faced with a high-stakes game of price-shifting basic ingredients, 
the world's largest food processors and retailers put out the call for maths 
PhDs and economic modellers to theorise and implement ever-more complex 
risk-management strategies just so they could keep up with the 
second-by-second spikes and dips of grain and livestock futures. In the 
meantime, high-frequency traders and momentum-driven hedge funds made it 
their business to speculate on food.

There were plenty of ways to get in on the action, but as an increasingly 
complex amalgam of food-based commodity derivatives piled one on top of the 
other, the more difficult it became to perceive what it was that lay at the 
bottom of the speculative scrum. What drove the global food market in 2011 – 
other than those old faithfuls, fear and greed? I put in a call to Professor 
Yaneer Bar-Yam, of the New England Complex Systems Institute (Necsi), to see 
if he might have an answer.

Necsi, based in Cambridge, draws on fields as various as maths, physics and 
computer science to provide new perspectives on – and perhaps even solve – 
pressing problems in economics, healthcare, international development, and 
military and ethnic violence. Last year, Bar-Yam and his colleagues published 
a paper called The Food Crises: A Quantitative Model of Food Prices Including 
Speculators and Ethanol Conversion, in which the Necsi crew mathematically 
isolated and quantified the effects of speculation as a driving force behind 
the bull market in global food derivatives.

"Prices have been way out of equilibrium in 2011," Bar-Yam told me. "The 
bubble has not burst yet."

According to Bar-Yam, the international thirst for biofuels has put a strain 
on arable land previously reserved for food production. At the same time as 
the rise of the biofuel mandate, the rise of investable commodity indexes and 
other electronically traded funds has offered investors of all stripes a 
chance to sink their cash in a sparkling new casino of derivative products. 
As a result, an ever-flowing spring of speculative capital sustains the 
status quo.

But just as food is no ordinary widget, speculation in commodity markets is 
not simply a matter of financial predation. "The high prices of food have 
resulted in accumulations of inventories at the same time as people can't 
afford food," said Bar-Yam, who noted that the Arab spring was triggered by 
the food-price bubble. In fact, Necsi's quantitative model of speculation 
predicted the uprisings in Tunisia, Libya and Egypt, and warned that if food 
prices remain inflated, riots and revolutions will go global sometime between 
July 2012 and August 2013.

"We are at a critical point," said Bar-Yam. "We don't have a stay-the-course 
option right now."

He believes the time has come for global regulators to step in and manage the 
global market. Their first task would be to guarantee transparency and make 
public information previously shrouded in secrecy – such as who holds the 
biggest stakes in global commodities. Transparent accounting practices would 
have made the disappearance of $1.2bn worth of customer money from the books 
of MF Global less a matter of sleight of hand and more a matter of 
international crime.

The second part of the speculation solution hinges on a return to traditional 
position limits in commodities, limits enforced by international laws geared 
to stop bankers, hedge funds and sovereign wealth funds from going long on 
the world's food supply and, in effect, gambling on hunger.

Nothing influences financial regulators like equations, so the reforms we can 
look forward to in 2012 will ultimately depend on the numbers. Which is a 
mixed blessing. "One reason people don't want to understand the math is the 
deafness of those who are making the money," said Bar-Yam. "But the old 
mathematics is manifestly wrong."