40 Forces Driving More
Other traders are called speculators—they buy and sell contracts based
on variations in current market prices versus future prices. They are after
short-term profits, and their actions provide liquidity by making sure
large distortions in price do not happen. To ensure that futures markets
operate smoothly, hedgers and speculators follow different rules.
For a century and a half, futures markets chugged along with hedgers
and speculators staying within their respective lanes of conduct. Then
came the deregulation of the 980 s, which relaxed the rules and blurred
the roles. Financial institutions like Goldman Sachs and other bank-
ers began crafting and selling to investors speculative index funds that
included prices of basic food commodities like wheat. To minimize
financial risk from their own index funds, bankers hedged their actions
by buying futures markets contracts—in effect, preventing futures mar-
kets from reconciling physical supply and demand. As one trader testi-
fied before Congress, such companies were engaged in “virtual hoarding
via the commodities futures markets,” in anticipation of earning higher
returns.
All speculative bubbles inevitably crash. When it happened in mid-
008 for wheat, an additional 0 to 55 million people in developing
countries reliant on wheat imports for sufficient food were pushed into
poverty and malnutrition. Goldman Sachs and others claim they are
not responsible for what happened. Yet no evidence has ever shown
that deregulation and changing the rules improved performance—the
futures market was not broken and it did not need to be fixed. As Bill
Clinton, whose administration helped encourage deregulation, later
said, “We all blew it, including me when I was president. We were wrong
to believe that food was like some other product in international trade.”
Futures markets for agricultural commodities had been a tool to
manage the uncertainty of providing food. Its rules of order provided
stability to smooth over unpredictable events like weather on wheat
harvests. For countries that needed wheat, futures markets helped ensure
sufficient food to feed their people. Many of these countries were home
to some of the most vulnerable populations in the world.
But deregulation relaxed the rules and conditions by which markets
operated. For investors, futures markets for food represented financial
gains and losses. Depending on the wealth strategy they chose, higher
food prices translated into higher profits. Whether or not those higher