As the national staple, corn is sold on almost every street in Mexico
Exclusive film Mexico's poor suffer as food speculation fuels tortilla crisis
13th September, 2011
A surge in financial speculation on maize is causing vastly inflated prices for corn tortillas - a sacred staple in Mexico - and threatening the health and livelihoods of the country's poor. Tom Levitt investigates
Lorenzo Canseco Hernandez and his wife Genoveva know little about international markets or food speculation. But they can explain the impact the recent jump in corn prices has had on their life.
In the isolated mountains of Oaxaca, South Mexico, where they live, it is coffee production that fuels the local economy. With coffee prices unpredictable, they rely on stable prices for their national staple corn.
'It has not only doubled but also in fact tripled. Because 2 years ago, corn cost 2 pesos, but now it costs 6 pesos or even 6.50 per kilo. Before, corn tortillas cost 2 or 3 pesos, but now costs 12 pesos per kilo,' says Lorenzo.
'The effect is that everything that we earn, the most part of it goes on corn and food, but there are also other important things we need money for, like our houses and other things, but we normally don’t have any money left over for anything else.'
In Mexico, not being able to afford the daily corn tortilla is unthinkable.
For many Mexicans, particularly the estimated 40 million living on less than $5 a day (£3), tortillas account for almost half of their average daily calorie intake. As a whole, the country consumes 23 times more maize than rice.
It is not just that maize is an important part of their daily diet, says Ignacio, a coffee-grower and community leader from the same village as Lorenzo and his family, it's much more than that.
'We have been eating corn tortillas since we were children. Our grandparents and ancestors taught us the importance of what this food means to us. When people are hungry, they ask for corn tortilla, this alone can satisfy our stomachs - maiz es la vida - maize is our life.'
Like a growing number of fellow Mexicans, Lorenzo and Ignacio are being priced out of their daily staple - corn tortillas, tacos and tostadas - despite it being a nutritionally essential and culturally significant part of his nation's diet.
A major factor behind the recent scale of price hikes in maize and Mexico’s corn tortilla is a newly emerging capitalist phenomenon – food speculation.
The rise of the food speculator
In brightly lit offices in London, Chicago and other financial centres, traders and investors are tracking the prices of maize and other staple food commodities.
Commodities markets were primarily meant to help producers and buyers find the true market price (‘price discovery' in trader-speak) for the product through futures contracts. These contracts have worked well for almost a century, helping to deal with the uncertainty of growing crops by guaranteeing a future market for the producer and stable price for the buyer.
For example a buyer of maize, such as a corn processing company, could protect itself against maize prices going up in future years by buying a corn futures contract to guarantee itself a stable price. This is known as hedging.
However, over the last decade there has been a surge in interest in buying and selling these futures contracts from people with no interest or connection to agriculture or the food sector. These investors are known as speculators.
Speculators do not have any commercial interest in the commodity they are trading - unlike the corn processing company they are not looking to take delivery of any maize any time soon. Their only ambition is to make a profit from the changing prices over the lifetime of these food futures contracts.
The rise in speculators has been facilitated by lax regulations which have allowed investment banks, like Goldman Sachs and Barclays, to create new funds that let people bet on the price changes of these food futures contracts.
Most large institutional investors, including pension funds, have little knowledge of commodities markets, or the time to learn, so investment banks have tailor-made index funds that track the prices of key commodities like maize and give investors a return based on how they perform.
The banks, in effect, act as the middlemen by taking investments and speculating on the investors’ behalf; buying and selling futures contracts in food commodities.
A market that was once largely dominated by commercial hedgers, such as the corn processing company, has now become swamped by financial speculators. Campaigners argue that the banks have turned a stable food market into one driven by the short-term profit motives of speculators.
As Alan Bjerga explains in his newly published book, Endless Appetites: How the commodities casino creates hunger and unrest, 'Physical goods have an obvious appeal to investors: Unlike a company that could go out of business or a country that could default on its debt, corn will always have some sort of value as something people can eat to stay alive. Every day more children are born who will need corn or some other crop to eat.'
And value they certainly have. In 2000 there was $6 billion invested in commodities, by 2011 it was $340 billion, of which $126 billion, according to data from Barclays Capital, is reported to be invested in food. The vast majority of this new investment has been by speculators with no interest in the agricultural sector or in actually taking delivery of the commodity.
For some analysts this is only the ‘tip of the iceberg’ in terms of the amount of financial involvement that will eventually move into food speculation.
But already this sudden influx of large investors over the last decade has destabilised the market and grossly exaggerated the normal fluctuations in food commodities trading. ‘It has been like an elephant jumping into a backyard kiddie pool’, explains one commodities expert in Bjerga’s book, ‘inevitably changing the way food prices are set’.
