Food prices have risen more than ever in recent years, and so far, we have heard three explanations: the war in Ukraine, Covid and climate change. Our interviewee reminds us of two things: there have always been wars, plagues and crises, and a determining factor is missing: the big food companies, their market power, and the way they operate. Today, companies like Walmart, Nestlé, and PepsiCo define their prices not according to supply and demand but to increase their shareholders’ profits. They are part of a world where the indebtedness of consumers makes them even more prosperous. In this context, raising interest rates to control price inflation does nothing to stop «corporate greed».

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Aquí, la versión en español. Here, the Spanish version

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Why is food so expensive? This straightforward question has no easy answer. The influential media outlet The Economist explained earlier this year that the main problem was the war in Ukraine and its effect on oil prices, energy and lower food production. Following the Economist’s logic, consumers are facing an inevitable chain of price rises that have led to a litre of oil costing over $3,000 in Chile, and there is not much to be done about it (see graph 1).

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Graph 1

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However, this explanation is incorrect. Alternatively, instead, it needs to be completed. Our interviewee, a PhD in economics, a specialist in food systems and agricultural development, sheds light on why an influential international media such as The Economist gives a partial explanation and how behind it lies the fallacy of believing and or reproducing the idea that the food system functions as a perfect market, where prices are defined as a result of the interaction between supply and demand.

The argument of Ryan Isakson, co-author of Speculative Harvests: Financialisation, Food and Agriculture, one of the most well-documented analyses of the global food system, has three parts. The first theme is the characteristics of this system. Since the 1960s, we have built a hyper-specialised system: only a few countries produce essential inputs such as wheat, maise or soybeans, and only a small variety of each is produced. Along with specialisation, another key element is high technologisation and the focus on producing short-term profits, which has led to the overexploitation of soils. All this has made us increasingly vulnerable to crises, such as a pandemic, climate change or worse, a war.

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“The current crises are showing the cracks in the food system. Wars and climate change are triggers of vulnerability within the food system. But they are not the underlying causes. The underlying causes are this corporate concentration, simplification and industrialisation within the food systems”

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But there have always been wars, crises and global plagues. Here then, comes the second part of the explanation. We have a highly vulnerable food system. However, in addition, we have that the main actors in this system – producers, distributors, supermarket owners – have merged and transformed themselves into corporations with an unaccountable market power, whose goal is not to optimise the costs of the production chain with you or us as final consumers in mind. Their big goal, instead, is to increase profits to keep their shareholders happy. So the logic by which prices are set is not with the consumer in mind but with the shareholder or the elites who control the financial sector and invest in these companies.

Here we come to the third part of the argument: the financialisation of life.

In TerceraDosis, we have explained how financial logic transformed the house’s value and meaning in various reports and columns, affecting the price, quality, dimensions, and ultimately the right to housing. Something similar is happening with the food system. The financial sector has also entered here, so the increase in food prices can also be explained by the fact that this industry has become a profitable business aligned with the dynamics of the financial markets. This means that much of what we pay for our food results from financial transactions and future values that have less and less to do with the real economy (the price of oil or energy, the production or scarcity of food). Just as relevant is the financialisation of everyday life: people go into debt to eat, and farmers go into debt to produce, which generates another volume of enormous profits for the financial world.

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“In the United States, President Joe Biden called out Tyson Foods – the world’s second-largest producer and marketer of chicken, beef and pork – for raising meat prices by 20 per cent, which helped double its profits”

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Let us now return to the initial question. What can be done if food prices rise because of the growing power of large corporations and the rise of financial markets? The typical answer, the one put forward by influential media such as The Economist, has to do with central banks and interest rate hikes that would allow consumption, and thus prices in general, to fall. But this also brings with it a reduction in economic growth, an increase in unemployment and a rise in the cost of credit. Moreover, as the chairman of the Fed, the US central bank, himself acknowledged, raising interest rates can do little to tackle rising food prices, the consumption of which people cannot reduce. On the contrary, Isakson argues in this conversation that to continue using the same tools is to deny complexity and, at the same time, harm lower-income groups and countries, who have no alternative but to go into debt (at higher rates) to ensure access to an essential good such as food.

