CASINO OF HUNGER – Presentation by: Mustapha Ojo Dániel Kloó How Wall Street Speculators Fueled the Global Food Crisis.

CASINO OF HUNGER – Presentation by:Mustapha OjoDániel Kloó

How Wall Street SpeculatorsFueled the Global Food Crisis

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TABLE OF CONTENT

INTRODUCTION CAUSES OF GLOBAL FOOD CRISIS COMMODITY FUTURE MARKET CASE STUDIES CONCLUSION

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INTRODUCTION

The rising food prices have created a food crisis that increased global hunger.

In the developing world, rising food crisis can be calamitous.

This is because many families spend more than half of their income on food.

INTRODUCTION (Cont’d)

The poorest family spend nearly three quarters of their income on food.

The food crisis has been on since 2008 and sparked civil unrest across the world from Cameroun to Indonesia. It threatened stability in 33 countries.

The Haitian government collapsed in April 2008 after more than a week of rioting over high food prices.

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CAUSES OF GLOBAL FOOD CRISIS

The crisis is attributed to forces of demand and supply as a result of the followings:

Biofuel and Global warming – Countries looking for ways to reduce the effect of global warming are shifting to Biofuel.

As a result of this, feed corn which is a staple food in many countries is in short supply because industrialized nations have used it for Ethanol.

CAUSES OF GLOBAL FOOD CRISIS

Population growth and prosperity in emerging countries – The planet's grain reserves are almost empty because of population growth and greater prosperity in some countries like India.

But classic demand and supply theory offers only partial explanation.

Experts believes that commodity speculators are the major reasons behind the food crisis.

Farmers and buyers of crops enter into a future contracts to protect themselves against adverse weather conditions and excessive price fluctuations.

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COMMODITY FUTURE MARKET

A Future market is a traditional tool for farmers to sell their harvests ahead of time.

In a future contracts, quantities, prices and delivery dates are fixed, sometimes even before crops are planted.

The commodity future market provides two basic functions to the agricultural economy – risk management and price discovery

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COMMODITY SPECULATORS

However, commodity speculators are taking advantage of this mechanism.

Recall that future contracts is an agreement to buy or sell a physical commodity for delivery in the future.

But most contracts are not bought with the intention of actually taking delivery of the commodity

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COMMODITY FUTURE MARKET

They can buy future contracts for wheat for example, at a low price, betting that the price will go up.

If the price rises by the agreed delivery date, they profit. As a result of this, commodity speculators have taken over

the market, buying future contracts at unprecedented levels and driving up short-term prices.

This has led to a doubling in the prices of commodities especially rice.

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Once there was a little island country. The land of this country was the tiny island

itself. The total money in circulation was $2 as there were only two pieces of

$1 coins circulating around.

There were 3 citizens living on this island country. A owned the land. B and C each owned $1.

$2Net Asset

110Value

Asset

CBAPeople

CASE STUDY

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B decided to purchase the land from A for $1. So, A and C now owned $1 each

while B owned a piece of land that is worth $1.

The net asset of the country now = $3

$3Net Asset

111Value

Asset

CBAPeople

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Now C thought that since there is only one piece of land in the country, its value must definitely go up. So, he borrowed $1 from A, and together with his own $1, he bought the land from B for $2. B sold his land and got $2, so his asset is $2. C has $2 in asset but with his $1 debt to A, his net residual asset is $1. Thus, the net asset of the country = $4

$4Net Asset

2(-1)21Value

Asset

CBAPeople

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A saw that the land he owned has risen in value. He regretted having sold it.

Luckily, he has a dollar loan to C. He then borrowed $2 from B and acquired the

land back from C for $3. The payment is by $2 cash (which he borrowed) and

cancellation of the $1 loan to C. As a result, A now owned a piece of land that

worth $3. But since he owed B $2, his net asset is $1. B loaned $2 to A. So his

net asset is $2. C has the 2 coins. His net asset is also $2.

The net asset of the country = $5. A bubble is building up.

$5Net Asset

223(-2)Value

Asset

CBAPeople

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B saw that the value of the land kept rising. He also wanted to own the land. So he bought the land from A for $4. The payment is by borrowing $2 from C, and cancellation of his $2 loan to A.

As a result, A has got his debt cleared and he got the 2 coins. His asset is $2. B owned a piece of land that worth $4, but since he has a debt of $2 with C, his net asset is $2. C loaned $2 to B, so his net asset is $2.

The net asset of the country = 6 dollars; even though the country has only one piece of land and 2 dollars in circulation.

$6Net Asset

24(-2)2Value

Asset

CBAPeople

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Everybody has made money and everybody felt happy and prosperous. One day an evil wind blew, and an evil thought came to C’s mind. “Hey, what if

the land price stops going up, how could B repay my loan. There is only $2 in

circulation, and, I think after all the land that B owns is worth at most only $1,

and no more.” A also thought the same way. Nobody wanted to buy land anymore. So, in the end, A owns the $2 coins, his net

asset is $2. B owed C $2 and the land he owned which he thought worth 4 dollars

is now $1. So his net asset is only $1. C has loan of $2 to B. But it is a bad debt.

Although his net asset is still 2 dollars, his heart palpitate. The net asset of

the country = $3

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So, who has stolen the $3 from the country? Of course, before the bubble burst B

thought his land worth $4. Actually, right before the collapse, the net asset of the

country was $6 on paper. Although, B’s net asset is still $2 but his heart is palpitating. B had no choice but to declare bankruptcy. C has to relinquish his $2 bad debt to B,

but in return he acquired the land which is worth $1 now.

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A owns the 2 coins; his net asst is 2 dollars. B is bankrupt; his net asset is 0 dollar.

(He lost everything) C got no choice but ended up with land worth 1 dollar;

the net asset of the country = 3 dollars

End of story; BUT, There is however a redistribution of wealth. A is the winner, B is the loser, C is lucky that he is spared.

$3Net Asset

102Value

Asset

CBAPeople

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CONCLUSION

It will be observed that the island’s value at the beginning was $2 but it is now $3,

Where did the difference of $1 came from? Who benefitted from the whole scenario? Who was the pawn in this game?

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THANK YOU FOR YOU ATTENTION!