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How Goldman Sachs Created the Food Crisis

Around the world, food is becoming ever more expensive. One main reason for the soaring food prices is actually Wall Street greed.

In 1991, bankers at Goldman Sachs came up with a new kind of investment product, a derivative that tracked 24 raw materials, from precious metals and energy to coffee, cocoa, cattle, corn, hogs, soy, and wheat, as part of a single mathematical formula they called the Goldman Sachs Commodity Index (GSCI).

The problem surfaced in 1999, when the Commodities Futures Trading Commission deregulated futures markets, and bankers could take as large a position in grains as they liked — something which had been forbidden to all but those actually involved in food production since the Great Depression.

According to Foreign Policy:

“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).

…This imbalance undermined the innate structure of the commodities markets, requiring bankers to buy and keep buying — no matter what the price.

…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.”

[via Foreign Policy]

Chapter: Food,Money :: 25 May 2011

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