Is there a way out? There is, but before that, Isakson believes it is key to understanding how the current model works and recognising the power of large corporations.

CORPORATE PROFITS

-According to the FAO, food prices have risen more in recent years than ever  in history, peaking in March 2022. Last June, the IMF warned that the sum of three crises (war in Ukraine, COVID and climate change) could lead to another one: hunger. So far, the explanations we have heard have had to do with war and the consequent rise in production and transport costs. But your analysis suggests paying attention to another element – corporate profits. Can you explain why?

-If we look at global food stocks, we can see that, even in the current context, what is produced is greater than what is demanded. In other words, we still have relatively high levels of stock-to-use ratios. The issue is that there are some distribution and supply chain bottlenecks. In particular, a bottleneck until the middle of this year was the Russian blockade of the Black Sea, which prevented food production from leaving Ukraine[1].

The wartime blockade is one factor. But there are other, deeper factors. Part of the price increase is due to rising input costs. In particular, fertilisers and oil. In fact, a recent study by the Economic Policy Institute found that approximately 38% of the increase in food costs over the past two years is due to these inputs. This figure is historically higher than usual, as inputs typically accounted for about 26% of price increases.

But in terms of contribution to cost increases, corporate profits are even more significant than that. Another IPE study found that these profits accounted for approximately 53% of the price increase over the last two years. This is a five-fold increase, as over the last 30 years, corporate profits accounted for approximately 11% of the increase in food prices.

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“The so-called ‘laws of supply and demand’ may apply when we talk about perfect competition, but they can hardly explain the oligopolistic dynamics that currently characterise the food system market”

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In the United States, President Joe Biden called out Tyson Foods – the world’s second-largest producer and marketer of chicken, beef and pork – for raising meat prices by 20 per cent, which helped double its profits. The same trend was seen throughout the food system, where retailers, restaurants, and major commodity distributors are experiencing record profits amid rising food costs.

So what is contributing to these rising costs? Is it shortage? Not necessarily. Are bottlenecks in the supply chain? Surely. But it could also be very much about corporate greed, or at least corporations trying to get ahead of inflationary pressures by raising their prices.

-But this has always been the case. That is, there is a historical and constant relationship between food prices and inflation, and they are mutually reinforcing….

-Indeed, the relationship between food prices and inflation is mutually reinforcing. But what is unprecedented is the dramatic increase in corporate profits. A large part of the explanation lies in the reorientation of these companies, in general, towards the so-called shareholder capitalism revolution over the last 20-30 years. In that context, corporations have become increasingly shareholder-controlled, and pleasing shareholders is much more relevant than before. For example, if these corporations require investment, they must generate immediate shareholder returns. So there is competition among corporations to capture investment from elites and the financial sector.

Companies compete and try to generate returns for their investors, but many of these profits are not necessarily reinvested in the food system or translated into better wages for workers. What we see within the food sector is a dramatic increase in compensation for directors and executives who receive stocks while their workers’ wages remain relatively stagnant. Today, we see record profits going back to shareholders in the form of dividends and share buybacks to increase the value of the available shares. Everything is geared to attract and reward shareholders.

-Can you explain the connection between the «shareholder revolution» and food prices? And why is it not picked up as an explanation for the steady rise in prices if it is so obvious? Earlier this year, The Economist did not devote a single line to ‘corporate profits’, which you claim is the main explanation…

-This is an excellent question. As I said, there is some truth in the Economist’s explanation. The war has contributed to the disruption of food supply chains, and high oil and energy prices have also pushed up costs within those chains. Moreover, The Economist’s analysis fits perfectly with how many mainstream media understand and present markets, i.e. under the logic of supply and demand.

