by Fred Pearce
For a while it looked like Zoellick was right. The 2008 grain harvest turned out to set a record. In the second half of 2008, food prices fell back. Longtime observers of commodity markets swiftly concluded that 2007–08 was a once-in-a-generation blip. Don’t worry, they said. High prices encourage more planting, the market is correcting itself, and all will be well. At a conference on the future of world agriculture I attended in London in June 2010, Ron Trostle of the U.S. Department of Agriculture echoed the common view of experts that “this kind of price spike happens only once in every three decades or so. It’s highly unlikely a price spike will be repeated especially in the next four to five years.” Around the same time, the UN’s food trade guru Hafez Ghanem insisted that “the market fundamentals are sound and very different from 2007–2008 . . . We don’t believe we are headed for a new food crisis.”
But by the end of the year, prices were surging all over again.
So if the “market fundamentals” were sound, what was the problem? Perhaps it was the markets themselves. For a while, some economists had been arguing that the freer markets that Zoellick saw as the solution to high food prices were in fact part of the problem. They were saying that speculation had played a big role in the price spikes of 2008. A group of eighteen leading U.S. economists wrote to the U.S. Congress saying that deregulation of financial markets had “encouraged hyper-speculative activities by market players who had no interest in the underlying physical commodities being traded. This produced severe price swings.”
This talk was sacrilege, and remains so in many quarters. But read the words of the traders themselves rather than the economic theorists, and there is a lot of support for the view that it was speculators that turned a supply-and-demand problem into a full-blown crisis, one in which—as the UN’s special rapporteur on the right to food, Olivier De Schutter, noted in 2011—an extra 40 million people have been made chronically hungry.
The investment bank Goldman Sachs concluded in a research report in 2008 that “without question, increased fund flow into commodities has boosted prices.” Its take was that the speculators were simply anticipating events in the real world. But to many it looked more like the speculators were creating those events. And to some that looked unacceptable. In the summer of 2008, financier George Soros told the German magazine Stern that speculators were distorting prices in a way that “is like hoarding food in the midst of a famine.” At U.S. Senate hearings around the same time, hedge fund manager Michael Masters said: “It’s not like real estate and stocks—when food prices double, people starve.”
There was a new narrative emerging. It said that food futures—previously a rather humdrum business that helped fund farmers and keep prices stable—had been taken over by speculators in the finance markets, and in the process it had turned into a dangerous beast that bankrupted farmers and caused worsening price volatility. It said that the same kinds of forces that had overwhelmed the world’s banks in 2008 were disrupting food markets too. And there was an extra wrinkle. It appeared that, as the banking crisis escalated, investors seeking a safe haven were buying into commodities and, by 2010, were driving up food prices once more.
The argument, in essence, is this. Until the 1980s, there was a mutually supportive relationship between farmers and market traders—a relationship that had existed since the mid-nineteenth century, thanks to the futures contracts system invented at the Chicago Board of Trade. But the deregulation of financial institutions in the 1980s undermined that relationship, by creating new forms of financial products that allowed speculators who knew nothing about farming or food trade to muscle in on the food futures business. New kinds of financial derivatives were created, somewhat analogous to those behind the subprime mortgage business, whose collapse triggered the 2008 banking crisis.
Traditional futures are themselves a form of derivative, of course. But the new forms began in 1991, when Goldman Sachs packaged up commodities futures of all sorts (from coffee and corn to oil and copper) into the Goldman Sachs Commodity Index. It then sold stakes in index funds. By buying them, investors were betting on the future price of a basket of commodities. The first index funds bumped along for years without attracting too much attention. Then in 2005, three things happened that suddenly made them extremely attractive to investors.
First, real food prices started to push up after a long period of decline. Second, it started to look like investing in some of the other derivatives markets beloved by speculators, like subprime mortgages, might not be so clever. And third, with fear in the financial air, some influential research suggested that commodities were sure-fire winners in bad times. This, argued Frederick Kaufman, the author of the Harper’s piece on the food bubble, was when the commodity funds took off and the food bubble started to inflate. Soon, the price of food futures began to depend less on the balance between supply and demand for the crops themselves, and more on what was happening elsewhere in the financial system. And that—if you cared about feeding the world rather than turning a profit—began to look dangerous.
