HOW DEREGULATION FUELS THE GLOBAL FUEL CRISIS
By David Moberg
In These Times
July 23, 2008
In April, crowds of angry Haitians -- reduced to eating mud cakes to staunch hunger -- erupted in deadly protests against high food prices, forcing the prime minister to resign. The price of rice, a staple of the Haitian diet, had risen 16 percent on the world market last year, then shot up 141 percent from January to April.
Around the world, similar riots -- or fears of them -- have pushed governments to restrict exports, reduce tariffs, attack hoarding, and take other desperate measures as prices of virtually all major food commodities have spiked -- and often fluctuated wildly.
But in the months since Haitians hit the streets, leaders of the major international financial organizations -- the World Bank, the International Monetary Fund (IMF), the World Trade Organization (WTO) -- as well as the Bush administration and European Union (EU) have responded weakly to the crisis. Mainly, they've issued underfunded appeals for emergency aid and for speedy conclusion of the latest round of WTO free-trade negotiations. For the world's poor, that's like lifting a drowning man out of the water, only to tie weights around his ankles and shove him back in.
When world leaders met in June for a U.N. Food and Agricultural Organization summit, says Steve Suppan, senior policy analyst for the Minneapolis-based Institute for Agriculture and Trade Policy (IATP), a research and advocacy group, "there was an urgent recognition of the food crisis but a more urgent sense of the need to salvage neoliberalism."
And Raj Patel, author of the recent book, *Stuffed and Starved: The Hidden Battle for the World's Food System*, adds, "It's preposterous that the Bush administration and E.U. are pushing us toward precisely the policies that got us into this mess."
Many developments may have triggered the food price crisis, including bad weather conditions (from droughts in Australia to more recent floods in the Midwest), oil price increases, and rising biofuel and consumer demand.
But the current food crisis ultimately stems from over-reliance on deregulated global markets and increasingly concentrated corporate control of an ecologically unsound world food system. Pushing free-market fundamentalism harder will only intensify the fault lines, setting the stage for even more serious crises in the future.
ALL MARKETS ARE NOT THE SAME
Agriculture and food markets aren't like markets for clothes or automobiles. Food is a daily essential, which consumes as much as two-thirds of the income of the poorest half of the world.
Many of those poor people are also peasants who rely on food production for their livelihoods. Farming depends on the whims of nature and slowly adjusted, seasonal plans. Agriculturalists don't merely turn out a product for the market; they play a major role in environmental conservation or degradation and the definition of people's cultures.
What's more, wide disparities in power, financial resources, and information exist between the many small producers and the handful of giant multinationals that control grain trade (like Cargill), hybrid seeds (like Monsanto), chemicals (like DuPont), wholesale markets (like Archer Daniels Midland), and retail markets (like Wal-Mart or Carrefour).
Add to that the distortions of markets in favor of the giants through governmental policies and the growing role of huge speculative investors.
"The markets are not perfect, and they can't be," says Sophia Murphy, senior adviser on trade for IATP. "The orthodoxy that drove liberalization of agriculture didn't take account of the way markets don't behave the way a neoclassical model of the economy behaves, and didn't allow for regulation that needs to make up for agricultural market failures."
But the rush to free-market fundamentalism has stripped governments of many of the tools they need -- such as maintaining grain reserves -- to produce price stability, equity, environmental sustainability, and widespread human social development.
Haiti is a case in point. In the early '80s, Haiti, though a poor country, produced nearly enough rice for its own population. But when a popular uprising overthrew Jean-Claude Duvalier's dictatorship, the new government turned to the IMF for loans. However, the IMF conditions for loans -- and later "structural adjustment programs" -- included cutting tariffs on rice.
Heavily subsidized rice from the United States flooded into Haiti, bankrupting many small farmers. Then U.S. food aid further undermined Haitian agricultural self-sufficiency.
Haiti now has among the fewest trade restrictions in the Americas, and produces only about 18 percent of its domestic rice needs, making its population -- four-fifths living on less than $2 a day -- extremely vulnerable to global price run-ups. However, Haiti's tiny rich élite prospers as the middlemen in this grain trade.
"LAUGHING ALL THE WAY TO THE BANK"
The story is similar throughout the developing world. From roughly 1950 to 1972, the U.S. government opened up markets and created dependency on global grain purchases by providing subsidized, low-cost surplus grain. Governments could pay with their local currencies, rather than dollars, and the United States used that soft-money income to finance its global, Cold War political and military objectives. The governments of developing countries willingly accepted the aid, hoping to pacify their urban poor while keeping wages low for new industries.
At around roughly the same period, the "green revolution" took place, which replaced traditional polyculture -- farming many food products from small plots -- with larger monoculture of crops that are more dependent on fertilizer, purchased hybrid seed, and irrigation. The shift raised rice yields per farmer but did not increase pounds of food produced per acre, according to Eric Holt-Gimenez, executive director of Food First, an Oakland-based research and advocacy group. It did, however, concentrate land ownership, move poor farmers onto marginal lands, and increase the role of multinational agribusinesses.
Then, in the '80s, World Bank and IMF loans, as well as structural adjustment programs, required that countries not only reduce tariffs and other trade barriers but also dismantle grain reserves, marketing boards, and other government institutions designed to stabilize food prices.
Free-trade agreements in the '90s locked in and further dismantled regulations of farming and food markets, especially in developing countries, even as farmers in Europe and the United States were able to keep many of their protections.
As countries tried to repay their foreign debts and buy imported food, they were forced to turn to commercial agriculture, most often large, industrial agricultural enterprises owned by foreign corporations.
With the world supposedly awash in cheap food, there was a sharp decline in international and national investment in agriculture for the local market, including basic research, often under budget-cutting pressure from the IMF.
