"A possible explanation is that the rise in (food) prices itself has triggered a self-sustaining upward spiral of demand, in which investors, wholesalers and final consumers want to buy more of a commodity each time its price rises and this leads to more hoarding and still higher prices," says Anatole Kaletsky at the London Times.

"Such self-sustaining price trends are normally rapidly reversed because value-oriented investors and commodity producers start to trade against the trend, selling more each time the price rises. In present conditions, however, it is harder than usual for speculators to trade against the rising price trend, because bank lending has dried up. Several American grain wholesalers, for example, have been pushed towards bankruptcy because they have sold futures against grain supplies they bought in advance from U.S. farmers and have then been unable to finance these temporary 'short positions' until the next harvest comes along."

Kaletsky argues that the credit crunch has exacerbated trend-following behavior among investors, promoted stockpiling throughout the global supply chain and encouraged hoarding by consumers. "This financially driven process, rather than a sudden increase in Chinese and Indian appetites, has probably been the main cause of this year’s shortfall in global food supplies," he says.

According to Kaletsky, if we can solve the credit crunch, we can solve the food crisis. If bank lending improves, speculators will have the ammunition necessary to trade against the rising food price trend. I personally believe that the credit crisis is far from over, and I will continue to argue that markets underestimate the de-leveraging of the global financial system that is underway. For the sake of the starving millions, I hope I am wrong.

Disclaimer: I do not have a position in agricultural commodities

Agricultural Commodities  Eben Esterhuizen 

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