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“The bulk of supermarkets’ income is earned not necessarily by selling food at fairly low margins, but by offering financial services such as credit cards, mortgages, insurance policies, even debit cards”

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But to reduce the explanation to a supply and demand problem is to ignore the key issue of power, and in this case, market power. As I said, the so-called shareholder revolution has been a critical driver of corporate concentration and mergers in the agri-food sector in the last three decades. These processes of corporate takeovers, along with freeing up resources and increasing shareholder profits, result in less competitive markets and thus increase the power of these corporations. The so-called «laws of supply and demand» may apply when discussing the perfect competition. However, they can hardly explain the oligopolistic dynamics that currently characterise the food system market.

-What is this dynamic like in the food sector, and how is it working?

Oligopolistic market power means that major agricultural suppliers, such as Cargill[2] and Bunge; major food processors, such as PepsiCo and Tyson Foods; and major retailers, such as Walmart and Tesco, have the power to set the prices of their products and to set them in such a way that they can be much higher than the increases in their input and transport costs.

However, this does not give them power over shareholders, who can invest their money wherever they want. Nor does it remove the incentive for corporate executives, primarily compensated with shares, to do everything they can to drive up share prices. In short, the shareholder revolution drives corporate concentration, and the resulting corporate concentration creates the conditions for higher corporate profits and higher shareholder returns. Some international media, such as The Guardian and The New York Times, have reported on how agri-food companies have dramatically increased their profits by raising food prices. Others, such as Forbes, have linked it to shareholder compensation. But these explanations require an acknowledgement of the role of corporate power, and some of the more conservative media are reluctant to do so.

-Can we go into more detail on the map of «the corporations»? Which ones dominate the food market, and what do they produce?

-The world trade in commodities such as maize, wheat, etc., is dominated by four companies, the so-called ABCDs, Archer Daniels Midland, Bunge, Cargill and Louis Dreyfus. They control between 70% and 90% of the world grain trade. In addition, they have a large storage capacity. This means that the global supply system is largely built on their private information; it is on what these corporations report that the Food and Agriculture Organisation of the United Nations (FAO) makes estimates of world stocks. So if these corporations are raising prices, who’s to say it’s not a fair price? Nobody knows what the supply conditions are.

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Other major players include food processors and supermarkets. Among the former are corporations such as Kraft Heinz, which controls the famous ketchup, mustard and mayonnaise brands of the same name, Oreo biscuits and other sweets; and others well known to the Chilean public, such as PepsiCo, controller of the soft drinks Pepsi, Crush, 7up, etc., and of the Evercrisp brand[3], and the Swiss giant Nestlé, which controls brands of mineral water and sweets, the famous Nestlé instant coffee Nescafé and the new premium brand Nespresso, Gerber brand baby food and pet food such as Purina and Dog chow. Among the processors, other corporations are significant globally but unknown in Chile, such as Tyson Foods and JBS, which sell wholesale meats.

Walmart (owners of Lider supermarkets in Chile), Kroger, Carrefour and Tesco are among the world’s most dominant food retailers. These corporations, especially the food suppliers and processors, have raised prices in recent years, and many have substantially increased their profits.

CENTRAL BANKS «HAVE A RATHER LIMITED TOOLBOX»

-In general, independent central banks use interest rates to reduce domestic demand and attack inflation. In this way, they cool the economy so prices can decrease. How useful are these tools in the current context? Can they reduce inflation if much of the price rise is driven by corporate profits?

-That is a great question and, to be clear, I do not consider myself a macroeconomist. But my analysis is that central banks have a reasonably limited toolbox. So they can raise interest rates, which will apparently put downward pressure on consumer demand, particularly on items like cars, bicycles, which are bought on credit, and any other kind of credit spending, for example, card debt. Similarly, if interest rates rise, they may dampen corporate investment spending, which could provide some slack to relatively tight labour markets, at least in certain contexts.

However, in this case, those tools are not that effective, particularly within this system of ‘petro-capitalism’, to use a term coined by Timothy Mitchell, where we have oil playing a very prominent role in almost every sector of the economy. So, going back to the Central Bank question, they can raise interest rates; they can address some of those inflation problems, but not others, particularly some of these driving forces, such as corporate greed.