The price of food futures sets the benchmark for current food prices and so the sudden surges of investment and rising price of futures contracts for foods like maize, is being passed onto consumers, like Ignacio and his family in Mexico, who buy corn products like tortilla.
Of course, it could just as quickly crash if speculators jumped out of one commodity and into something else.
As it stands though, speculators are seeing the same warning signs as everyone else - weather-damaged harvests, soaring demand for maize (for feeding livestock and converting into biofuels), fears about the impact of climate change on future yields and gambling on ever higher prices.
Speculation linked to volatile maize prices
In the short-term at least, the impact of this new volume of speculation is far greater price rises in maize than poor families would otherwise have had to suffer – giving them little time to adapt.
In the case of maize, international trading prices have not only trebled in the past decade but also risen in two sudden and unexpected leaps. After rising from around $2 a bushel in 2000 to $3 in 2007, they more than doubled in price in less than a year to reach almost $8 in 2008. After dropping back in 2009 they have now recently jumped towards $8 a bushel again.
| Maize prices no longer follow supply and demand trends (graph provided by World Development Movement)
Former city broker Brett Scott explains how this influx of new speculators - now thought to be making up as much as 80 per cent of all trades in some food markets – could be causing these sudden jumps in the market price of maize.
‘It may be the case that a market with 30 per cent of activity accounted for by speculation might work well, but what about a market with 60 per cent? What about 85 per cent speculation? These are not linear relationships – a market does not inevitably get more and more efficient as more speculators come in, and it is easy to imagine that there’s a tipping point where too many speculators destabilise prices rather than help them. Most speculation is short-term trading for short-term profit and it works if it’s done amidst a market concerned with long-term fundamentals. But what if it’s done amidst a market that’s already largely constituted by speculators? That’s speculation on speculation, and that’s how bubbles form.’
Olivier de Schutter, the UN’s rapporteur on the right to food, is adamant that speculators are to blame for the jumps in food prices. He says prices of key cereal crops like maize have, 'increased very significantly but this is not linked to low stock levels or harvests, but rather to traders reacting to information and speculating on the markets.'
While the poor suffer, investment banks are making massive profits. While they remain notoriously secretive about their earnings from food speculation, it was reported that Goldman Sachs made more than $1 billion from commodities trading in 2009, and, in the UK, Barclays is believed to be making up to £340 million a year.
Mexico's tortilla price wars
Back in Mexico, any profits made from escalating tortilla prices are being reaped by the large agribusinesses that now dominate the maize market.
Traditionally maize was grown all over the country. Such is the importance of the crop that, according to the sacred book of the Popol Vuh, the gods created people out of a corn mill, giving the ancient Mayan civilisation their name as 'People of the Corn'.
But the birthplace of the first maize plants in the world is no longer even self-sufficient in maize. Since being forced to open its domestic markets to international trade domestic farmers have struggled to compete against heavily subsidised cheap imports from the US.
The picture is somewhat complicated by the two different types of maize consumed in Mexico – white and yellow. There are many other varieties but they are not grown on a large scale.
White maize is largely grown in the north of Mexico in one state, Sinaloa, to create food such as tortillas for human consumption. The yellow maize is largely imported from the US and fed to livestock to meet Mexico's growing meat consumption.
It is the rising demand for yellow maize for Mexico’s growing livestock sector that has seen imports from the US increase and left the country with a substantial deficit in maize production. Politicians may say Mexico has ambitions to be self-sufficient but already one-third of the country’s corn needs are imported. Mexico is the second largest importer in the world, after Japan.
This maize deficit is amplified when, as happened in 2006/7 and again this year, the native white maize harvest is badly affected by poor weather leading to lower than expected yields. Mexico is forced to import maize for food from an international maize market gripped by speculators.
With climate change and more unpredictable weather events it is possible that Mexico will become more, rather than less, dependent on imports.
The sudden leaps in the cost of maize after the poor harvest of 2006 reached a peak in January 2007 when tortilla price inflation officially hit 19 per cent year-on-year – the real figure may have been much higher. That peak coincided with a mass protest on the streets of Mexico City when thousands held up cobs of corn and complained about the rapid spike in the cost of their daily staple.
Some Mexican commentators say a recent close presidential election was the main spark for the protests, but there is no doubt the public anger shocked the authorities and international observers. The protest has since been seen as the first early warning sign of the ‘food riots’ that spread across the world in 2007/8 and again earlier this year in Africa and the Middle-East.
