What the closing of Kansas City’s Mercantile Exchange can teach us about how Wall Street stopped treating food like food.
by Elizabeth Rush
Just off of Country Road 518 in Hopewell, New Jersey, sits Double Brook Farm. It’s run by a self-exiled New Yorker but it’s not one of those now-standard upstart farms, with roving bands of earnest college kids tending rocket and a hearty couple of ex-Brooklynites overseeing the whole grass-fed operation. Double Brook’s turn-of-the-century-barn, its grazing cattle, and its hundreds of Rhode Island Reds clucking and strutting about all belong to Jon McConaughy, a 46-year-old with an all-American face, a football player’s build, money to blow, and a beautiful wife. Last year, McConaughy exchanged a two-decade long career as a commodities trader on Wall Street for these two hundred acres.
Just off of Country Road 518 in Hopewell, New Jersey, sits Double Brook Farm. It’s run by a self-exiled New Yorker but it’s not one of those now-standard upstart farms, with roving bands of earnest college kids tending rocket and a hearty couple of ex-Brooklynites overseeing the whole grass-fed operation. Double Brook’s turn-of-the-century-barn, its grazing cattle, and its hundreds of Rhode Island Reds clucking and strutting about all belong to Jon McConaughy, a 46-year-old with an all-American face, a football player’s build, money to blow, and a beautiful wife. Last year, McConaughy exchanged a two-decade long career as a commodities trader on Wall Street for these two hundred acres.
Double Brook, a small farm specializing in grass-fed meat, free range poultry, and various vegetables symbolizes one of the most unexpected turns the American economy has taken in recent years. For decades, banks have shied away from granting loans to farmers because, like restaurants, farms are considered risky investments. But the tides might be turning as the price of nearly every commodity on the face of the earth is on the rise.
“Farming is the new ‘good investment,’” says McConaughy, who grew up in the dairy country of rural New Jersey, only five miles from Double Brook. “I always knew I was going to return to the farm. But I am not the only banker-turned-farmer—it’s a trend.”
Last year I met Dean Carlson, another member of the growing sect of Wall Streeters gone AWOL, at a TED talk in Phoenixville, Penn. Carlson’s seventeen-minute presentation was one of the most powerful I have ever witnessed. In it, he explained the Rule of Seventy, a method commonly used in finance to estimate the time it will take for an investment to double. Divide seventy by the projected annual growth rate and you get the number of years it will take for the growing thing to become twice as big. An economy with a ten percent growth rate, for instance, will double in seven years’ time. Two hundred years down the line, if that same economy keeps growing at ten percent per year, it will be five hundred times as big as it is today, and two hundred and seven years down the line it will be a thousand times its original size. When Carlson applied the Rule of Seventy to food production he became scared of agribusiness’ approach to feeding the planet.
Like McConaughy, Carlson traded his three-piece suit for some dungarees and a whole bunch of cattle. He purchased Weybrook Farm, which rests in the verdant swath of land just northwest of Philadelphia known as Chester County, in 2009. Carlson has a quiet way about him, a lip that turns slightly up at the corner, and a slow drawl that makes you think he has spent his entire life tending farm animals. When I asked Carlson, why he chose to invest in livestock and years of hard labor, his reasons were straightforward enough. “Exponential growth, the idea of having to consume more to keep our economy afloat, always bugged me,” he told me. “It can’t hold. I figured it out over time. Then I watched the 2009 bailout happen and saw the depth to which we would defend that very idea. Right around then I was reading The Omnivore’s Dilemma. I saw that food costs are going to go up, and how do you protect yourself against that? After twenty years on Wall Street I knew this much: an individual can’t get involved in the financial side of things because the game is rigged in favor of the banks. The only thing I came up with was to get involved in farming itself. ”
You may have heard it before: Food is the next bubble. Between 2002 and 2008, the price of wheat nearly quadrupled, rising from three to eleven dollars a bushel. According to the senior economist for the U.N.’s Food and Agricultural Organization, the cost of food has increased, on average, fifty to sixty percent a year in recent years, forcing many in poor countries to spend half their take-home pay to put food on the table. With food prices doubling every two years in some places, a bag of rice that costs a dollar today will cost five and a half dollars in four years and $41 in 2022.
But what does this Food Bubble look like? In Egypt, food riots turned into the toppling of Mubarak in 2011, and in Bangladesh three years earlier, tens of thousands of textile workers demanded higher salaries to meet the skyrocketing cost of food. Here, however, in the United States, grain subsidies shield consumers from feeling the crushing price of wheat. But the relative safe remove from which we view this crisis will not last forever.
