The crisis of the banks is responsible for high food prices

(or: The rise of the oligopolies)

Lenin, in his ”Imperialism-The highest stage of capitalism” describes how in the period around 1900 the world had been divided up among all the major imperialists and that inter-imperialist rivalry for greater profits would open up a new period. This period would be that of the degeneration of capitalism, one of wars, civil wars and revolutions. Out of this period would arise the birth of Socialism. The achievement of Socialism is not automatic but would involve a life and death struggle between the working class and the capitalist class of the world. This period of capitalist decay, Lenin described as the era of imperialism. One of the key characteristics of this period is the dominance of finance capital. Finance capital is the result of the merger of banking capital and industrial capital. Put in simple terms: The banks control major industrial monopolies while at the same time, major industrial monopolies control the banks. The more than 100 years that has passed since the writing of Lenin’s work on imperialism, has confirmed his conclusions. In fact the higher level of concentration of capital that now exists, enables the major imperialist banks to operate on such as scale as to virtually control the life and death of the billions of people on the globe. Already in the 1970’s the Political Research office of the US Central Intelligence Agency, a major representative of American monopoly capitalism, commented on their vested interest in a ‘hungrier world’, saying that the near monopoly of the US as a food exporter would lead to greater political dominance politically and economically, like never before, acquiring the life and death power over the fate of multitudes of the needy. (Theresa Hayter, 1981, The Creation of World Poverty). Sixteen of the twenty top food multinationals in the world are US companies. The cross ownership and control of all these companies by the world’s major banks enables them to pass on their crisis of falling profits on to the shoulders of the working class, fellow poor and lower middle classes of the world through spiralling high prices of food and oil.

The current crisis of capitalism (and the major banks)

Alan Greenspan, the ex-Governor of the United States Federal Reserve bank has stated that the crisis of the collapse experienced in the housing sub-prime market could have occurred in any sector of the economy. Over a 3 year period, before the sub-prime market collapse, we have seen a massive increase in house prices, in some cases a ten-fold increase. What is really meant by Greenspan’s statement is that the prices and the massive rate of profit in every sector of the world economy have no relation to the actual cost of production and represent a bubble that will burst. In other words, supply and demand are not the main factors that determine prices. This means that the actual profits being made by the world monopolies, in every sector, is not backed by real production and actual costs. Banks speculate over housing prices. Home mortgages are sold from one speculator to the next, who bets of the price of the house going higher and higher. Eventually, a limit was reached beyond which home buyers could not afford to pay. In order for banks to continue to profit, this led to the growth of what is now known as the sub-prime sector. In other words, banks started offering loans to people whom they knew would struggle to or even not be able to repay the loans. When these sub-prime buyers started to default on payments, the banks started to lose massively. It is estimated that the amount of losses that the banks had to write off internationally is at least $1 trillion (or R7000 Billion). The actual figure is possibly bigger than what the capitalists are prepared to admit. The cases of Enron (falsified production and profits), Bear Stearns Bank (collapsed due to losses in sub-prime market), the IT bubble (banks invested in IT firms that had no relation to the actual value of these firms- millions of the US workers and middle class who had been lured into investing in them lost heavily, many losing their life savings), are not isolated incidents but rather a feature of the current capitalist system. The banks had lured many of the middle class, many higher-paid workers, pension fund managers to invest in property: ”Houses prices will always go up, it is a good investment”, was the mantra churned out by the banks and investment managers. When the housing crash came, again, millions have had their life savings wiped out. The major banks ability to exploit millions of the world’s masses has been dented by the sub-prime crisis. In order for the major banks to recover their losses and to continue their profits, they have accelerated their speculation on commodities that they know are essential for the daily lives of people, namely oil and food. The mantra they now churn out is ” Oil prices will always go up; high food prices are here to stay, at least for a few years”.