Between 2005 and 2008, speculators piled into commodities index funds. The funds swiftly came to dominate key U.S. markets in corn, wheat, and soy. A report from Morgan Stanley estimated that the number of contracts in corn futures increased fivefold between 2003 and 2008. The distinguished Indian economist Jayati Ghosh said later: “From about late 2006, a lot of financial firms realized that there was really no more profit to be made in the US housing market.” They switched to commodities and began pushing up prices “so that what was a trickle in late 2006 becomes a flood from early 2007.”
As the prices of shares, real estate, and other former wealth generators fell during the credit crunch of 2008, the prices of commodities index funds continued to rise, as investors poured in. This accelerated as governments in the United States and Europe tried to save the world banking system by pumping in new money—quantitative easing. Much of this new money, we now know, went straight into commodities. In 2003, there had been $13 billion in agricultural commodity funds. But by 2008, many commentators put the figure at over $300 billion.
In his Senate testimony that year, Michael Masters reported that financial speculators accounted for two-thirds of the futures market, and they were crashing the system. Lou Munden, whose Munden Project analyzes complex market systems, says “price booms are a symptom of an excess of capital. What happened in 2007 and 2008 wasn’t much to do with supply and demand for food. It was people getting out of the subprime market and looking for somewhere to put their capital.” Franz Fischler, a former European Union agriculture commissioner, later told me he reckoned that the volume of trade in the agricultural derivatives market had reached fifteen times the size of the real agricultural economy. “This is nothing to do with the futures market. It is pure speculation.”
The prices that speculators were paying for food futures inevitably fed back into the real price of wheat and rice and corn being bought and sold on world markets. Even in 2011, many traders doggedly denied any influence, at least in public. But the UN trade body UNCTAD did not believe them. It said in June 2011 that “the financialization of commodity markets” had “accelerated and amplified price movements.” In the old days, futures prices were tethered to the real prices of commodities. Now it was the other way round.
Anti-capitalists were quick to claim that Wall Street was fueling global hunger. Deborah Doane, the boss of the World Development Movement, attacked the financiers at a Barclays Bank annual general meeting in 2011: “Allowing gambling on hunger in financial markets is dangerous, immoral and indefensible. And it needs to be stopped before any more people suffer to satisfy the greed of the banks.” You don’t have to subscribe to her dim view of capitalism to believe that the system requires control in the name of feeding the world.
Let’s be clear. Speculation did not on its own trigger the soaring food prices of recent years. The background imbalances of supply an
d demand, including both droughts and the boom in biofuels, began the process. But everyone, from market traders to their biggest critics, believes that the speculation massively amplified the price signal. Most critically, the new-style futures markets for the world’s basic foodstuffs were creating instability where once, as the Chicago Board of Trade has argued for decades, commodities markets had created stability.
Through late 2010 and 2011 prices soared once again. Heat waves and fires across Russia’s grain belt cut the wheat harvest by 40 percent. Rain and tornadoes put wheat crops in jeopardy in the U.S. and Canadian prairies, and La Niña messed with the harvests in Argentina and Brazil. But a bad situation was again made worse by rampant speculation. After federal reserve chairman Ben Bernanke pumped another $600 billion of “quantitative easing” into the U.S. economy in November 2010, Barclays Capital said speculators were pushing record amounts into index funds, in the hope of tapping more profits as prices rose. Investment in commodity index funds in the United States alone was reported at above $400 billion. The bubble inflated. Back in the real world, by mid-2011, wheat was up 98 percent from the previous May, beef 32 percent, sugar 48 percent, cocoa 80 percent, cooking oils 53 percent, and rice 33 percent. Food prices overall had tripled since 2004.