- Frederick Kaufman
Kaufman, whose general enthusiasm is tempered by a sharp and yet non-aggrandizing intellect, and I are chatting in front of the Federal Reserve’s enormous black wooden doors. At least forty-feet-high, they look like it would take a battering ram to make them budge. The grates covering the Fed’s windows are strangely thick—as though the iron has been placed in a microwave and puffed up like a marshmallow. And the walls of the Federal Reserve are fashioned from stacked blocks of sandstone and limestone. Each stone block is roughly three by five feet. Underground, beneath this behemoth of a building, sits a vault that holds more the 194 billion dollars in gold bricks.
“I brought you here for a reason,” Kaufman tells me. “This is 33 Liberty Street, where both money and debt are manufactured. It is the perfect place to start when trying to understand how Wall Street has driven up the cost of food worldwide.” In 2009, the Federal Reserve printed an unprecedented one-and-a-quarter-trillion dollars of new money in a single day, he says. “Out of the bowels of the Fed, more bills magically appeared and they used it to purchase debt — home mortgages, business loans, school loans.” The Fed purchased about one fifth of our county’s mortgage-backed securities. “That’s what Occupy Wall Street doesn’t quite understand,” Kaufman adds. “You can’t just get rid of debt, of student loans and the like, because money enters the market as debt. That’s what it is, at the core.”
From this moment forth, every step of my Kaufman-led tour of the increasingly securitized financial district is monitored. Five security guards walk past us while we sit, staring at the double doomsday doors. One cop car cruises by, slow and deliberate. Just across Liberty Street from the Federal Reserve is the corporate headquarters of JP Morgan Chase, recently splashed across headlines when Occupy Wall Streeters dumped five-gallon-buckets of human excrement over the bank’s public plaza. The culprits were caught, thanks to surveillance cameras, and the city-mandated public plaza at the base of sixty-story high headquarters remains closed.
- The walking route through the financial district of New York
- The map traces the walking route Fred Kaufman and Elizabeth Rush took through the financial district over the course of the story
Kaufman began his investigation into hunger, which led to his recent publication of the book Bet the Farm: How Food Stopped Being Food, with what he thought was a relatively easy question: Where does the price of food come from? His foodie friends had no idea. They were interested in slow food, and the traditional curing methods of Tibetan yak farmers. And Kaufman’s banker buddies didn’t want to go there because, he says, they were afraid of “holding the bag for 900 million starving people.” So Kaufman called Daryll E. Ray, director of the Agricultural Policy Analysis Center at the University of Tennessee—and an old front-runner for President Obama’s Secretary of Agriculture position before Vilsack got the job—who advised Kaufman to investigate Commodity Index Funds.
Over the past twenty years, Wall Street has become increasingly invested in America’s food production. It started with the invention of the Commodity Index Fund (CIF) by Goldman Sachs in 1991, which allow bankers to buy and sell shares of wheat, soy, cottonseed, and corn oil futures (among countless others) as if they were Apple stock. Most of the big banks involved in the real estate bubble—JP Morgan Chase, Barclays, Morgan Stanley—have their own unique CIFs, which have provided them with billions of dollars in relatively risk-free investments that they hedge and move around to turn a profit.
“Commodities are a futures market,” Kaufman explained, noting that it took him “almost a year to figure out how futures work.” He broke it down for me into the four most basic components: “One, we have a need every day for products that only come out of the earth once, maybe twice a year. It’s feast or famine and the cost of these goods once was dependent upon where we are in the growing cycle. Two, civilization—philosophers, doctors, teachers, and all of us city-dwellers—we need easy access to food year-round. So we arrive at the third truth, which leads to a futures market—the need for price stabilization, for all of us, farmers and city dwellers alike, to survive. If wheat costs one dollar a bushel in autumn and one hundred dollars a bushel in winter no one is happy.”
Kaufman went on to describe the actual invention of a futures contract, which he compared to a promissory note that guarantees the future purchase of a select commodity at a set price, often a tiny bit lower than the current going rate.
“Everyone knows the risks involved,” he told me. “And everyone is buying and selling and trading, and traditionally the market itself is kosher, because everyone involved is playing by the rules. The purchases and the sales equal each other out, thus stabilizing the price.”
