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Fund managers manipulating food prices

In recent months, hedge funds, pension funds and other group investment vehicles, which strive for maximum return in minimum time, have turned the commodity market upside down. These funds of the rich and famous, facing difficulty in the stock market lately, turned their attention to the commodity market. Instead of trading in blue chips and other stocks they began trading in commodity futures — setting off the current steep rise in commodity prices.

Hedge funds and others have gained piles of cash from Middle Eastern oil-producing nations in the last three years. As oil prices scaled new heights, a situation like that of the mid-1970s emerged, with oil producers needing a place to park their extra cash. It was handed over in bundles to countries including Brazil, Argentina and Mexico. These countries borrowed the money, misspent it, and soon had to be bailed out by the International Monetary Fund.

This time around the fund managers were smart. Instead of putting money in questionable investments, they decided to invest it in commodities. Relaxed limits by the U.S. Commodity Futures Trading Commission on how much money could be pumped into the grain trade by hedge funds, index funds and pension funds, helped them a lot.

The price rises over the past year of all commodities including food grains are a testament to this manipulation. Minor climatic events in Australia and elsewhere have cut into food grain production, but these have been balanced by huge increases in the overall production of wheat, coarse grains, pulses and rice in India and elsewhere.

India's total grain output this year is expected to be 227 million tons, compared to 214 million tons last year. This huge jump is sufficient to offset any losses in Australia and elsewhere. It is expected that in 2008 the global wheat crop will yield 646 million tons of wheat, a record and about 45 million tons higher than last year. Hence world consumers may well ask: Where is the shortage, and why these dramatic price rises?

Agreed that 20 percent of U.S. corn has been diverted to biofuels, but there is plenty to go around. Not only that, there is a huge amount of cultivable land in the United States which the government pays farmers not to cultivate. If this land were put back into cultivation it would relieve the shortfall. Hence it is perceived shortages that have raised prices for the wrong reasons. It is the extra speculative cash that has added tremendous volatility to the grain market.

Speculators are busy informing the public that it is not their fault, claiming it is increased demand by prosperous China and India creating price volatility. This is a flimsy argument. India does not plan to import any wheat this year. I do not believe China is in the market for wheat in a big way. The other argument is that stocks of wheat and other staples in the United States are at a 60-year low, resulting in nervousness in the market and higher prices. This also is a flimsy argument. All the United States has to do is bring the unused acreage into cultivation and build up its stocks.

This behavior is puzzling to an unseasoned watcher. Even the very investigative U.S. media have missed the connection between hedge funds and high grain prices. They have fallen for the propaganda that since oil prices have quadrupled, other commodity prices have to follow suit. This argument is also absurd. The oil component in grain production is about 17 to 19 percent. This alone would not triple production costs.

Price manipulation in the United States has indirectly impacted the grain trade in India, especially during the current March-April harvesting season. India now is harvesting a record wheat crop of 78 million tons, and government procurement of 7.5 million tons in just 10 days at the start of the season has been a record. A total of 15 million tons of wheat will be procured this season. This target is within easy reach. The procured wheat is sold at subsidized rates to the poor.

Some farmers in India, noting the international price rise, are holding back their crops in anticipation of better prices later. This is ill advised, however. There is plenty of wheat in the market and the government's subsidized pool is full, so hoarding may not have the desired results.

A month ago the government was unsure of total grain output and was not confident of procuring all it needed. Now, with fresh data on crop yields, the government is happy and is going about taming inflation.

The situation of the rice crop will be known in six months. Recent forecasts predict a favorable rainy season for India, and the rice crop may repeat the wheat crop's plentiful performance. Hence all this talk of an upcoming catastrophe is patent propaganda.

While India has been harvesting its bounty, grain traders and investment fund managers in the United States were not counting on this scenario. Their information system had told them of poor crop prospects in Asia. Unlucky for them, India will not import any wheat this year. In addition, India may continue to export rice as it has done in previous years. Current export restrictions are temporary and will cease when the new crop arrives.

The production and distribution statistics for China's crops are unknown. In this Olympic year China does not wish to divulge any poor statistics that might tarnish its image. The country should be credited for having a good distribution system in which farmers cannot hold back their crops. As far as we know, its current crop prospects are as good as before. Hence investment fund managers may have made a wrong bet this year.

In this election year, the U.S. government is powerless. U.S. officials know the whole situation, but are too busy putting out fires in Iraq and handling the sub-prime loan crisis to pay attention to rising food prices. Commodity traders picked this year deliberately because they anticipated the government's inaction. Not even the aspiring U.S. presidential candidates have commented on it.

Since the inevitable has happened, what is next? Do we have to let a few rich and powerful people in Chicago, Kansas or New York mess with the world food supply? Should the U.S. government not get investment funds out of the grain trade? Should funds managers not be penalized for messing with the fragile supply and demand of the world's food?

I believe, in this year of regular crop production, the politicians appointed to the U.S. Commodity Futures Trading Commission should act strongly. This agency has a mandate to regulate the grain trade. It is responsible for opening this market to unlimited trading by giant hedge funds and others last year, and it should put an end to it.

If the CFTC acts, will this bubble in the commodity market burst?

Probably, yes. Wide price swings in the grain market, well above industry fundamentals, will belong to the past. Wheat and other grain prices will return to their real value under normal pricing structures.

In short, there has been no large-scale drop in food grain production this year. Whatever drop has occurred in one region has been supplemented by higher production elsewhere. The current high prices of food grain are the result of power plays by a few rich and powerful people. Speculative money is undermining the world order and it is a dangerous game. The U.S. regulatory agency must step in soon; otherwise, civil unrest will become the norm.

Source: UPI Asia Online

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