-That is without considering the global and domestic effects of the rate hike….

-Exactly. The uneven global impacts of rising interest rates are central to the analysis. When central banks in the United States, Europe, and Japan raise rates, they can be effective to some extent because people in those countries – or at least certain sectors of their population – have more discretionary income and, therefore, more capacity to reduce their consumption.

But within the poorest countries, most people’s expenditures are not discretionary. Food is not a discretionary expenditure. People need to eat. Housing is not discretionary either. So when the prices of these goods go up, people increase consumption by taking on more debt because they have no choice. Moreover, when countries, or consumers more generally, take on more debt, as we saw for much of the last decade, with low-interest rates and then suddenly those rates go up, well, you generate enormous indebtedness across the world.

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“They are cultivating land they would not have cultivated before (…) So you’re degrading topsoil, waterways, simplifying farming systems, all as a result of these financial pressures”

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The third world’s so-called ‘debt crisis’ in the 1980s was preceded by much cheap credit, pushed by governments and consumers throughout the ‘Global South’. That is, until the US central bank, under Paul Volcker, raised interest rates, like 20%. That decision created a dramatic debt burden for these countries that were already heavily indebted. And that is what we see once again. Many of these countries still have to repay that debt in US dollars. Furthermore, when the US central bank raises rates again, it increases the cost of servicing that debt and reduces the ability of these countries to invest in social services, including, for example, access to food and other kinds of programmes, health care, education and so on. Thus, first-world efforts to address inflation through monetary policies may have adverse consequences for populations in the global south.

FOOD SYSTEM AND FINANCIALISATION

-In your book, Speculative Harvests: Financialisation, Food and Agriculture, you and Jennifer Clapp analyse the links between financialisation and the food system. Can you explain financialisation and how it affects and relates to the food industry?

-Before getting into the subject, I want to acknowledge that financialisation as a concept has been criticised for being too broad. However, the most common definition is the growing prominence of financial actors, financial motives and the type of financial gains within the functioning of economies and their governance. If you look at the literature on financialisation, you will find, on the one hand, the so-called financialisation of accumulation. That is, this idea that profits within the economy are increasingly accumulated through financial channels rather than «real activities», such as the production and trade of goods and services. This could be traditional financial firms such as banks, investment banks, hedge funds, etc., which play a more prominent role in the economy than other actors, such as consumer goods producers. But it is also the case that these non-financial firms earn a larger share of their profits through financial activity. So, in the case of food retailers, for example – supermarkets – it can be said that they earn most of their income not necessarily by selling food at reasonably low margins but by offering financial services such as credit cards, mortgages, insurance policies, even debit cards, and so on. In other words, a significant part of their profits come from financial activities. For example, a company like John Deere sells farm equipment, but what is really profitable for them is financing those farm equipment purchases.

A second aspect of financialisation is the so-called financialisation of everyday life, or that financial tools and logics increasingly mediate everyday practices. So, for example, if you are a cash-strapped household and you have to consume food, you don’t go out and buy that food. What you do is buy that food on credit with the shop card. Similarly, to mitigate agricultural producers’ vulnerability to climate change, many organisations encourage farmers to buy financial derivatives, which are called «parametric insurance». These insurances deliver a payout when there is an adverse weather event. This is the growing prevalence of financial logic, where a «financial derivative» is expected to provide security rather than looking at the causal roots of that vulnerability and investing, for example, in agroecological practices that improve the resilience of agriculture.

-How does financialisation relate to the crisis in the food production system?

-To understand the dramatic rise in food prices that we have seen since the mid-2000s, there is one major milestone: the deregulation of commodity trade, particularly in Europe, but especially in the United States, which is the leader of the world’s largest commodity markets. This was very important not only because the US is a major exporter of food but because most exports are denominated in US dollars. When these markets were deregulated, they allowed the development of new financial products, the most important of which are commodity index funds.

