Mbale — As pointed out in my last week's article on the crisis of global capitalism, the fundamental problem that faces the system is the imperative to maintain the 'value of money' of existing financial instruments that are held by wealth holders.

This is what created the credit crunch that blew up in our faces in March this year. At that time the focus was on the crisis of the subprime mortgages in the US and to some extent in the UK. This crisis led to the collapse of a number of mortgage companies and banks because many mortgagees found it difficult to maintain payments and many lost their houses.

The crisis that is still engulfing us is to do with bank failures and these failures are a continuation of the subprime mortgage credit crunch.

This is why we argued that it was wrong for us to focus just on the financial aspects of the global crisis instead of looking at the bigger picture of the whole global capitalist system, including the agricultural economy.

This past week, our own finance minister warned us that the global financial crisis was going to affect our exports to the developed countries because of the recession that is feared to engulf the entire world economy as a result of the global capitalist crisis. This is because the financial crisis just obscures the more fundamental problem.

In this article, we will focus on the manner in which this crisis has affected food prices throughout the world. In fact when the credit crunch struck and the food crisis was announced, the crisis was recognised as a global food crisis.

That is why the International Monetary Fund and the World Bank immediately held a special session of the Boards of Governors to develop policies to deal with the crisis when it became clear that the food crisis was likely to stay with us until 2015 at the very least.

Immediately following the meetings of these multilateral institutions, the world food organisation - FAO held an urgent Food Summit on June 3-5 in Rome. The Summit called for an immediate response by governments.

After the World Bank meeting, the British Prime Minister, Gordon Brown, wrote a letter to Japanese Prime Minister Yasuo Fukuda, who was at the time the chair of the G8, in which apart from asking the group to act with speed to address the soaring food prices, also pointed out that financial market-based risk management instruments, including derivatives, had to be considered as contributing to the food price volatilities.

Derivatives are contracts and 'options' to buy a certain commodity in the future at a fixed price, which then fixes a 'value' to the paper instrument in terns of that commodity. What did Brown mean by this statement?

The real problem underlying currency instability and commodity price volatilities is the fact that the dollar, which acts as a global reserve currency, is not backed by any solid money commodity such as gold or silver. These money commodities were historically over-run by the growth of capitalist wealth.

As a result not all paper wealth that was held by economic actors could be changed into gold in periods of crisis when the demand for 'real' money became overwhelming.

With the collapse of the gold standard in the US in the 1970s because of the outgrowth of Eurodollars, attempts were made to rely on other commodities such as platinum to back up the dollar, but this was a non-starter because the cost of storing platinum was too high to be borne by paper wealth holders.

But financial instruments, especially future options and instruments called derivatives continued to grow in volume.

This is what led to the food commodities coming into the picture to back up future contracts and derivatives expressed in US dollars.

The centre of the global commodity trade is the Chicago Board of Trade - CBOT. It is here that global trade in commodities is valued and undertaken together with other commodities markets. It is also here that all commodities are 'financialised' in dollar financial instruments.

Wheat, oats, corn, rice and soybean are all agricultural products traded on various commodities exchanges, including the CBOT. Here the exchanges also trade the financial 'products,' as well as futures and options contracts on these and several derivative products such as bean oil.

Coffee, cocoa, sugar, cotton and orange juice are all 'soft' commodities, many of which are traded on the CSCE (Coffee, Sugar and Cocoa Exchange). Interestingly, since 80% of the oranges grown in the U.S. are turned into frozen orange juice concentrate, it's the juice that is traded as a commodity, not the fruit.

An article that appeared in the Toronto Global and Mail of May 31 argued that it was the deregulation of financial markets and the systematic exploitation of US regulatory loopholes that had led to the upsurge of speculative investments in food commodity markets, much of it by institutional investors such as the managers of pension funds. "These funds", wrote the authors, "have ploughed tens of billions of dollars into agricultural commodities as a way of diversifying their assets and improve returns for their investors."

According to the authors, the amount of fund money invested in commodity indexes had climbed from just $13 billion in 2003 to a staggering $260 billion in March 2008, according to calculations based on regulatory filings.

There were warnings that this amount could easily quadruple to $1 trillion, if pension fund managers allocated a greater portion of their portfolio to commodities, as some consultants suggested they were poised to do.

Thus, it was the progressive loosening of regulatory requirements, which made possible the enormous influx of money, much of it fleeing the meltdown in the market for mortgage-backed securities and the wider fallout, including big leveraged buyouts in banks.

Because agricultural markets are small - relative to stock markets - the amount of cash pouring into these markets gives these funds substantial clout. The authors observed that these big institutional investors controlled enough wheat in futures instruments, which could supply the needs of American consumers for the next two years.

They blamed the "demand shock" from these recent entrants to the commodities markets as the primary factor behind the sudden soaring of food prices. They noted that if no immediate action was taken, food and energy prices were bound to rise still further leading to the catastrophic economic effects on millions of already stressed U.S. consumers and the possible starvation of millions of the world's poor.

For instance, the Ontario Teachers' Pension fund, which began with a modest investment in food commodities in 1997, had by 2008 invested some $3 billion in this market. With rising investor activity and increasing demand, prices began to rise.

Between 2000 and 2007, the price of wheat increased 147 per cent on the CBOT. Over the same period, corn increased by 79 per cent and soybeans by 72 per cent. As more funds moved in to invest, speculators began to clamour for more flexibility with trading limits and since there were no controls, the food commodity prices kept on rising.

It has been estimated that for every one percent increase in the price of food, there is an additional 16 million people who go hungry. In its briefing paper for the World Food Summit, the FAO Secretariat devoted two perfunctory paragraphs to the influence of financial markets in pushing upwards the cost of staple food commodities in its assessment of recent developments.

However, it had nothing to say about the matter when it came to recommending "policy options" for dealing with the problem. This was not accidental, but a reflection of the positions of the United States.

This is why it was correct to conclude, as we did in the last article, that for the financial oligarchy who wield power in the United States, the demand is that the state must guarantee them 'communism' (which can assure them their needs) while for the producing and middle classes the attitude of the state is only to guarantee them the conditions for 'free competition' for the little the financial oligarchy is able to leave aside for the 'markets' (to compete over according to their abilities and devices).

Financial markets in the global capitalist system, as well as global inter-governmental organisations such as FAO, it seems, have no 'policy options' for the starving masses, but there are always 'options' for 'bailing out' the financial oligarchy when their greed messes up 'the markets.'

Prof. Nabudere is a re-known academic and political activist.