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The Food Round Robin and Famine

June 3, 2008

Back in the 1980s, the U.S. Department of Agriculture was saddled with mountains of surplus cheese, corn and other foods. In the past, the government has maintained stockpiles to stabilize prices. While an expensive measure on the surface, the food was made available to the poor on a global basis.

Today, government storehouses are bare. Because of record high prices, farmers have elected to sell their crops on the open market. Food prices have risen 45% globally in the past nine months. The current economics of food along with changes in federal farm subsidy programs seem to signal to end to food reserves of the past. Like the open market, the stockpiling of food is a money-making prospect as well. The government subsidizes food stockpiling by making payments to companies that hold grains and foodstuffs. All sides want to make a living.

A coalition of religious and farm groups, in a letter to Congress, warned that low food supplies increase the risk of hunger and higher prices. The coalition is calling for the creation of a strategic grain reserve similar to the strategic petroleum reserve. “As a matter or national security, our government should recognize and act on its responsibility to provide a stable market for food in an era of unprecedented risk.”

As usual, there is disagreement. Some experts say large government stockpiles are not only unnecessary and expensive, they are counterproductive.

The USDA’s sole remaining sizable stockpile holds about 24 million bushels of wheat in a special government trust dedicated to international humanitarian aid. The food program has dwindled from its original 147-million-bushel level since government administrations have failed to replace used grain over the years.

The government has provided credit for all kinds of money to fight hunger. Most food stocks are now in private hands and on the open market instead of government hands. As a result, the federal government no longer has large stockpiles to easily meet the need for any perceived crisis or to manipulate prices.

Congress continues to throw money at the problem. Lawmakers and the White House are prepared to spend more money that we borrow from the Federal Reserve for international programs as the politicians increase the national debt. The U.S. in the last year provided more than $2 billion in foreign food aid.

Many farmers today are growing crops for fuel instead of food. Some say that this development is outside of government control, making it harder for the government to manage crop production. The reality is that government subsidies promote the production of corn for bio-fuel, which is easily within the control of the federal government. It is almost a though the right hand does not know what the left hand is doing.

As much as a third of the corn crop could be dedicated to ethanol production, which is not a very efficient process. The result is higher prices and the perception of tighter supply. Institutions that formerly promoted ethanol and bio-fuel mixtures as a panacea substitute for petroleum are crying foul because of the unexpected effect on food prices.

Higher prices also mean federal spending is rising for food programs. Spending is not meeting pace with expenses. Many school districts are being forced to raise lunch prices. High prices and low supplies have had immediate impact on food banks and food available to support humanitarian aid.

The government is blaming commodity traders and is threatening action. Economists, traders and regulators routinely dismiss the notion that excessive trading is the culprit instead of traditional market forces such as supply and demand.

“You’ve got futures exchanges that are rife with the ability to manipulate and excessively speculate,” said Michael Greenberger, a law professor that formerly spent two years in charge of the trading and markets division for the Commodity Futures Trading Commission. “Congress firmly believes that they’ve got to bring this speculation under control. And it is my thesis that if these markets were policed, the prices would drop very rapidly.” More regulation and expense for symptoms of the disease is always the answer instead of eliminating the core problem.

In an election year, the specter of market manipulation has been publicly promoted for the first time. In the meantime, the federal government continues to maintain that the country does not have a food shortage, but rather, a shortage of resources. What is the difference when you are hungry and need food to eat? Famine is famine.

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