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“Financial speculation exacerbated underlying market conditions, contributing to higher food prices”

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These funds track a range of commodity prices, including food commodities, textile fibres, energy commodities, minerals, and so on. Investors can give the investment banks a fixed amount of money upfront, and the returns on that investment are based on what happens to the prices of these commodities. If prices rise, investment banks give investors a payout based on the increase in commodity prices; if prices fall, investors do not get paid. In either case, the investment bank still keeps the funds paid in advance.

Now, the way these banks offset the payments they have to make is by investing their surpluses themselves in commodity futures, which is allowed by financial deregulation. So they put that money into futures, and, as their prices go up, they can trade them and get back some of the money they pay. Eventually, many of these investors know nothing about agriculture, but they want to take advantage of this potential to benefit from rising food prices. So what do they do? They put their money into commodity index funds, and as these funds put that money into the futures markets, they keep rolling them over, rolling them over, and suddenly you see a huge increase in futures prices…. And what happens? People often look to the futures markets for what is called ‘price discovery’: the futures markets are supposed to give you an idea of what the real price will be in a while. So how do big food companies like the ones mentioned above, which control the world’s supply, set prices? Well, they look to the futures markets, which directly contribute to higher prices.

So, in that dramatic rise in food prices that was seen in 2007, 2008 and 2011 – and also now – yes, there were underlying supply and demand factors in terms of fuel, drought, etc. However, even the World Bank and the International Monetary Fund have concluded that these factors cannot fully account for the dramatic price jump. Thus, the argument is that financial speculation exacerbated underlying market conditions, contributing to the rise in food prices. 

-In your book, you also argue that financialisation generates new unsustainable agricultural practices, and the explanation for this lies in the fact that financial actors demand immediate returns….

-Indeed. Here in Ontario, for example, researcher Sarah Rotz found that if farmers want to expand production or acquire more farmland, they have to lease this land to the financial sector. So there is a growing practice of leasing farmland to financial landowners. But they lease it at very high prices. So they give preference to larger farmers because they have experience with capital-intensive farming and are more likely to know how to use the capital equipment and the machines of capital-intensive farming. Now, in addition to this, what Rotz found in his interviews with farmers is that because they have to lease land and they need to get their yields in the short term to pay the financial owners, they are applying higher amounts of agrochemicals, which affects the health of the soil. In addition, they are cultivating land they would not have cultivated before: waterways, hilltops, and land that would have been left to conservation in earlier times. So topsoil is being degraded, waterways are being degraded, and farming systems are being simplified, all resulting from these financial pressures to extract yields from farmland.

-So far, we have identified two manifestations of financialisation: rising prices and unsustainable agricultural practices. But you also argue that financialisation drives corporate concentration….

-Of course, financial pressures have contributed to corporate concentration within the food processing and agricultural input sectors, among others. For example, with the seed and agrochemical companies, pressure for mergers and acquisitions led to the merger between Dow and DuPont, giving rise to ‘Corteva’, then ChemChina and Syngenta merged, and then Bayer acquired Monsanto. So the Big Six became the Big Three. And that means there are fewer varieties of seeds grown and fewer chemicals. So you have a highly productive food system but with a minimal range, making it vulnerable to environmental stress. Suppose you have a limited number of seed varieties in the environment, and a new plant disease emerges, or there is a new or more resistant pest. In that case, it could wipe out a significant part of the agricultural landscape or production. Therefore, you are also producing less resilient food systems.

-When we talk about climate change and sustainable development, the focus has been on agricultural production systems, how small farmers adapt and mitigate, and their relationship with the soil and production systems. But not a single line is devoted to the problem of financialisation…

-Ironically, to some extent, financialisation is seen as the solution to the various difficulties faced by smallholder farmers worldwide. Indeed, within the Sustainable Development Goals, explicitly and implicitly, there is a big push towards financial inclusion. The idea is that providing financial services to poor people worldwide, including poor farmers, will allow them to unlock their entrepreneurial potential… I have done much fieldwork in Guatemala, and you see this explosion of financial services available to farmers. And you also see their increasing indebtedness. Farmers are taking on more loans to finance the intensive production of new, non-traditional export crops, such as strawberries, fresh flowers, broccoli, and green beans, which Guatemalans generally do not consume. They have been encouraged to grow them partly to pay off their national foreign debt. But in the process, the farmers themselves become heavily indebted.