The relation of the banks to oil and food (the rise of oligopolies)

The establishment of the World Trade Organization (WTO) in 1995, after several rounds of trade negotiations since the second imperialist world war, set the scene for the lowering of trade barriers, especially for food. The result has been the unprecedented spread of multinationals across the globe to seize substantial parts of the world food resources.(Shawn Hattingh, 2008, Liberalizing free trade to death). US negotiators had set as one of their goals as achieving world dominance in food similar to what has been achieved by multinationals in the non-agricultural goods sectors. The result has been that at least 80% of the land world wide that produces food for export is now in the hands of the multinationals.

The cross control of the banks over food multinationals may be seen for example in the Board of directors of the world’s biggest food company, Nestle. Some of the Nestle directors also serve on the boards of the US bank HSBC and the Bank of International Settlements. The major US and British banks also have substantial shareholdings in Nestle. JP Morgan Chase, SSB, Barclays and other banks also have major shareholdings in the largest oil company in the world, Exxon Mobil. Barclays bank is also the biggest individual shareholder in the food conglomerate, Monsanto.

The objective basis for speculation by the banks, ie the control of the world food resources by major companies, has now been achieved.

When a world sector is controlled by a few companies, then we may say that an oligopoly exists when these companies act together in order to raise prices and thus profits. (www.oligopoly.com ). For example an oligopoly exists in the soft drink sector which is controlled by Coca Cola, Pepsi and Cadbury-Schweppes. Although the 3 companies still compete with each other for market share, they act together when it comes to keeping prices high for the flavoured sugar water that they sell. The US and EU banks are now acting as an oligopoly in the world food sector. Exxon Mobil, BP, Shell, Chevron, Total, are in effect acting as the main oligopoly for oil. The Wall Street Journal report (14 July 2008) reports that about 70% of all benchmark crude traded on the New York Mercantile Exchange is controlled by speculators. The resulting super-profits for the banks of such extensive control by the oil oligopoly may be seen in the huge profits they are making. The balance sheet of Exxon Mobil, for example, reflects payments of dividends every 3 months of 25% in 2003, increasing to 35% in 2008.

Another important aspect of the modus operandi (the method of operation) of the oligopolies is that they often buy up local brands. They appear as local companies and thus disguise their imperialist nature. This helps achieve buy-in by the local working class and creates the impression of companies that have the development of the local population at heart. Their crass, brutal, exploitative nature is given a respectable face. Thus the same product may go under different brand names in various countries- one name in Venezuela, another in Germany, yet another in Vietnam, etc. In South Africa, the impression has long been created of there being a local banking sector whereas in reality all ‘local’ banks are controlled by the major imperialist banks. This is demonstrated by the extensive shareholdings the imperialist banks have in Nedbank, First National, Standard and Absa.

The myth of a shortage of oil and food (US subsidy system)

Despite the repeated statements by capitalist agents of the IMF and the UN about a supposed shortage of food and oil, there is sufficient evidence to the contrary. Firstly, quite simply, there are no queues at the petrol pumps and the supermarket shelves are always full. The Japanese warehouses are full of US rice. Tongaat Hulett reported a bumper crop of maize this year. But further evidence of an overcapacity to produce food is given by the US and EU subsidy system.

Food Technology has become so advanced that the cost of production has fallen dramatically over the years. A Congressional Research Report to the US Congress in April this year puts the cost of producing (transport included) the contents of a box of cereal at 3,3 US cents (less than 25 cents in South African currency). This would ordinarily mean that prices of boxed cereal would fall. The only way to keep them up (and profits along with it) is through artificial means. This is where the US and EU subsidy system comes in.

The biggest annual subsidy in the US is called the Direct and Countercyclical programme. Over $20 billion dollars has been given from 2002 to 2006 to farmers not to produce anything. This is to create an artificial scarcity so that prices can be kept artificially high. The EU also has a subsidy programme that allows massive tracts of land to be taken out of production, for the same reason.

There is sufficient evidence that hedge-fund speculators are keeping oil out of the market to keep the oil price rising. The 1 billion oil barrels that they are speculating with is more than the combined total of the US strategic reserves over 5 years. (Michael Masters, 2008, testimony to the US Senate). There is sufficient oil and no scarcity of it exists.

