Treating food like stocks and shares is a recipe for disaster

Droughts, storms, floods – after this year’s washout of a summer, it is hardly a surprise that farmers are warning of rising food prices on supermarket shelves.

The price of wheat is 16% higher than this time last year; corn costs are up 7%; and there is an increasingly fierce battle about how to make the best use of agricultural land.

But don’t be fooled into thinking this is a simple tale of supply and demand – crops keeling over in the baking midwest sunshine and hungry mouths to feed thousands of miles away. The world market for food includes not just farmers and shoppers, but hundreds of millions of dollars of complex financial bets.

Wall Street’s geniuses are forever looking for new products to package and sell. Over the past decade, helped by a convincing pitch about hungry Chinese factory workers and harvests ravaged by climate change, they have persuaded investors, including ordinary pension funds, to plough billions of dollars into commodities, including food.

The Institute of International Finance has estimated that by the middle of last year, $450bn of financial assets was invested in commodities – or derivatives, betting on future price movements.

In principle, there would be nothing wrong with financiers moving into the food market if it directed billions of dollars of investment towards expanding production, bringing new land into cultivation and developing new technologies to boost yields.

But – as the thoroughly mad market for mortgage-backed securities in the run-up to the credit crisis, and the resulting building boom across the US, illustrated very clearly – the price signals emerging from the stampeding herds of Wall street can be deeply misleading.