[Part 1 is here and included links to President Clinton's comments on a number of topics; Part 2 is here and was focused on his comments on Greece, the Euro and the financial crisis in Europe; Part 2A is here and was focused on the role of commodity market speculation and corn-ethanol conversion on food prices]
In this post, I discuss some of President Clinton's comments around food security at CGI2011. He was asked a question on his views about the impact of climate change on food security, especially in Africa. He started by saying that the countries likely to be affected are mostly in Africa, but not exclusively so - he also mentioned Haiti, Afghanistan, other Caribbean states, etc. He then emphasized the importance of local agricultural infrastructure as a critical element of preserving food security in places like Africa. I've not provided the complete transcript but only the most pertinent excerpts from his comments, with any bold text being my emphasis and italics representing President Clinton's emphasis. There are sections where my audio recording was unclear and I've included question marks in those portions:
In the places which can clearly feed themselves based on their top soil and their agricultural practices, and that’s virtually every place in Africa [...] what we should do is what Bill Gates said [...] we should rebuild the infrastructure of sustainable agriculture. I think it’s really, really important. Therefore I am strongly opposed to the completely understandable efforts of the Chinese, the Saudis and others who cannot possibly produce enough food for themselves, to either lease long-term [???] land and in effect turn these farmers into cogs [???] because what they will do is they will quickly use up the top soil and undermine their long term sustainability, but that doesn’t mean they’re bad people [...] I’d like to see the world get together and actually develop a food sustainability model for the 21st century. And that at least in the early years, not to cut these countries out of the market, but to build their own agricultural [practices?], I think the US and Canada and Europe, coz we have big surpluses [...] we should offer longer-term contracts to the Chinese and Saudis for the basic grains at prices that will guarantee decent profits but not exorbitant ones and stop price spikes. Keep price high enough to get investment into agricultural activities in Africa, Latin America, South-East Asia. I don’t have any objection to big money going to Africa but the most important thing is until you develop a sustainable agricultural framework in these countries, they’re not going to benefit. [He then discussed Ethiopia and the dearth of sustainable agricultural infrastructure, food storage capacity and food co-op mechanisms there and that with a "boom crop" they were not able to transport and store food effectively].
President Clinton's points of emphasis were:
- Self-sustainability of farming communities (a theme also advanced by Secretary of State Hillary Clinton)
- Stable prices and profits over the long run while avoiding exorbitant prices
- Paramount importance of food security
Let's explore this topic further, by looking at a few distinct but related threads.
1) Impact of Free Trade Policies
It's instructive to start with some history that runs closest to president Clinton's comments - his public apology in front of a Congressional panel in 2010 for the impact of trade liberalization policies that the US pressed Haiti to implement, that devastated local agriculture in Haiti. Here's a short video clip on that and a partial transcript of the Kim Ives interview of President Clinton in the video (via Amy Goodman at Democracy Now):
KIM IVES: But what about the change in your thinking to have you issue your apology the other day about the food policies?
BILL CLINTON: Oh, I just think that, you know, there’s a movement all around the world now. It was first — I first saw Bob Zoellick say the same thing, the head of the World Bank, where he said, you know, starting in 1981, the wealthy agricultural producing countries genuinely believed that they and the emerging agricultural powers in Brazil and Argentina, which are the only two places that have, parenthetically, increased wheat yields per acre, grain yields per acre in the last decade, because they’re the only places with more than twenty feet of topsoil, that they really believed for twenty years that if you moved agricultural production there and then facilitated its introduction into poorer places, you would free those places to get aid to skip agricultural development and go straight into an industrial era.
And it’s failed everywhere it’s been tried. And you just can’t take the food chain out of production. And it also undermines a lot of the culture, the fabric of life, the sense of self-determination. And I have been involved for several years in agricultural products, principally in Rwanda, Malawi, other places in Africa, and now increasingly in Latin America, and I see this.