It is becoming clear things have gone badly wrong. A system of buying and selling food futures is no longer stabilizing prices. Instead it is creating price instability, and the kinds of price spikes that leave poor people starving. Speculators are no longer oiling the wheels of the global food supply engine. They are in charge of a runaway train. The crisis in the world’s banking system was bad enough. A similar seizure in the world food system has the potential to be even more devastating for the world’s poor. For hundreds of millions of people around the world, the majority of their cash goes to buy food. As Masters put it: when food markets fail, people starve.
This book is about land grabbing rather than the functioning of the food markets. But, as we shall see, speculation in commodities is now leading to speculation in the farmland that can secure supplies of those commodities. What damage will it inflict this time?
Chapter 3. Saudi Arabia: Plowing in the Petrodollars
Fly over Saudi Arabia today and you will see that the desert sands are dotted with huge circles of green. They were not there thirty years ago. These geometric oases are man-made, the result of a $40 billion national effort to create giant farms in the desert to irrigate fields of wheat, fruit, and fodder crops. Look down carefully, and you may also see giant sheds holding tens of thousands of cattle in the desert.
The Tabuk plain in the northwest of the country, close to Jordan, gets an average of just 2 inches of rain a year. Yet it is a prairie of wheat fields. Fortunes are being made here. The biggest farm—covering nearly 90,000 acres, or eight Manhattans—is run by the Tabuk Agricultural Development Company (TADCO). Its irrigation pumps extract up to a million acre-feet of water each year from beneath the sands.
TADCO is part of the vast business empire of the al-Rajhi brothers—Sulaiman, Saleh, Abdullah, and Mohammed. As the Economist put it, they have made “one fortune from money brokering and another from farming.” Each brother became a billionaire as they turned a small money-changing business servicing migrant workers in Saudi Arabia into the world’s largest Islamic bank, the Al-Rajhi Bank. Then they joined the country’s 1980s cropping boom which, for a while, made Saudi Arabia self-sufficient in wheat.
But Saudis don’t live by bread alone. Dairy farming is the other big domestic agricultural business. Raising cows in the desert seems even odder than growing wheat. But in the center of the country, near the capital, Riyadh, the late Prince Abdullah al-Faisal, eldest son of the former King Faisal, has established the world’s largest dairy farm. At the heart of the Al Safi farm are six giant sheds, where thirty thousand Holstein cows from Europe produce around 42 million gallons of milk a year, sold under the Danone brand. To keep their udders productive, the cows are cooled by a constantly circulating mist of water. Surrounding the sheds are 7,400 acres of fields, where dozens of movable irrigation units called central pivots, each up to a third of a mile long, irrigate alfalfa, sorghum, and hay destined for the cows’ feedlots. This too takes prodigious amounts of water, pumped from more than a mile below the sand.
Not far away, Almarai, a food conglomerate also owned by the Saudi royal family, has five dairy farms with thirty-six thousand cows. This giant was established in 1976 by racehorse-breeding Prince Sultan bin Mohammed bin Saud Al Kabeer and a colorful Irish dairy magnate, Alastair McGuckian. In semiretirement today, back home in Dublin, the jovial piano-playing McGuckian now writes musicals. He still oversees an agricultural empire that extends from the bogs of Ireland to China, Egypt, Germany, Thailand, the United States, Britain, Russia, Romania, and Zambia, where he grows marigolds. But his enterprise amid the singing Saudi sands is still his biggest.
There is a madness about farming in the desert—especially when temperatures are above 100 degrees Fahrenheit, there isn’t a river for hundreds of miles, and the only water is more than a mile underground. The technological bravado is breathtaking, but Saudis are slowly realizing that it cannot go on. That their dream of turning oil wealth into food self-sufficiency is doomed, and they will have to get food from elsewhere. I heard this at a conference on the country’s changing attitude to water, held at the Jeddah Hilton in 2009. Outwardly everything looked normal—normal at any rate for the commercial capital of a superrich petro-kingdom. There were flowers and fountains in the atrium, nineties-style lifts zooming up and down in glass shafts, and limousines outside delivering ministers and industrialists. Not far away a huge desalination plant was making the waters of the Red Sea drinkable for the city.