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“How do the big food companies that control the world’s supply set prices? Well, they look to the futures markets, so that directly contributes to higher prices”

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In January 2020, just before the pandemic, I did field research in Guatemala. I interviewed farmers, and several talked about how this pressure to repay debts has intensified the highly extractive forms of agriculture. Historically, they had engaged in agroecological and self-sustainable farming practices. However, in the community, I researched there is now a big push towards blackberries, which is a major export crop. And how they are depleting water sources and the intensive use of chemicals to encourage these crops is so great that even if they wanted to stop growing these blackberries and go back to maize and beans for household subsistence, the soil would no longer support it. So they get into this cycle of chemical dependency, which also means dependency on credit to buy those inputs.

-It seems that financialisation is a global threat. However, governments and global policies related to financialisation as a solution. Why has it not been addressed as such?

-In the United States, there were efforts to reduce speculative trade that was implicated in the global food price crisis between 2007 and 2012. For example, the Dodd-Frank Consumer Protection Act was passed in the US in 2010. And part of that involved placing limits on speculative trading in commodity derivatives. However, this law only came into force for ten years. And partly because there were financial players, large corporations in the food system, and a handful of large agricultural interests, particularly large corn producers, who profited and lobbied.

Then there was some debate about how causality can be proven: whether speculation leads to rising food prices or rising food prices lead to speculation. And then, finally, some very watered-down rules were implemented. But it wasn’t until 2020-2021 that they really came into force. Now, why don’t people do anything about it? It is on the radar of certain people, certain reformers. But there are also pressures from the financial actors, from the people who benefit from this, not to implement the reforms.

The current crises are showing the cracks in the food system. Wars and climate change are triggers of vulnerability within the food system. But they are not the underlying causes. The underlying causes are this corporate concentration, simplification and industrialisation within food systems.

WHAT THE FOOD SYSTEM SHOULD LOOK LIKE

Figure 2

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-Chile is a country highly dependent on food imports (figure 2), which is an essential factor in the recent rise in inflation. Most of our agricultural sector is highly mechanised and geared towards those export crops you mentioned: cherries, and avocados, which require much water. What is the alternative for countries like ours, small and highly dependent on world trade?

-I will talk about the two key qualities of a resilient food system. Firstly, there is diversity, and secondly, redundancy. And what is meant by diversity is multiple diets, multiple seed varieties, multiple crops, etc. Redundancy is multiple sources. In recent years we have seen in some countries, for example, an increase in the diversity of diets because more grains and fruits and vegetables are being consumed than before. But globally, it is reduced diversity because everyone consumes only a handful of commodities. There is also a big push to grow only one or two varieties of seeds or to grow the same one. For example, if you are in Argentina, you grow wheat; if you are in Bolivia, you grow quinoa; or if you are in Vietnam, you grow rice. There is little diversity of commodities within a given country. But that also means less redundancy. This is why Ukraine is so important to the food system in Africa today because it is a unique source that provides wheat and other cereals. So, through specialisation, we have created an efficient food system. But specialisation has also created a highly vulnerable system, which is why we have these bottlenecks in the supply chain.

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“Today, the food system is an oligopoly and a handful of corporations dominate almost every sector of the supply chain”

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So how do we get away from this? How do we get a country like Chile, which is arguably at the forefront of this so-called non-traditional agricultural export revolution and is now specialised in producing fresh fruit and vegetables and wines, mainly for northern consumers, out of this? As other academics have proposed, it is not easy, but there should be more regional food systems. That is, tapping into the potential to create redundancies and increase diversity within the food system.