But over the past two decades, commodities markets have undergone a veritable sea-change. As with almost everything Goldman Sachs touches, their CIF was an overnight sensation, leading other banks to concoct their own unique CIF elixirs, each placing a slightly different weight on their chosen commodities. Thomas Reuters, for example, invests five percent of its fund in coffee, six percent in corn, six percent in live cattle, six percent in natural gas, one percent in orange juice, five percent in sugar, and so on. Each fund’s dispersal of investments is unique. While commodities markets have traditionally had space for speculators who provide liquidity on which farmers and the like rely to keep their businesses afloat, CIFs siphoned more money into commodities than ever before. By 2007, the CIF phenomenon was snowballing—some might say out of control.
Pick up the business section of the newspaper and you are bound to see a headline linking farmlands and Wall Street. The exponential association between the two began in ’07, when food prices skyrocketed. Jeremy Grantham, founder and chief strategist of the famed asset-management firm GMO and a “bubble” prediction specialist, titles his latest Quarterly Letter (followed by many with cult-like devotion) Welcome to Dystopia! Entering a long-term and politically dangerous food crisis. In it, he paints a rather grim picture of rising commodity costs thanks to water shortages, erosion, climate change, depleted fertilizer stocks, and a slowing rate of grain productivity, which results in a state where “rising food prices will make food too expensive for hundred of millions.” Grantham’s solution: “For any reasonable investment group with a ten-year horizon or longer, one should move steadily to adopt a major holding of resource related investments...forestry, farms...and stuff in the ground.” In other words: The cost of food—i.e. “stuff in the ground”—is certain to rise; buy your stock now.
- A decrease in the Ganges flow — thanks to overuse and poor water management upstream in India — has left the lower Ganges devoid of the channel troughs necessary to carry the monsoon season’s high volume of water, leading to a rise in destructive flooding. Some say river bank erosion is one of the main causes of poverty and rural-urban migration in Bangladesh.
About a week after my Wall Street walking tour with Kaufman, McConaughy, the commodities trader turned farmer, explained to me that the common wisdom from financial advisors—to invest five to ten percent of a portfolio in agricultural commodities—will lead to a classic case of demand exceeding supply. While he was initially skeptical of blaming Wall Street for the soaring price of food worldwide, he eventually conceded, “I think you certainly can make the argument that if you get more people investing in commodities the price will go up.”
“My daughter recently had me into her tenth grade class to give a talk about the cost of food,” Kaufman says as we walk past the building where George Washington was inaugurated, past Brown Brothers Harriman, one of the oldest and largest investment banks in America, and past Zuccotti Park, home of the Occupy Wall Street movement. “I sat in front of the class and took a slow bite out of a chocolate glazed donut. It was 8:30 in the morning and the students were slack-jawed.”
Out of his bag Kaufman pulled a second, perfectly glazed donut. He asked a simple question. “What is the most someone will give me for this?” One kid offered five dollars, another offered ten. Everyone wanted the sole remaining donut in the room. Finally, Kaufman handed the pastry to the student who handed him a hundred dollar bill. (Only in New York City. The kid, it turns out, was the son of an Internet pioneer.) Then, Kaufman brought out an entire box of donuts from behind the desk. Suddenly the hot ticket item of the morning was free. Everyone got one, and no one wanted them quite as much.
On one hand, Kaufman was explaining supply and demand; on the other he was arguing for price transparency in commodities markets. When something is vital to human survival, the mechanisms that decide its price ought not only to be knowable but should also be organized in such a way that they serve the interests of the world’s population. Estimates show that there are now twelve times as many future investments in wheat than there is actual wheat in the ground. The cost of the commodity is rising and no one can tell why at first glance, but buying more wheat futures suddenly seems like a good idea to those who can afford to do so, pushing the price up even higher.
- Allatoli, Bangaladesh where record breaking floods have rearranged the ground cover, forcing farmers to walk upwards of three kilometers over river-silt just to get to arable land.
“The problem is not going away,” Kaufman says as we walk through the vaulted arcade along the Barclay-Vesey Building, so named because it sits between Barclay and Vesey Streets. Barclay Street is named not after the banking institution, but after Reverend Henry Barclay, one of New York’s early settlers from the preeminent Barclay clan. But the extent to which his fancy family was tied to the famed British-originated banking institution is unclear. The Barclays bank we all know, the international progenitor of the old-world institution, has one of the largest CIF’s of all, pulling in over three billion dollars in profits in a single year. Recently, a stream of headlines ran in international newspapers linking Barclays to the rising cost of wheat. In September of last year, the headline in the UK’s Independent read, “Barclays makes £500m betting on food crisis”.
