Response to “The Food Bubble” by Fredrick Kaufman in Harper’s Magazine, Letter to the Editor, Harper's Magazine, by Steve Strongin

Your recent cover story on the global food shortage of 2008, “The Food Bubble,” by Frederick Kaufman, was a deeply disappointing treatment of a vitally important subject. By taking liberties with the facts and misrepresenting some of the most basic aspects of the commodity futures markets, the author spun a tale that had scant regard for reality.

First, there is no direct connection between Goldman Sachs and the sharp rise in the price of Minneapolis Wheat in 2008. As Mr. Kaufman himself acknowledges, Minneapolis Wheat has never been a component in the Goldman Sachs Commodity Index (GSCI). Further, contrary to Mr. Kaufman’s assertion, the GSCI was not the first traded commodity index. The CRB Index was investable since the early 1970s and futures on the CRB Index have been traded since 1986, 5 years before the creation of the GSCI. Finally, Mr. Kaufman also failed to mention that the GSCI was purchased by Standard and Poor’s in February 2007, becoming the S&P GSCI™ and retains a connection to the firm in name only.

Second, the author provides no credible evidence of a connection between commodity index investing in general and the sharp rise in the price of Minneapolis Wheat in 2008. Serious inquires into the rise in food prices, such as that conducted by the Organisation for Economic Co-operation and Development (OECD) have concluded that “index funds did not cause a bubble in commodity futures prices.” * Similarly, in regard to the rise in energy prices, an interagency task force led by the US Commodity Futures Trading Commission (CFTC) and including participants from the US Department of Agriculture (USDA), Department of Energy (DOE), the U.S. Treasury, the Board of Governors of the Federal Reserve System and the Securities & Exchange Commission, concluded that “current oil prices and the increase in oil prices between January 2003 and June 2008 are largely due to fundamental supply and demand factors,” and their analysis “does not support the proposition that speculative activity has systematically driven changes in oil prices.” **

To the contrary, commodity index funds provide the futures markets with a stable pool of capital that improves the ability of farmers to insure themselves against the risks inherent in agricultural prices, which can allow them to produce more food at a lower cost.

Mr. Kaufman glosses over the facts underlying the 2008 Minneapolis Wheat price spike, which was a classic commodity price spike driven by an extraordinary shortage of inventory. This shortage resulted from rising global demand for grain, which led consumption to exceed production in 7 of the 8 years preceding the price spike according to the USDA, and the worst drought in Australia in over 100 years, which cut the country’s wheat production in half. According to the USDA, US wheat inventories before the 2008 harvest had fallen to their lowest levels for 50 years, and world wheat inventories had fallen to their lowest levels since 1982 – not, coincidentally, the last time wheat was as expensive (in real terms) as in 2008.

Long-term trends, including increased meat consumption by the growing middle class in the emerging markets and the increased use of biofuels in the developed markets, have created a backdrop for global food shortages and, as a result, millions are left desperately exposed to the vagaries of the weather for their survival.

It is a shame that the plight of these millions appears to merit a cover story in your magazine only when it is exploited as a pretext to launch unsubstantiated attacks against the financial industry. Alleviating food shortages will require hard policy choices to be made based on a serious public discussion of the problem. Your unfounded conspiracy theories only serve to delay this vital debate.

Steve Strongin
Head of Global Investment Research
Goldman Sachs

*Irwin, S. H. and D. R. Sanders (2010), “The Impact of Index and Swap Funds on Commodity Futures Markets: Preliminary Results”, OECD Food, Agriculture and Fisheries Working Papers, No. 27, OECD Publishing.

** Interagency Task Force on Commodity Markets, Interim Report on Crude Oil, Washington D.C.