So we genuinely thought we were helping Haiti when we restored President Aristide, made a commitment to help rebuild the infrastructure through the Army Corps of Engineers there, and do a lot of other things. And we made this devil’s bargain on rice. And it wasn’t the right thing to do. We should have continued to work to help them be self-sufficient in agriculture. And we — that’s a lot of what we’re doing now. We’re thinking about how can we get the coffee production up, how can we get other kinds of — the mango production up — we had an announcement on that yesterday —- the avocados, lots of other things. And so -—
(Also see: Dave Johnson at Campaign for America's Future)
2. Impact of Crops Grown for Ethanol Fuel and Associated Subsidies
President Clinton has previously raised concerns over the impact of rising food prices due to ethanol production, on stability across the world. In April 2009, the U.S. Congressional Budget Office (CBO) published a paper on "The Impact of Ethanol Use on Food Prices and Greenhouse-Gas Emissions". Here is an extract from the findings:
Over the past several years, the use of ethanol as a motor fuel in the United States has grown at an annual average rate of nearly 25 percent. That growth was driven by rising prices for gasoline coupled with long-standing subsidies for producing ethanol, which encouraged makers of ethanol to increase production. All told, despite a slowdown in production in the last quarter of 2008 as a result of falling prices for gasoline, overall consumption of ethanol in the United States last year hit a record high, exceeding 9 billion gallons.
In 2008, nearly 3 billion bushels of corn were used to produce ethanol in the United States. That amount constituted an increase over the previous year of almost a billion bushels. The demand for corn for ethanol production, along with other factors, exerted upward pressure on corn prices, which rose by more than 50 percent between April 2007 and April 2008. Rising demand for corn also increased the demand for cropland and the price of animal feed.
Those effects in turn raised the price of many farm commodities (such as soybeans, meat, poultry, and dairy products) and, consequently, the retail price of food. Pushed up in part by those effects and by surges in the price of energy, food prices rose by almost 2½ percent in 2006, by 4 percent in 2007, and by more than 5 percent in 2008. That those increases coincided with higher prices for corn raises questions about the link between ethanol production, the demand for corn, and food prices.
CBO estimates that from April 2007 to April 2008, the rise in the price of corn resulting from expanded production of ethanol contributed between 0.5 and 0.8 percentage points of the 5.1 percent increase in food prices measured by the consumer price index (CPI). Over the same period, certain other factors—for example, higher energy costs—had a greater effect on food prices than did the use of ethanol as a motor fuel.
In a recent, must-read paper published in Sep 2011 that I discussed in Part 2A - "The Food Crises: A Quantitative Model of Food Prices Including Speculators and Ethanol Conversion" - the authors M. Lagi, Yavni Bar-Yam, K.Z. Bertrand, and Yaneer Bar-Yam summarized their findings as follows:
Recent increases in basic food prices are severely impacting vulnerable populations worldwide. Proposed causes such as shortages of grain due to adverse weather, increasing meat consumption in China and India, conversion of corn to ethanol in the US, and investor speculation on commodity markets lead to widely differing implications for policy. A lack of clarity about which factors are responsible reinforces policy inaction. Here, for the first time, we construct a dynamic model that quantitatively agrees with food prices. The results show that the dominant causes of price increases are investor speculation and ethanol conversion. Models that just treat supply and demand are not consistent with the actual price dynamics. The two sharp peaks in 2007/2008 and 2010/2011 are specifically due to investor speculation, while an underlying trend is due to increasing demand from ethanol conversion. The model includes investor trend-following as well as shifting between commodities, equities and bonds to take advantage of increased expected returns. Claims that speculators cannot influence grain prices are shown to be invalid by direct analysis of price setting practices of granaries. Both causes of price increase, speculative investment and ethanol conversion, are promoted by recent regulatory changes—deregulation of the commodity markets, and policies promoting the conversion of corn to ethanol. Rapid action is needed to reduce the impacts of the price increases on global hunger.