The World Trade Organization (WTO) and the so-called Doha round of agricultural trade negotiations (How imperialism is tightening their grip over the world food resources)

A slight reduction in subsidies by the US, EU and Japan will not translate into greater market access into these markets by farmers in the neo-colonial world. Reduction in subsidies will mean that farmers in the US, EU and Japan will be compelled to produce more [they would be paid less to NOT produce]. This would mean a general drop in world food prices as there would now be more food on the world market. In is thus in the interest of the monopoly capitalists of the US, EU and Japan to not reach agreement on any reduction in subsidies. This is especially in the light of the major banks betting on ever rising food prices. Any major reduction in food prices could lead to a downward spiral as banks offload their shares at higher prices before the smaller investors have a chance to do so. The banks would still suffer huge losses as their profit levels depend on ever-rising food prices.

The reluctance of many of the leaders of the neo-colonial countries to reduce their own tariffs and subsidies further is not as a result of them being friendly to the poor. Rather they are aware of the socio-political consequences of having been seen to agree to policies that are a direct cause of mass starvation and hunger- in other words the threat of revolution in their own backyard is what is keeping them from openly agreeing to the whims of their imperialist masters. The South African government is a rare exception, being so confident of their ability to control the masses that they are the only country in the world to have so completely scrapped food subsidies and tariffs. Over 1 million rural workers have lost their jobs since 1994 in South Africa. Such is the absolute loyalty of the ANC government to their imperialist masters.

The artificially higher food prices is having the effect of driving down more of the trade barriers that still exist in the neo-colonial world. In the desperate bid to get more food, many neo-colonial countries are forced to lower or scrap barriers to allow sufficient food at market rates to enter. The recent spike in food prices is accelerating the destruction of the remaining world peasantry. Indeed, increasingly, the bones of the peasants are whitening on the fields of the neo-colonial world.

How the banks are driving up oil and food prices

As far back as 1991 a US Congressional oversight committee lifted the limits on the extent to which the Wall Street banks can gain from speculation from hedge fund activities. Since then the amount of funds that are being controlled by the banks, through hedge funds amount to $516 trillion — this is ten times the world gross domestic product. Speculators who operate at the Chicago Commodity Exchange (this is the main exchange that sets world food prices) say that prices do not have any relation to supply and demand and are grossly over-inflated. Hedge fund speculators bet on prices going up; Sometimes farmers would sell their next year’s crop as a means of gaining operating capital. (This is an example of the so-called ‘futures’ market). What banks have done through the hedge funds is that they have gained control of the food crop, oil production, mineral production, equivalent to ten years of world GDP. The new speculators would buy up, say, next year’s crop at a low price from the farmer. They would then bet on the price rising and then resell the crop at a higher price. The next speculator would buy up the same crop at a higher price and then resell it at an even higher level, and so it would go on. At all stages the price has no relation to the actual cost of the crop or even if it is planted at all. At some stage it would have to be planted and the difference between the actual value of the crop and the speculative value would have to be made up from somewhere. This is the origin of all the legal scams to lure the government funds and pension schemes to invest in hedge funds. US and EU banking regulations allow the major banks to plunder workers’ funds in this way in an unlimited fashion. The 2007 financial report of Nestle, for example, openly reports on income from hedge fund activities.