Also over the past decade, governments, again under IMF prodding, have let grain reserve stocks drop to the lowest point in several decades.
Millions of small farmers were pushed off the land and into cities or into international migration -- 2 million in Mexico alone, since NAFTA was implemented in 1994.
Many developing countries that had earlier fed their own populations became less self-sufficient. In Africa, governments, international investors, and organizations financed the import of grain and the export of specialty crops. But they failed to invest in roads, refrigerated storage, and other technology to get local food to urban markets, Suppan says, leaving 40 percent of all food produced to rot in the fields -- depriving urban dwellers of food, farmers of income, and nations of potential for homegrown economic development.
Meanwhile, big corporations continue to rake in huge profits. "The industry is not in crisis at all," Holt-Gimenez says. "They're laughing all the way to the bank."
The global grain trade was supposed to take the place of governments with their reserves stored for hard times, such as when an Australian drought in recent years reduced rice and wheat exports to Asia.
"But the private market has very little interest in managing a reserve," Murphy says. "Why would they? They don't care about the price. They don't eat food; they sell it to the highest bidder. They're only interested in getting food before the competition does."
If world grain reserves had been higher, the recent unusual weather might have had little effect, although climate change does pose a major threat to food production and prices in the long run.
China, which resisted much outside neoliberal pressure, maintained substantial rice reserves and has preserved much greater price stability. But as part of joining the WTO, it relaxed restrictions on soybean imports. The world's largest soy importer now suffers from price spikes and from growing concentration of foreign control over soy oil processing. Yet contrary to the argument that the recent price hike is a result of increased meat (and grain) consumption by the rising Chinese middle class, China has increased production and continues to supply most of its own growing food consumption.
Biofuels have increased demand, accounting for somewhere in the range of 3 percent (the U.S. Department of Agriculture's estimate) to 30 percent (International Food Policy Research Institute estimate) of recent price hikes.
But the impact is complex: Using corn for ethanol, regardless of questions about its wisdom, doesn't boost rice prices -- and has limited impact on meat prices because the waste mash from distilling is used to feed cattle.
Originally encouraged to use up European and American surpluses, biofuels were seen by many farm and environmental advocates as a potential locally controlled and sustainable business. But biofuels now threaten to become a global, corporate-controlled industrial farming and export business that may put fuel for American SUVs in competition with food for poor people in other countries, all while degrading tropical forests.
The boom in energy prices -- oil for production and transport, natural gas for fertilizers -- boosts food costs and is likely to have even greater significance on prices in the future. But that's partly a consequence of free-market failures to properly account for the costs of dependence on cheap oil, including the threat climate change poses to tropical agriculture.
THE MAIN CULPRIT: CHANGING FUTURES MARKETS
Yet changes in supply, demand, and agricultural costs don't adequately account for the huge price spikes.
An E.U. study earlier this year concluded that certain food commodities had increased in price three times more than agricultural markets would explain. One possible reason: speculation in commodity markets.
Agriculture futures markets provide farmers and industrial users of farm products a chance to lock in prices for future delivery. This provides a hedge against damaging price fluctuations and helps to set an openly known market price. Small-scale speculators help provide liquidity for such markets.
But deregulation of American commodity markets in both energy and agriculture in the late '80s and early '90s expanded the ways in which companies could make trades without federal regulation.
Other regulatory changes made it possible for large investors, including institutional investors like pension funds, to buy agricultural futures without limits. Congress had imposed such limits to prevent manipulation of the relatively small futures markets -- much as Enron did with California electricity rates.
In recent years, these big investors have increasingly bought futures indexes and other bundled futures products as part of a diversification of their holdings. But these investments behave entirely unlike the traditional futures buying and selling by farmers and grain users.
As hedge fund manager Michael Masters explained to Congress in May, these investors -- with an estimated $250 billion now invested in commodity futures -- tend to hold their investments like a stock or bond, not trade in search of the appropriate market price. They thus skew the price upward, regardless of supply and demand of the real product. As the price increases, more money flows in, pushing the price even higher.
Eventually, such a commodity bubble will burst -- as the housing and dot-com bubbles burst -- but with harsh consequences for real people.
While Congress has begun to close some of the regulatory loopholes, speculation still magnifies real-world food price increases. Once again, free-market fundamentalism creates real economy failures -- taking food out of hungry people's mouths.
THE RISE OF FOOD SOVEREIGNTY
As long as the food system is organized around free-trade policy and maximizing private profits, Suppan and Murphy argue, it will exacerbate volatility, inequity, and environmental damage.
What's needed, says Murphy, is "not just a redistribution of wealth but a new model of agriculture and a new model of consumption."
Food sovereignty advocates propose that people -- local communities and nations -- should have the right to make decisions about their own food regimes, including how much and what to import and export, and whether to use the genetically modified crops that agribusiness pushes as a false solution to the current crisis.
"The food riots are calling for two things," Patel says. "Obviously food, but also accountable government." Under global trade agreements, many governments have lost that accountability to their people.
A new food regime also needs an alternative to current industrial farming, with its ever more costly and damaging practices and growing concentration of profit from feeding the world. This alternative agro-ecological model would rely on the productivity and resilience of small farmers.
Earlier this year, a U.N. commission of 400 agricultural experts concluded that the world needed to shift from agricultural business-as-usual to a more ecological and small-scale approach. To no one's surprise, the U.S. government and agribusiness refused to endorse its recommendations.
How many more food riots will it take to change their minds?
--David Moberg, a senior editor of In These Times, has been on the staff of the magazine since it began publishing. Before joining In These Times, he completed his work for a Ph.D. in anthropology at the University of Chicago and worked for Newsweek. Recently he has received fellowships from the John D. and Catherine T. MacArthur Foundation and the Nation Institute for research on the new global economy.