Speculators Are Driving Up Food Prices – Or Not

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Why are food prices increasing?

Dr. M. Joy Hayes wrote a reductive and redundant article about how commodities speculators have force food prices higher, and that the trend will continue. Her article for The Motley Fool that was run by AOL Daily Finance, gives a simplistic example of speculators purchasing futures contracts from other speculators instead of from farmers taking price protection will increase prices of meat, grains and other traded agricultural products.

What any junior college freshman majoring in economics can easily explain is the proven fact that futures contracts have been proven to decrease volatility in the underlying product, leading to more stable prices.

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When Goldman Sachs and Morgan Stanley offer bonds based on futures prices in agricultural products, that makes capital available for the production of meat, grains and important foods, such as orange juice and milk.

When private speculators like George Soros and Kevin Sandroch purchase soybean futures, soybean farmers can sell the contracts and obtain loans to raise those crops.

In fact, when a commodity no longer has an underlying futures contract the price always skyrockets and becomes so volatile, that farmers have to cut back production. Congress forced the New York Mercantile Exchange to stop trading onions after there were shortages in the 1960s thinking wrongly that prices would drop, but instead onion prices tripled and food companies went out of business.

So why are food prices rising?

The biggest reason is that India and China are importing more food, and the United States is using a large portion of the corn crop to produce ethanol, and Brazil is doing the same thing with it’s sugar crop. Less corn means more expensive costs for dairy, poultry, hog and cattle farmers, so they produce less and charge more or else they simply stop farming.

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This practice pits the one billion starving people, against the eight hundred million people that want bigger, more powerful automobiles. This is a formula for much higher food prices in the near future. Add poor harvests in Australia, Russia and China, and the world is looking at a worldwide famine.

Global warming has been named as a cause, as well as industrial land usage taking away from total farm acreage.

One advisor to the Congressional Committee on Agriculture suggested that soy milk be substituted for milk in school programs, claiming: “soy milk is better for children than cow’s milk and is more humane.”

What farmer is going to grow soybeans, when corn is six dollars a bushel due to subsidized ethanol programs that benefit Archer Daniels Midland, the largest political contributor of any food company in the world?