Saudi Arabians have grown colossally rich on the country’s oil reserves. They have grown used to the idea that petrodollars can buy them anything. But Saudis are waking up to the fact that all their wealth will count for nothing if they have nothing to eat. And—despite the conference tables heaving with French, Persian, American, and Arab cuisine—that is a growing threat. “If we want our grandchildren to live as we are, we need to change now, or we will be like an African country in fifty years, asking for aid,” Adil Bushnak, a former member of the Saudi Supreme Economic Council, told me during a conference session I was chairing.
The desert farms are magnificent twentieth-century monuments to unsustainable agriculture. They were created in the aftermath of the oil crisis of 1973. Back then, the OPEC oil-producing states, headed by Saudi Arabia, held the world hostage over oil supplies, causing fuel rationing and lines at gas stations around the world. As anger grew, the United States threatened to organize retaliatory food sanctions. OPEC got its way, restricting oil supplies. The world has paid much higher oil prices ever since. But in the aftermath, the Saudis took that American threat to heart. And with the huge new wealth that the oil revenues were generating for them, they set about insulating themselves against any future food embargo by farming the desert. Even the Saudis cannot use sea water to irrigate fields, so they are pumping up underground water reserves from beneath the desert.
By the 1990s, with $85 billion invested, Saudi Arabia was one of the world’s largest wheat exporters. Like the dairy business, the wheat crop was vastly subsidized. Money was no object. The government paid its farmers five times the international price for wheat—not just for the wheat the nation wanted, but for any wheat the farmers cared to produce. Riyadh charged nothing for the water pumped from beneath the desert, and virtually nothing for the fuel needed to pump it. This deluge of largesse generated full granaries but staggering inefficiency, not least in the use of water. Every ton of wheat required between 3,000 and 6,000 tons of water—three to six times the global average.
Why such hydrological madness? Saudis thought they had water to waste because, beneath the Arabian sands, lay one of the world’s largest underground reservoirs of water. In the late 1970s, when pumping start
ed, the pores of the sandstone rocks contained around 400 million acre-feet of water, enough to fill Lake Erie. The water had percolated underground during the last ice age, when Arabia was wet. So it was not being replaced. It was fossil water—and like Saudi oil, once it is gone it will be gone for good. And that time is now coming. In recent years, the Saudis have been pumping up the underground reserves of water at a rate of 16 million acre-feet a year. Hydrologists estimate that only a fifth of the reserve remains, and it could be gone before the decade is out.
It took years for the truth to sink in. But in 2008, the Saudi government announced it would end wheat subsidies, with the aim of phasing out all production by 2016. Instead, it would import wheat to make Saudi bread. It decided to keep the cowsheds, but reduce their water needs by feeding the animals on foreign fodder. Then, just as the Saudis abandoned their former goal of food self-sufficiency, came the first world food price spike. A bit of food inflation didn’t worry the Saudis much. Almost any world price for grains was cheaper than growing them at home. What did scare the Saudis was when their key grain suppliers started banning exports to protect their home consumers. This eventuality, after all, was the nightmare that pushed the Saudis into attempting self-sufficiency in the first place.
So, finding it impossible to feed itself, and unwilling to rely on international food markets, Saudi Arabia came up with Plan C. Under the King Abdullah Initiative for Saudi Agricultural Investment Abroad, announced in 2008 in the wake of the global food crisis, the sheikhs decided to buy up farmland in foreign countries. The King called in his country’s agribusiness billionaires, including the al-Rajhi brothers and a number of royal princes. He offered to underwrite the creation of a series of giant consortia to find and cultivate foreign fields, and bring the food home. Soon, the commerce ministry had identified twenty-seven countries that might appreciate Saudi investment in their farms; the ministry of agriculture opened diplomatic doors; the Saudi Industrial Development Fund granted credit; and the government put up $800 million.
