Frederick uncovers the 1991 scheme where Goldman bankers lead by Gary Cohn created a derivative that tracked 24 raw minerals; including coffee, cocoa, cattle, corn, hogs, soy and wheat and how that scheme was then manipulated to raise food commodity prices.
Each element was given a calculated investment value and is now known as the Goldman Sachs Commodity Index (GSCI). The GSCI has been a static commodity vehicle for the past decade while bankers focused their attention on collateralized debt (hello economic crisis) until 1999 when futures markets were deregulated. That’s when bankers started taking large positions in grains.
Following the money trail Frederick reports:
Food inflation has remained steady since July 2008 when there was $318 billion in the commodity markets - up from the $55 billion speculators dumped in the first 55 days of 2008. In 2003 commodities futures markets were only worth $13 billion. "You had people who had no clue what commodities were all about suddenly buying commodities," an analyst from the United States Department of Agriculture stated.
Between 2005 to 2008 worldwide prices of food rose 80 percent, and they’ve kept on rising. Olivier De Schutter, the U.N. Special Rapporteur on the Right to Food, concluded that in 2008 "a significant portion of the price spike was due to the emergence of a speculative bubble."
So as the dollars poured into the markets, bankers hedged bets on food derivates. Led by oil and gas prices which are the main commodities of the index funds, the new investment products boosted the markets of all other indexed commodities. The result: a food bubble.
Wheat topped $25 from $4-6 and so food prices started skyrocketing. "What we are experiencing is a demand shock coming from a new category of participant in the commodities futures markets," hedge fund Michael Masters testified before Congress in the midst of the 2008 food crisis.
Frederick writes: “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.” Read the full scoop on Foreign Policy.
According to him, the solution could be for the US government to outlaw long-only trading in food commodities for investment banks. The Minneapolis Grain Exchange brokers laughed at him - while the world’s poor are on the brink of starvation.
But while US congress denies a food crisis, the World Bank reported 44 million people are affected by the escalating price of food at a G20 meeting. In another report:
"According to Moskovsky Komsomolets, in March global inflation has accelerated in most regions of the world. Inflation in the Euro zone last year amounted to 2.7%. In the U.S., where the economists have long feared deflation, in March the annual price increase amounted to 2.7% as well (in February - 2.1%). Emerging economies also show price increase. In India, consumer prices over the past 12 months increased by nearly 9%, while in February this number was at 8.3%. Annual inflation accelerated in China as well and amounted to 5.4%. A comparable increase in prices was observed over two years ago when in July of 2008 prices rose by 4.9%. Food prices in the country experienced even more significant increase at 11.7% compared to March of 2010."