In the newest Harper's, Frederick Kaufman fills in backstory (subscription only) on the food-commodities part of the financial-reform debate, making the case that Goldman Sachs contributed to the tragic global wheat shortage of 2005 to 2008 by creating an agricultural commodities index that backfired when the market couldn't get enough of those delicious food futures:
The index funds may never have held a single bushel of wheat, but they were hoarding staggering quantities of wheat futures, billions of promises to buy, not one of them to ever be fulfilled. The dreaded market corner had emerged not from a shortage in the wheat supply but from a much rarer economic occurrence, a shock inspired by the ceaseless call of index funds for wheat that did not exist and would never need exist: a demand shock.
Here we seem to have something of a perfect storm. The focus of the global food system has shifted from feeding people to maximizing profit, and that runs into Wall Street's increased appetite for exciting new derivative products. As in other sectors, like housing, making money off a product has little to do with supplying the product itself -- the wheat is separated from the bread, as it were. In a rush to extract as much money as possible from food commodities, Wall Street isn't thinking even a few steps ahead to what the compounded results of their trading might be. One operations person at the Minneapolis Grain Exchange says, "I view what we're working with as widgets." A wheat trader explains his job: "You look at a chart. You hit a number. You buy." There's liquidity. But there's also speculation that can't be hedged, because in the meantime, people around the world don't have anything to eat. But that's not Goldman's problem.
One senses when looking at food commodities that few of the people involved really understand what they've done, which is perhaps one sign that we're gambling at the wrong table.
(Photo credit: Ian Hayhurst)