Poorly architected "free trade" agreements that could severely impact local agriculture and prosperity in developing nations is bad enough. On top of that, you add the food price increases due to subsidized agriculture in developed countries focused on diversion of food crops to fuel needs. Perhaps the most deadly in the trio of policies is the crushing impact of deregulated market speculation in commodity markets.
3. The Commodity Futures Modernization Act (CFMA) and Impact of Market Speculation on Food prices
As The Big Picture pointed out:
In Bailout Nation, I held Bill Clinton, and his two Treasury Secretaries, Robert Rubin and Larry Summers, responsible for signing the ruinous Commodity Futures Modernization Act that exempt Derivatives from all regulation and oversight. The CFMA was passed as part of a larger bill by unanimous consent, and that Clinton signed on December 21, 2000.
Bill Clinton now joins Alan Greenspan in admitting his contribution to the credit crisis.
The former president admits his error: He said his Treasury Secretaries — Robert Rubin and Lawrence Summers — were wrong in the advice they gave him about regulating derivatives. And, he was wrong to follow their advice.
Bloomberg has the details:
“Their argument was that derivatives didn’t need transparency because they were “expensive and sophisticated and only a handful of people will buy them and they don’t need any extra protection,” Clinton said. “The flaw in that argument was that first of all, sometimes people with a lot of money make stupid decisions and make it without transparency.”
“Even if less than 1 percent of the total investment community is involved in derivative exchanges, so much money was involved that if they went bad, they could affect 100 percent of the investments,” Clinton said.”
Clinton doesn’t only throw Rubin and Summers under the bus — he also blames his successor, George W. Bush:
“Clinton also said the Bush administration contributed to the financial crisis with lax regulation.
“I think what happened was the SEC and the whole regulatory apparatus after I left office was just let go,” Clinton said. If Clinton’s head of the Securities and Exchange Commission, Arthur Levitt, had remained in that job, “an enormous percentage of what we’ve been through in the last eight or nine years would not have happened,” Clinton said. “I feel very strongly about it. I think it’s important to have vigorous oversight.”
He certainly has a point about the SEC — the Bush appointees for SEC chairman ranged from bad to worse.
So, what do CFMA and derivatives have to do with food security?
As the paper cited above explains, record-setting massive price spikes in recent years are attributable to essentially unrestrained speculation in deregulated commodity markets, as shown in this chart reproduced from the Lagi et al. paper:
I discussed the role of speculation on food prices more extensively in Part 2A, showing that the issue has been severe largely in the latter half of the last decade and appears to stem at least in part from the flight of money from a collapsing real estate market prior to the onset of the Great Recession. I would encourage readers to click through and read my entire post here. Needless to say, it is desirable to enact policies that strongly discourage the kind of speculation on essential commodities that could result in massive price spikes not tied to supply-demand equilibrium.
Pension funds are perhaps the largest combined source of money going into commodity market speculation. As this article points out:
In a new report, Hungry for Justice, Fighting Starvation in an Age of Plenty (pdf), Christian Aid says it is not primarily the hedge funds that are behind this trend. More pertinent are the activities of institutional investors such as pension funds looking for a safe place in which to grow their money following the burst of the dotcom bubble and collapse of the property boom.
The scene was set for their entry into the commodities market in 1991, when Goldman Sachs created an index of 18 commodities, including various foods, in which people were invited to invest. As well as providing diversity in the form of different types of commodities, from oil to metals to foodstuffs, that would perform differently, the index would offer diversity at a broader level to those with investments in traditional assets such as shares and bonds.
Business built up quickly, becoming an avalanche once the Commodity Futures Modernisation Act was passed in the US in 2000. That allowed banks, brokers and other financial institutions to develop, market and trade a variety of unregulated financial products.
Crucially, it also allowed more heavily regulated investors to enter the commodities market. Pension funds, for instance, are banned in the US from speculating on commodities futures themselves because that involves leverage, or the use of borrowed money. However, the Act gave them access to the index funds. And they have money – lots of it. An indication of the funds at their disposal is the fact that the combined value of the world's 13 largest pension markets is around $US26.5trn, higher than the combined GDP of China and the US.
