London — 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."
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THIS TO MI IS ALOAD OF CRAP. WE HAVE THESE LITTLE MEN SPECULATING; YOU CALL IT , ITS NOTHING MORE THAN SOPHISTICATED GAMBLING THAT IS VERY ADDICTIVE CORROSIVE AND CORRUPTIVE AS HELL. HOW THE HECK CAN THESE PEOPLE SPECULATE ON THE BACKS OF POOR PEOPLE. FIRST AND FOREMOST AFRICA NEEDS TO DEVELOP ITS OWN M,ARKET ECONOMY WHICH IS INDEPENDENT OF THESESCHEMEING CORRUPT ORGANISATIONS. WISHING THEM CHANGING AND ADDING CHECKS AND BALANCES ONLY MEANS THEY DEVELOP MORE WAYS OF GETTING CHECKS AND HIGHER BALANCES. AFRICA WILL NOT THRIVE UNTIL THEY BREAK FREE OF THESE PEOPLE WHO ARE INTENT ON BLEEDING WORLD MARKETS DRY.HOW CAN SOME ONE WHO BETS NEVER LOSES? THIS IS TOO BIG A FIX AND THE PEOPLE OF THE WORLD AND GOVERNMENTS ACCEPT THIS FOOLISHNESS !!!!!!! ? YOU ARE TELLING ME NO ONE GOES TO JAIL FOR THIS GRAFT DEFCEIT CON GAME FRAUD AND THEFT BY ORGANISED CHEATING. TRIPLE LARCENY OF THE HIGHEST ORDER ? I SAY DEATH BY ELECTROCUTION IS WHAT THIS DESERVES. THESE THIEVES HAVE BANKRUPTED THE WORLDS ECONOMIES ESPECIALLY THOSE IN THE WEST AND NOW THEY ARE TRYING TO STEAL THE LITTLE PENNIES FROM THE POR PEOPLES MOUTHS AND THEY STILL HAVE LISCENCES. TELL ME DO THESE CRIMINALS THESE PIRATES THESE CORRUPTORS DESERVE TO LIVE ??? WHY ARE AFRICAN GOVERNMENTS TRADING THEIR COMODODTIES ON THE THEIR EXCHANGES.. BY RIGHTN WALL STREET SHOULD BE BANNED FORM WORLD TRADING ITS INTERNATIONAL CRIME OF HUMAN DISASTERS THAT NEED TO EBDEALT WITH AT TH3E HAGUE ALONG THE SAME LINES AS THOSE WHO COMMIT GENOCIDE. THESE GUYS ARE MURDERING PEOLE WIT THEIR GREED AND THEIR FIXED GAMBLING THEY ARE OBNOXIOUS AND TRULY DISHONEST YET WE SEE MEN LIKE OBAMA GIVING THEM TRILLIONS OF DOLLARS WHEN THEY SLOSE SO THEY CAN CONTINUE TO RIP OFF THE WORKING CLASS PEOPLEWHAT PEOPLE DONT KNOW IN EUROPE IS THAT THEY ARE PAYING FOR THE WEALTH THAT WAS LOST ON THE MARKETS BY THE WEALTHY WHO HAS BEEN ROBNBED PENNILEAS THIS WHY THE WORKING CLASS HAS TO FOLLOW THESE AUSTERITY MEASURES. THEY WQERE CONNED SO WE HAVE TO PAY. THIS IS AVERY CROOKED WORLD WE LIVE IN DONT GET IT TWISTED ./ THE PEOPLE OF EGYPT WANTED CHANGE THE WEST DOES NOT WANT CHANGE IF THEY SEE CHANGE THIS WOULD EFFECTIVELY OVERTHROW THEIR CORRUPTED POWERS. THEY ARE LIVING IN A COMBUSTIBLE BALOON THEY HAVE LIMITED TIME LEFT. AFRICA NEEDS TO BEGIN TO IDENTIUFY WITH ONE CIRRENCY THIS WOULD CHANGE THE BALNCE SHEETS DASTICALLY. I MANTAIN THAT WITH THE RESOURCES THE MINERALS AFRICA S BALANCE SHEET COULD NOT BE TOPPED NOR COULD IT FALTER. IT COULD NOT BE UNDERSOLD NOR COUDL ITS TRICKED NOR COULD IT BE REDISCOVERD IT WOULD BE TOOSOLIDAND THE MARKEST COULD NOT DO ANY THING BUT BITS. THE WEST IS TRYING DESPERATELY FROM KEEPING AFRICA UNIFYING AS ONE SOVEREIGN NATION WITH DEMOCRATIC AND HUMAN ANTI GRAFT LEGISLATIONS THAT WOULD DEAL MORE THAN HARSHLY WITH FRAUD OR ANY KIND OF BRIBERY THAT CREATES TREASON AND SEDITION. AFRIC HAS AGREAT CHANCE NOW TO BE THE FOPUNDING FTHES OF DEMOCRACY IF THEY SO CHOOSE AFRICA HAS THE WORLDS LEADING POSITION IF ONLY THEIR EYES WOULD OPEN.ONE ARMY ONE MONETARY SYSTEN ONE HIGH COURT FOR JUSTICE ONE AFRICA INDIVISBLE WITH LIBERTY JUSTICE FOR ALL"