Global Markets and Deregulation Strike Again

by Gretchen Gordon, Policy Fellow, Food First

You wouldn’t know it by watching Congressional debate on C-SPAN, but if you turn on the news, it’s clear that the global food system is in crisis. Food prices globally have skyrocketed, in some cases 80%. Food protests and riots from Italy to Yemen have begun capturing worldwide attention, and policymakers are scrambling to point fingers at a litany of culprits—everything from climate change, high oil prices, a weak dollar and the biofuels boom, to meat eaters in China. All of these factors have played a part in the current crisis, but the blame game is also allowing one culprit—the principle protagonist in this story—to get away with not even a mention. It’s a character you might have heard of recently for its role in that little unfortunate sub-prime mortgage mess. That’s right, deregulation.

Pundits have spent a fair amount of air time describing the deregulated financial markets that sparked the mortgage crisis. But the regulatory state of global agricultural markets is something most policymakers, let alone consumers, haven’t given much of a thought. In many ways the dynamics at play are similar: global markets, deregulation and speculative capital don’t mix well. However, in two key regards, these markets differ substantially: the scale of deregulation, and the scale of consequences.

First, let’s look at the scale of deregulation. Deregulation in agricultural markets, like economic deregulation in many sectors, reached full tilt in the eighties and nineties. Trade and development economists preached the wonders of open markets, unfettered production, and industrial agriculture. The World Bank and International Monetary Fund conditioned loan policies on the elimination of government intervention in agricultural markets. Global commodity agreements, price supports, and other mechanisms which helped keep global supplies and prices stable, were dismantled. The World Trade Organization’s Agreement on Agriculture, together with multi-lateral and bilateral agreements including the North American Free Trade Agreement (NAFTA), slashed agricultural tariffs in the developing world, and opened up markets for a growing global agribusiness industry.

In the US, the 1996 Farm Bill eliminated the last vestiges of domestic price supports for most commodities and replaced them with a massive system of subsidies—the only thing left to prop up a farm economy in perpetual crisis. Market liberalization and the dumping of cheap commodities swamped small farmers here and abroad, pricing them out of local markets. Cheap feed crops fueled industrial livestock production, increasing meat consumption and driving out small producers. The few independent farmers who stayed in farming shifted production to a few commodities including corn and soy that can be stored and shipped to distant markets.

The impact of all this deregulation was to replace local market access for the majority of small producers with global market access for a few global producers. Thanks to non-existent anti-trust enforcement and rampant vertical integration, we’ve reached a level of concentration in our global agriculture system that would make Standard Oil blush. Three companies—Cargill, Archer Daniels Midland and Bunge—control the vast majority of global grain trading, while Monsanto controls more than one-fifth of the global market in seeds. Consumers from Sioux City to Soweto are more and more dependent on fewer and fewer producers. By eliminating the breadth and diversity of the system, we’ve eliminated its ability to withstand shock or manipulation.

Perhaps the greatest evidence of the scale of deregulation of the world agricultural market is the liquidation of reliable grain reserves. Though we’ve impressively deregulated financial markets, the Federal Reserve and central bankers across the globe still maintain the ability to soften the spikes and plunges of our monetary system. Not so in food markets. For centuries grain reserves have been an essential component of functioning food systems. When prices are high grain reserves can be released on the market, bringing prices down. When prices are low, reserve systems buy up grain, bringing prices back up. In the last two decades, however, the US and most other governments have let reserve systems wither, placing full faith in the free market to self-correct, and eliminating their last emergency response mechanism.

Remember the mortgage crisis? After the mortgage crisis, investors needed a new place to put their money. So they pumped it into commodities, farmland, and the new biofuels boom. Before it became a favorite climate savior, the idea of growing crops for ethanol was sold to US farmers as a way to bail out the rural crisis and channel excess supply, while letting the free market continue to dictate prices. Seeing the volatility in the market and knowing that grain reserves were depleted, the grain traders started withholding supply in hopes of higher prices, playing off currency differentials, and shifting production and investments in search of greater returns. In many cases speculative fear caused the scarcity price effect, more than actual shortage. Investors started hedging their bets, buying grain futures, and driving up prices even more. Though the biofuels boom has exacerbated speculation and high prices, that boom wouldn’t have been possible without a deregulated global market.