The bets they make on commodity indices, however, have a knock-on effect. While they are not allowed to invest in commodities futures directly, every index-linked investment they make tends to produce a related investment in the "futures" of the individual commodities on the index by whichever bank or finance house is managing their business.
Here's an example:
According to a Guardian Newspaper article, The California State Teachers Retirement System, the No. 2 U.S. pension fund, has approved a plan to invest in commodities. Calstrs has not immediately approved a budget for its first investment in commodities but officials at the $138.5 billion fund said they will probably know by early autumn how much they should recommend for an allocation. Calstrs spokesman Ricardo Duran stated in an email to Reuters that the commodities allocation will come out of the fund’s Absolute Return asset class, which targets to make up 5% of the fund’s overall size. At nearly $140 billion, Calstrs is the second largest public pension fund in the United States, after the $200 billion California Public Employees’ Retirement System, or Calpers. Calpers started investing in commodities in 2007 with a $450 million program that tracked the S&P GSCI Commodity Index. The program attained a value of over $1 billion in early 2008 as Calpers’ benefited from record high prices of oil and other raw materials. But the portfolio plunged to about half of its value during the recession although it has since recovered. Where Calpers and Calstrs lead others will follow.
Another article on the same topic, from 2008:
With the popularity of long-only commodity index funds and the prevalence of total-return index swaps, the definition and quantification of speculation has changed, according to Jim Bianco, president of Bianco Research in Chicago.
Let's say a pension fund, like the California Public Employees Retirement System, wants to increase its exposure to commodities. Calpers, a speculator according to the CFTC, does a total-return swap with Goldman Sachs Group Inc., a hedger. Goldman promises to pay Calpers the total return on the Goldman Sachs Commodity Index and hedges the swap by buying futures contracts. Calpers's speculative bet on commodities gets recorded as Goldman's hedging in the COT report. In so doing, investors circumvent the position limits on non-commercials, says Aronstein, who estimates that passive commodity index exposure in commodities amounts to some $250 billion.
At least some pension funds are rethinking this:
Some pension funds are beginning to question their investments in commodities after accusations that massive flows into the sector have distorted markets, fuelled food inflation and hurt poor nations.
The role of hot money in commodities has unnerved some investors following high profile campaigns by pressure groups and French President Nicolas Sarkozy linking surging grain and fuel prices to a rise in poverty in developing countries.
"The last thing they want to do is to be on the other side of a trade to a starving person in Africa," said a source in the fund management industry in London who has noted an increase in concern about the issue but declined to be named.
France is due to press for tough new regulations on commodity speculation at the first ever summit of agriculture ministers of the G20 group of top economies this week.
4. Addressing Food Security
Clearly, addressing food security requires a broad policy framework. This framework should include the following elements at the minimum:
a) Support local sustainable agriculture to enable self-sustainability in food production, especially in developing or poor countries - organization like the Bill & Melinda Gates Foundation have a strong focus in this sphere.
In this context, increase the focus on organic farming. The Rodale Institute recently published the results of a study which found that:
Organic yields match conventional yields.
Organic outperforms conventional in years of drought.
Organic farming systems build rather than deplete soil organic matter, making it a more sustainable system.
Organic farming uses 45% less energy and is more efficient.
Conventional systems produce 40% more greenhouse gases.
Organic farming systems are more profitable than conventional.
b) Change ethanol policy to reduce or eliminate subsidies for corn-based ethanol - in order to stem or reverse the secular increase in long-term food prices due to ethanol conversion
c) Dramatically regulate and limit speculative market behavior in essential commodities like food to avoid large food price spikes that are attributable to such behavior - I would strongly encourage President Clinton to enlist the support of all major pension funds in this effort as part of a potential set of future CGI commitments