Virtually all major banks have opened up access to Commodity Index funds, whose sole purpose is to speculate on the prices of oil, minerals and food. (These include banks like the Wall Street banks in the US such as Bank of America, JP Morgan Chase, Citibank, HSBC; as well as Barclays and Deutsche banks). Unlike previous financial instruments, these hedge fund prices are not related to actual production and have no limits. Already the hedge fund price for a barrel of oil has reached close to $200 per barrel. The banks have no regard for the consequences. The banks had lured people to invest in the IT boom (that went bust), then lured people into the property boom (that is quickly going bust) and now the banks are luring people into the so-called commodities boom. All manner of manoeuvres and tricks are being tried by the big capitalists to lure governments, smaller capitalists, workers and the middle class to enter into speculating on basic commodities such as oil and food, on the same tune: ”everyone uses these and the prices are going up all the time, the time to invest is now….” Some are even offering ‘discount’ shares such as in the case of the ‘Sasol Inzalo’ scheme. The banks are encouraging huge funds to be invested at a time. For example, to speculate in commodities via the Deutsche bank one has to buy a minimum of 200 000 shares. Millions are being set up to lose their life savings and pensions. Hundreds of millions more people are being driven into starvation by the major banks. Most certainly many people are dying of hunger because of being unable to afford basic foodstuffs that are being sold at prices way above their actual value.

How the monopolies in South Africa benefit from high oil and food prices

Despite Sasol having been built up over the decades through taxpayers funds (primarily from the working class), the majority shareholders are US banks (JP Morgan Chase, SSB, etc). These are the same banks that are playing the leading role in driving up world food and oil prices. It is not in their interest to allow the real cost of producing oil from coal ($10-40) to filter through to the local general public as this would help to bring down the world oil price. [Sasol currently produces at least 40% of South African oil needs].

There are 5 monopolies that currently control the bulk of the economic wealth in South Africa [Anglo American, Old Mutual, Sanlam, Liberty Life, Rembrandt]. All of these monopolies have substantial controlling stakes held by a combination of the US and European banks. Again, these are the same banks that are driving the speculatively high oil and food prices. Incidentally, the Public Investment Corporation (which invests the pension funds of government employees) is a major investor in these 5 monopolies and thus expose workers pensions to being raided by the international banks. This is especially the case if any of the local pension funds have invested in commodity hedge funds for a quick return on their monies.

There are about 50 000 commercial farmers in South Africa that produce over 95% of the local food production. All these commercial farmers are directly or indirectly dependent on the above 5 monopolies and thus the major international banks. Recent research by the Centre for Rural Legal studies shows that many farm workers are still earning between R100 and R1000 per month. In other words not only do super-exploitative relations still exist on the commercial farms but the farm workers are not benefiting from the current high food prices. AgriSA confirms that the current high prices are good for profits. The major players in AgriSA are none other than the big 5 monopolies.

The existence of oligopolies in every food sector means that the cases of price fixing in the bread, milk , pharmaceutical and now the chicken industry in South Africa, are nothing else but the profiteering of the international banks on local terrain. All the companies that have been found to have colluded in raising prices, have substantial direct and indirect shareholdings held by international banks.

‘Aid’ for Africa

Both US and European banks compete with each other to give ‘Aid’ to Africa. Two-thirds of ‘Aid’ is generally bank loans that generally help to further enslave the working class in Africa. ‘Aid’ is fundamentally to provide an avenue for each group of capitalists to establish and control their respective markets. Finance for ‘Aid’ often does not even leave the US or EU. For example, market rates are paid to US food giants to channel food, to be transported by US ships and dished out every step of the way by US personnel. Seed may even be given free in the first season but the following year the seed has to be bought at market rates from the same US or EU supplier. The offer of ‘Aid’ often comes with conditions of planting cash crops, with the consequent destruction of local, self-sufficient food production. It is in this light that the recent EU ‘Aid’ of 1 billion euros is to be seen: Locals have to accept European seed and plant cereal, with consequent further destruction of local food production.

The destructive actions of the banks through ‘Aid’ is an international phenomenon. For example the 500 000 tons of rice that the Philippines had to import was bought up by speculators and the government had to pay the inflated price.

The myth of the small farmer benefiting from high world food prices

Firstly, any gain that any small farmer may make is severely undercut by the high oil price. Secondly, most small farmers are subsistence farmers. They often produce just enough for themselves and would have nothing or very little to sell on the market. Let us take for example the small rice farmer. If he/she sells all his produce on the open market, they still have to pay high prices for the other foodstuffs that they need to survive. The high food prices are thus still a mechanism to strip even the small farmer of the fruit of his/her labour.