At the time, the surge in biofuels demand in the US and the monopolistic control of agribusiness giants in Mexico were blamed for the rises – food speculation was largely unheard of or not understood. Even now the extent of its impact is questioned.
Alfonso Murillo, vice-president of the council for agribusiness in Mexico, is one of the few who is well aware of the growing numbers of speculators in the corn market. ‘They are just making a contract and reselling a contract and they go into the market or out of the market depending on the profit margin. They don’t need the corn for any purpose. This speculation is growing stronger and stronger,’ he says.
However, Alfonso, who also works for Maseca, the world’s biggest producer of corn flour and tortilla, is sceptical about how much impact speculation is having on the consumer food prices. He believes higher maize prices are stimulating more production in both Mexico and around the world and that the government can control prices.
Food price hikes creating nutritional crisis
While the impact of speculation is disputed - the impact of volatile food prices is clearer.
This year a bad frost in Sinaloa destroyed around one half of Mexico’s harvest and forced the import of large quantities of white maize again - at the same time international prices have been rapidly escalating, led by speculation.
With tortilla price inflation currently running at more than three times the minimum wage, analysts say the situation is getting out of control, with poor families being condemned to poverty.
‘Mexicans spend 20-30 per cent of their expenditure on food which is a lot higher than the expenditure in Europe or North America,’ says Ken Shwedel, head of food and agriculture for Rabobank in Mexico. ‘So as tortilla prices are going up 15 per cent that means you’re spending more on tortillas, which means you have less disposable income to spend on other things like books, schools, clothing and health.’
Luis Hernandez, a journalist with Mexico's La Jornada, who has written on the maize crisis, says people have also had to vary their diet to include less nutritional but cheaper foods such as pasta soup. In some cases, people cannot even prepare their own food as the cost of traditional ingredients like tortilla become unaffordable and are forced instead to buy cheaper western junk food.
However, the group hardest hit by rising prices is not the urban population who protested on the streets in 2007 but Mexico’s rural poor, typified by cash-crop farmers like Lorenzo and Ignacio from Oaxaca, who, according to Shwedel, face a growing nutritional crisis.
‘The rural poor are probably the poorest of the poor. Their diets are poor and they are making no more than minimum wage in most cases. They don’t produce enough corn to live on and are going to have to go, later in the year, to the market to buy corn. So when the prices have gone up, they’re the ones that can least afford to pay the higher prices for corn,’ he says.
'As well as eating less nutritious food, we've seen households having to eat into their savings or take out loans just to afford food and cut back on expenditure on healthcare and education,' says Murray Worthy from the campaign group World Development Movement (WDM). 'All of these have much longer term impacts than just the impact of high prices in the short-term.'
Limit speculators grip on market
The group is campaigning to reduce the influence speculators can have on food prices by both limiting the amount of the market they can hold and making their transactions more open and transparent.
It believes speculators shouldn't make up more than 25 per cent of the market - and not the 60 per cent or more they currently make up in the case of some food futures market. It also believes forcing banks to report positions they hold would allow regulators to properly assess if a market was functioning to supply and demand fundamentals.
Others say regulation won’t be enough and that food should not be allowed to be speculated on at all. ‘This device [the futures market] that was put in place supposedly to create price certainty at a given time has been a way of getting rich off the backs of others and giving rise to food insecurity,’ says Luis Hernandez.
He believes Mexico should focus more on increasing its self-sufficiency in corn - now a national campaign Sin maíz, no hay país (no corn, no country) - and supporting rural communities that have been devastated by free-trade and now suffering from higher food prices.
The Mexican government acknowledges the volatile maize and tortilla prices but rather than reducing the grip of agribusinesses or capping prices, it has taken the unusual step of speculating on maize prices itself. It announced in December 2010 that it had bought maize futures contracts on behalf of corn processing companies, to 'guarantee prices'.
Ken says the move fits with the Mexican government’s recent policy of not wanting to intervene directly in the market. Up until the 1990s it controlled food and tortilla prices to keep them affordable for poor Mexicans.
However, the government move has been seen as too pro-agribusiness, which many feel is to blame for exherting to much control over tortilla prices. Either way, the intervention shows no signs of reducing the current tortilla price inflation.
In the village of Chuxnaban, in Oaxaca, the young children in the village school are the only signs of a youthful population. Most of the older children and young adults have already left in search of a better future. Lorenzo is not optimistic. 'I think there will be much more migration. Young people will go to other states, to other countries like the US in the hope of finding money and food,’ he says.
The irony is that these migrants may well end up as cheap labour in the US, helping to produce maize that will eventually make its way back to their homeland.
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