How Goldman Sachs Created the Food Crisis

Forget oil, forget gold. The 3 most valuable commodities in the world are air, water and food. Without those 3 people die. If there is a shortage of any of those 3 things can turn very bad, very fast.

So far the first 2 have proved somewhat elusive for the mega bankers to turn a profit on. Though I suspect water will be the next crisis to hit after food. However, they have figured out a way to turn food into a profitable speculative venture and that is one of the roots of the current food crisis.

But we need a little history to understand why and how.

Some years ago Goldman Sachs started hiring people with majors in math, statistics, physics, computer science, etc. They didn't just hire any person off the street. They cherry picked the best and brightest of these from the top universities around the world. They used them to create extremely powerful computer models and systems to predict market trends, trade shares and (some say) manipulate the market.

The Matrix, but with money: the world of high-speed trading

In 1991 Goldman Sachs came up with the Goldman Sachs Commodity Index (GSCI). It took what are 24 real things people eat and drink - corn, cattle, wheat, hogs, etc. - and turned those into a complicated derivative investment that people could invest it.

This wasn't a problem until 1999 the futures market was deregulated. This meant that bankers could get in on the action. Before this you actually had to be involved in the production of food to be involved in the food futures market. That allowed an explosion of investment and exposed a flaw in the GSCI that impacts food prices.

How Goldman Sachs Created the Food Crisis

The structure of the GSCI paid no heed to the centuries-old buy-sell/sell-buy patterns. This newfangled derivative product was "long only," which meant the product was constructed to buy commodities, and only buy. At the bottom of this "long-only" strategy lay an intent to transform an investment in commodities (previously the purview of specialists) into something that looked a great deal like an investment in a stock -- the kind of asset class wherein anyone could park their money and let it accrue for decades (along the lines of General Electric or Apple). Once the commodity market had been made to look more like the stock market, bankers could expect new influxes of ready cash. But the long-only strategy possessed a flaw, at least for those of us who eat. The GSCI did not include a mechanism to sell or "short" a commodity.

This imbalance undermined the innate structure of the commodities markets, requiring bankers to buy and keep buying -- no matter what the price. Every time the due date of a long-only commodity index futures contract neared, bankers were required to "roll" their multi-billion dollar backlog of buy orders over into the next futures contract, two or three months down the line. And since the deflationary impact of shorting a position simply wasn't part of the GSCI, professional grain traders could make a killing by anticipating the market fluctuations these "rolls" would inevitably cause. "I make a living off the dumb money," commodity trader Emil van Essen told Businessweek last year. Commodity traders employed by the banks that had created the commodity index funds in the first place rode the tides of profit.

These profits have drew investors like files to the manure. Since the bursting of the tech bubble there has been a 50 fold increase in the amount of dollars invested in commodity index funds.

But when the global financial crisis sent investors running scared in early 2008, and as dollars, pounds, and euros evaded investor confidence, commodities -- including food -- seemed like the last, best place for hedge, pension, and sovereign wealth funds to park their cash. "You had people who had no clue what commodities were all about suddenly buying commodities," an analyst from the United States Department of Agriculture told me. In the first 55 days of 2008, speculators poured $55 billion into commodity markets, and by July, $318 billion was roiling the markets. Food inflation has remained steady since.

This has led to a new bubble - a food bubble.

The result of Wall Street's venture into grain and feed and livestock has been a shock to the global food production and delivery system. Not only does the world's food supply have to contend with constricted supply and increased demand for real grain, but investment bankers have engineered an artificial upward pull on the price of grain futures. The result: Imaginary wheat dominates the price of real wheat, as speculators (traditionally one-fifth of the market) now outnumber bona-fide hedgers four-to-one.

The result has been horrible. Bankers and speculators are at the top of chain on this making huge profits. Consumers and farmers are at the bottom. The amount of hungry people in the world due to rising food prices has risen to never before seen levels..

But for the roughly 2-billion people across the world who spend more than 50 percent of their income on food, the effects have been staggering: 250 million people joined the ranks of the hungry in 2008, bringing the total of the world's "food insecure" to a peak of 1 billion -- a number never seen before.

Perhaps even more frightening is there may not be a way to stop it.

What's the solution? The last time I visited the Minneapolis Grain Exchange, I asked a handful of wheat brokers what would happen if the U.S. government simply outlawed long-only trading in food commodities for investment banks. Their reaction: laughter. One phone call to a bona-fide hedger like Cargill or Archer Daniels Midland and one secret swap of assets, and a bank's stake in the futures market is indistinguishable from that of an international wheat buyer. What if the government outlawed all long-only derivative products, I asked? Once again, laughter. Problem solved with another phone call, this time to a trading office in London or Hong Kong; the new food derivative markets have reached supranational proportions, beyond the reach of sovereign law.

Plant a garden if you can. The food bubble may be worst yet.

Yep, f'ing bs. Many food products contain corn, wheat, or soy beans. These are what are used for animal feed as well. Goldman must go down before they starve the world in every way.


www.businessinsider.com...

Great info!
I knew the commodities market was the next bubble a few years ago when they merged the 2 trading houses in Chicago. Their profits are now the world's miseries - a horrible way to make a living - directly on the suffering of others.
Don't let them fool you, if Pandora came out of a box it can go back in. Powerful interests might scream bloody murder but no more rightfully than the poor their practices are starving.
It's become painfully obvious that we have no representative government free from special interests.
We may as well put the Goldman Sachs logo over every Federal building.

To make the bubble even worse all food costs are tied to fuel costs and we know where that is heading ......
If you can buy now you will save later.
I recently bought several cans of coffee on sale for $7, the following week it had jumped to $15.
When people in the US begin starving no amount of political rhetoric will be able to stop the human tsunami in the streets.

reply to post by Asktheanimals


Yup - food and fuel are tied to some extent. Between the commodities market, fuel prices and the various natural disasters it is the "perfect storm" for food prices.

I agree that eventually a human wave will cause the change even if they currently laugh at any laws that might be passed. However, things may be very bad before that happens.