How can we fight high food prices?

There have been heroic uprisings against high food and fuel prices around the globe. Although some temporary gains have been made what is immediately needed is an end to speculation on commodities. What is needed is a mobilisation beyond the scale of the international general strike on 1 May in 1886 which won the 8 hour day. Indeed today a much broader general strike is possible. Unfortunately most of the worker leadership in the Communist movement is corrupted; the trade union leadership are largely co-opted and there is a huge absence of class-independent, mass working class parties.

We nevertheless still make a call for activists and working class fighters around the globe to take steps towards such a general strike. This would be just the first step. The current crisis shows that the system of capitalism is the root cause of world suffering and hardship.

Indeed the speculation over food and oil confirms the final words of the Communist Manifesto that Communism…”can be attained only by the forcible overthrow of all existing social conditions.” For this to occur requires the rebuilding of a revolutionary Communist International as part of our current struggles against the capitalist system. We say that this should involve the rebuilding of the Fourth International. Workers of the world unite! We have nothing to lose but our chains!

References:

1. Lenin, 1917, Imperialism the highest stage of capitalism. http://www.marxists.org/archive/lenin/works/1916/imp-hsc/index.htm
2. Marx, 1867, Capital Volume 1, Chapter 1 Commodities and money. http://www.marxists.org/archive/marx/works/1867-c1/1868-syn/ch01.htm
3. Teresa Hayter, 1981, The creation of world poverty
4. Shawn Hattingh, 2008, Liberalizing free trade to death
5. Capehart & Richardson, 10 April 2008, Food price inflation: causes and Impacts (CRS report for US Congress)
6. Urquhart, 1 July 2008, Food Crisis Which Crisis?
7. http://www.farmpolicy.com/?p=704
8. Fabiosa, Beghin et al, undated, The Doha round of the World Trade Organization and Agricultural markets liberalization: Impacts on Developing Economies. (Forthcoming in the Review of Agricultural Economics)
9. Ivanic & Martin, 2006, Potential Implications of Agricultural Special Products for Poverty in Low-Income Countries. Draft.
10. http://dbfunds.db.com/dba/index.aspx. Accessed 03.05.08. (Deutsche bank Agricultural speculative fund)
11. http://seekingalpha.com/article/14222-barclays-new-commodities-etf-now-trading , accessed 02.07.08.
12. Missy Ryan, 11 April 2008, Analysis- What will Doha really do for world food prices?
13. Dirk Willem te Velde, undated, The Common Agricultural Policy and Developing countries (Overseas Development Institute).
14. William Krist, 2007, Trade and the Farm Bill (of the USA)
15. William Pfaff, 16 April 2008, Speculators and soaring food prices. (International Herald Tribune).
16. Tom Robbins, 5 May 2008, Milk, poultry and pork price hikes on the menu.
17. Morgan, Gaul & Cohen,2006, Harvesting cash: A yearlong investigation by the Washington Post.
18. Michael Masters, 20 May 2008, Testimony before the Committee on Homeland Security and Government Affairs, United States Senate. (on the role of Commodity index funds and banks in speculation and higher prices).
19. Abdullah Al Dardari, 10 July 2008, Q&A: Speculation is causing an oil and food price bubble. http://ipsnews.net/news.asp?idnews=43144
20. www.oligopoly.com
21. http://www.bookrags.com/wiki/Oligopoly
22. http://www.bookrags.com/research/oligopoly-ebf-02/
23. Wall Street Journal, 14 July 2008, Report on Congressional findings on Commodity speculation.
24. Fox Business.com, 10 March 2008, Derivatives are the new ticking time bomb.

22.07.2008

by Workers International Vanguard League, First floor, Community House, 41 Salt River rd, Salt River, 7925. mail: wivl@sn.apc.org, website: www.workersinternational.org.za