Over the past year, we’ve seen our grocery bills rise and rise. Our newsfeeds tell us it’s caused by a variety of factors, like the invasion of Ukraine or supply chain problems. We can blame monopolies, market power and price gouging, too.
But there’s another player in this game that has gone mostly under the radar. And that’s investment banks on Wall Street and their subsidiaries.
How Investors Profit Off Food They Don’t Sell
In commodity markets, buyers and sellers can make contracts (also called futures) with each other. A buyer agrees to purchase a farmer’s goods (for example, grain) sometime in the future for an agreed-upon price. That price is locked in, even if the market price of the good changes after the contract was signed.
In theory, these contracts should help growers manage the risk of changing supply and demand by guaranteeing a future price. But there are other kinds of financial tools in commodity markets.
For example, swaps are essentially a bet on how the value of a commodity will change from Date A to Date B. They don’t require any buyer to actually pick up goods at the end of the swap period — making it a prime tool for investors looking to make a quick buck.
In fact, these financial tools (also called derivatives) have grown beyond the domain of growers, food manufacturers and their buyers. They are now also a route for investment banks to make money. And that’s where speculation comes in.
Speculation is the trading of commodities for profit. And the more wildly commodity prices swing, the more money speculators can make on those price changes through swaps.
Because of this, speculation can affect the real-life prices for food — in this case, driving them up. The actual buyers and sellers of the goods become more irrelevant to the price. And now, deregulated speculative activity is responsible for an estimated 10-25% of our current food prices.
Food Speculation Has Deadly Consequences
This isn’t the first time we’ve seen the harmful effects of commodity markets. Economists have pinned swaps as the main driver of the 2008 financial crisis.
Now, shocks to the global food supply, from COVID to the war in Ukraine, have become blood in the water for the sharks on Wall Street. Speculators have rushed into the grain market, worsening any existing supply shocks. Meanwhile, the financial sector quickly blamed prices on supply shocks only — neglecting to mention how speculation shakes up an already unstable market.
The result: low-income families struggle more than ever to afford food for their families while hunger rises at home and abroad.
We Can Fight High Food Prices By Reining in The Banks
In the years since the 2008 financial crisis, the federal government tried to reform the financial sector. But the heavyweights in the industry lobbied hard to shut down even the most common-sense regulations. The recent flurry of activity in grain markets came on the heels of recent regulatory rollbacks won by the financial lobby.
The U.S. has so far failed to reign in the speculators wreaking havoc on the food system. That’s because these banks have huge lobbying powers and market power. The four largest banks in the U.S. — Citibank, JPMorgan Chase, Goldman Sachs and Bank of America — control 90% of the U.S. swaps market.
Wall Street needs to get its hands off our bread. We can’t afford more price hikes on groceries because big-wig investors want a few extra millions in their pocket. The regulating agencies must be able to meaningfully regulate their charges. And we need an end to speculation on commodities like grain, full stop.
We can’t let Wall Street off the hook. Spread the word on how speculation grows our grocery bills!