While farmers in the US may have seen the price for a bushel of corn go from $2 to $6 in the last two years, their inputs—everything from seeds to fertilizer to diesel for tractors—have also multiplied, significantly deflating any increase in income. The difference between a short windfall and long-term profit shift is being able to pass on price increases to consumers, something only the big guys have the market power to do. Cargill’s third-quarter profits have increased over 86%. General Mills’ are up 61%, and Monsanto’s are up 45%.

The Cargills and ADMs of the world are traders—similar to financial traders—but in livestock and commodity futures. In an unregulated global market they’ve gained enough market share that through buying and selling, they can play off both supply and demand. And their actions can set the direction of global prices. They can send shockwaves through the entire system. Now, the unregulated market runs on the principle that capital will work in its best interest, and it’s not in agribusiness’ best interest to tank the entire agricultural system. But in the recent corn and soy spike, even the multinational livestock producers and food companies have begun to feel the sting. When the stakes get to a certain level, the gambler can make decisions that are against his own self-interest.

So that brings us to the second key difference between the housing crisis and the food crisis: the scale of consequences. When a housing bubble inflates till it pops, people lose their homes. But when a food bubble grows till it bursts, people starve.

The problem with booms is they’re almost inevitably followed by busts. Worse news is that what we’re seeing right now—skyrocketing food prices and growing hunger—are still the effects of the boom. If the weather turns bad, commodity prices could still double over the next few months. But with the stability of the food and agriculture system left up to the whims of mother nature’s next crop yield, or how Cargill, ADM and the venture capitalists spin the roulette wheel, the bust is in the making. If the rural farm economy tanks, we’re set to see farm foreclosures, another banking crisis, and global hunger that will make the sub-prime mortgage effects look like a drop in the bucket.

So what are world leaders doing about this impending crisis? Politicians like George Bush and Gordon Brown, in lockstep with the World Trade Organization and the World Bank, are mainly proposing two solutions to the food crisis: food aid, and increased free trade in industrial agriculture. Agribusiness is positioned to cash in on the perceived need to ramp up production globally and to tear down remaining trade barriers. And Monsanto already has policymakers parroting its line of increasing efficiency and yields through investments in genetic engineering and high-tech inputs.

The architects of the failed free market are now prescribing more of the same, and policymakers are swallowing it part and parcel. However, rather than solutions to the problems of the global agricultural system, these are root causes. While urgent measures need to be taken to address acute hunger in places like African countries and Haiti, Bush’s $200 million food aid proposal is equivalent to his $300 tax return in terms of actually fixing economic malfunction. At its root, hunger is not about lack of food, it’s about poverty and inequity, and the inability to access available food. Just as if middle class Americans had better-paying jobs, they wouldn’t need a tax refund; if small farmers in Africa had access to land and local markets they wouldn’t need food aid. Another gross injustice of our food aid policy is the requirement that the majority of it be purchased and shipped from the US rather than bought from local producers. Where’s that food aid going to come from? Big agribusiness. Meanwhile, African producers will once again be denied income and shut out of their local market.

Back on C-SPAN, there’s a $280 billion Farm Bill mired in political wrangling in the Senate. Unfortunately, those billions don’t go to help fix this broken food and farming system. What they do instead is give more biofuels tax breaks and more subsidies for agribusiness. But no provisions for reserves… No price management mechanisms… No regulation. Once again, corporate lobbyists have worked hard for their paychecks.

It’s long past time we re-claim a rational economic and agriculture policy in this country and globally, before it’s too late. The unregulated free market has proven itself the gambling addict that it is—incapable of self-control. We saw it in the sub-prime mortgage crisis and we’re seeing it in the current food crisis. The venture capitalists and the ADMs and Cargills have bet both the house and the farm. Now global leaders have a choice: they can either regulate, or leave the fate of our economic and food systems to the next roll of the dice.


Gretchen Gordon is a fellow at Food First/Institute for Food and Development Policy.

This story first appeared April 18 on the Food First website.

From our daily report:

Food protests hit the First World
WW4 Report, April 27, 2008


Reprinted by World War 4 Report, May 1, 2008
Reprinting permissible with attribution