The Goldman Food Bubble

Democracy Now interview with Frederick Kaufman, author of the Harper's Magazine piece I just posted.

Excerpt:

"""The wheat markets, in particular, in this country are the outcome of a process of development of over 150 years. And that is why, from about 1903 to 2003, the real price of wheat in this country has gone down. And this was one of the great reasons for America’s great twentieth century, the fact that we had cheap food, we had cheap bread. And Goldman, in 1991, came up with a new idea and a new product, which, as I said before, completely restructured this market and completely threw it out of whack.

But before we go there, we just have to maybe review for a second a little bit about how these markets worked and what kept that wheat price stabilized. And Juan, you mentioned the Minneapolis Grain Exchange, this kind of obscure syndicate in the Midwest, which is where the price of this particular kind of wheat, hard red spring wheat, which is the most widely traded wheat in the world, and it’s the most widely exported wheat from the American continent—we kind of set the world price on this wheat. This is where it happens. What’s the history of that price being stabilized is you have, traditionally, in the wheat futures market, two kinds of players: one of the farmers and the millers and the warehousemen—right? And this, of course, includes players like Domino’s Pizza and Sara Lee and General Mills, very large business, capitalist stakes are in this wheat market, right? And they are called bona fide hedgers, because they’re actually buying and selling real wheat. As the price fluctuates in the futures markets, you also traditionally have speculators in this market, people who don’t want wheat, who wouldn’t have any place to put it if they bought it, but they’re making money off buy orders and sell orders, as the price fluctuates each day, and hopefully they’re bringing in some money for themselves every day. That’s the idea.

Now, the key here is that both the bona fide hedgers and the speculators, every time they buy, they’re also selling, and every time they sell, they eventually buy. So their positions are cleared off at the end of the day, OK? Goldman, we have to understand, and a lot of these banks, are not interested in the particular structure of any of these markets. I think it’s a lot of mistake people make when they think about how these bankers are working. We think that they’re actually interested in the markets. We think that they’re—no. What they’re after are very large pools of cash for themselves. They’re after accumulating huge pools of money that they can do with whatever they like on a day-to-day basis. Right? And so, Goldman, in 1991, came up with this idea of the commodity index fund, which really was a way for them to accumulate huge piles of cash for themselves. It wasn’t really about the markets, anyway. The market was just an excuse. And so, the fact that they threw these wheat markets out of whack didn’t really matter to them.

How did this work? Instead of a buy-and-sell order, like everybody does in these markets, they just started buying. It’s called "going long." They started going long on wheat futures. OK? And every time one of these contracts came due, they would do something called "rolling it over" into the next contract. So they would take all those buy promises they had made and say, "OK, we still—we’re just going to—we’ll buy more later. And plus we’re going to buy more now." And they kept on buying and buying and buying and buying and accumulating this unprecedented, this historically unprecedented pile of long-only wheat futures. And this accumulation created a very odd phenomenon in the market. It’s called a "demand shock." Usually prices go up because supply is low, right? That’s the idea. There’s not a lot of supply, so the price goes up. In this case, Goldman and the other banks had introduced this completely unnatural and artificial demand to buy wheat, and that then set the price up. Now, a lot of people are saying, "Oh, it was biofuel production. It was drought in Australia. It was floods in Kazakhstan." Let me tell you, hard red wheat generally trades between $3 and $6 per sixty-pound bushel. It went up to $12, then $15, then $18. Then it broke $20. And on February 25th, 2008, hard red spring futures settled at $25 per bushel."""