Along the Hudson River, just a quarter-mile west of One World Trade Center and the Barclay-Vesey Building, and a stone’s throw from Goldman Sachs, sits the Irish Hunger Memorial. The raised plateau of grass holds a traditional Irish cottage and rocks transplanted from the Emerald Isle, honoring the million people who died of starvation there between 1845 and 1852. When we get to the water and the memorial, Kaufman stops. The day is bright and sunny and the wind whips up whitecaps on the Hudson.
“During the famine there was an incredible amount of food in Ireland but the food was shipped to London because people in London could pay for it. And the people in Ireland could not,” Kaufman explains. He tells me that the memorial always reminds him of Amartya Sen, the 1998 winner of the Nobel Prize in economics, “who brought me to my first real watershed idea in my investigation of hunger: People don’t go hungry because there isn’t enough food; they go hungry because they can’t afford to eat.”
While the Irish Famine might seem far off, hundreds of millions of pounds of grain go uneaten in American grain silos because they are impossible to sell at their record high prices. In 2007, right when the price of commodities shot through the roof, a flip occurred—thanks to a complicated set of circumstances ranging from drought to a sharp spike in the cost of crude oil, and, perhaps most presciently, to the fact that more and more speculators began investing in commodities themselves. Where America once had a grain deficit, we suddenly had a surplus, according to Doane, a nearly century-old firm specializing in agricultural analysis. Food prices shot up, thousands of tons of U.S. grain went un-purchased and uneaten, and food-related riots broke out in more than thirty different countries. What had happened? Were people actually being priced out of the ability to eat?
An estimated one in seven people on the planet are at risk of starving to death, and that number is, like the cost of commodities themselves, on the rise. But that figure is hard to imagine when we rarely, if ever, see a starving person on the streets of New York. Visit Bangladesh, though, and you get a much sharper sense of what this scary ratio looks like. Loss of crops—thanks to increased salinity in the water table from rising sea levels—and a general movement away from failing farms toward the city where more westernized wheat-based diets reign, means that an ever increasing number of people are “food insecure.” Nearly half the global population is labeled as such, and if the price of food rises at the current rate this will lead to an increase in food insecurity by a factor of eight percent between now and 2016. Apply the Rule of Seventy, and you learn that in 35 years all of Bangladesh will be hungry.
- When rural peasants reach the city they often become more dependent upon imported food stuffs, the price of which are tied to Wall Street’s commodities markets.
Kaufman and I amble along the Hudson River to North End Avenue and the New York Mercantile building, bought by the Chicago Mercantile Exchange (CME) in 2009. A non-descript, if sleek, fifteen-story outpost on the northern edge of Battery Park City, the building is far less interesting than the previous incarnations of the commodities trading markets. Commodities exchanges began in the nineteenth century to facilitate and regulate the buying and selling of life’s necessities as an increasing number of people moved from farms to cities. Founded in 1898, CME was first the Chicago Egg and Butter Board, expanding over the years to encompass everything from cattle to different classes of milk, and wheat, eventually privatizing in 2000. Like the CME, the New York Mercantile Exchange began as a place where dairy merchants got together and sold their product, growing over the years to include all different types of “stuff from the ground”: oil, dried fruits, gold, precious metals, potatoes, wheat and poultry.
But the once famous grain pits where traders gesticulated wildly and chomped on wheat to determine its quality have been replaced by the ability to trade online. Just this week CME announced that it will close Kansas City Mercantile Exchange’s open grain pit trading floor in June. One of the few remaining grain pits in the United States, the majority of the world’s hard red winter wheat was once traded in Kansas City. But the transactional age has increasingly divorced those who buy and sell commodities from the commodity itself. According to Reuters, “Just 41 wheat futures contracts traded hands in the Kansas City Board of Trade pits last friday, while 26,573 contracts were traded electronically.” The era of mercantile exchanges that serve the people through price stabilization is coming to an end.
Today, trading wheat futures is no longer about the actual quality and quantity of the product; it’s about numbers on a screen. McConaughy, who worked at Credit Suisse as a contemporary commodities trader from 2007 to 2011, said of his previous line of work, “I was just trying to get a return for the banks’ money. I looked at the relationship between products. It didn’t matter if it’s a stock or a bond or a commodity like oil, cotton, or wheat.” What were once treated like concrete items upon which our lives depended, are today treated like stock, and the closing of the grain pits is just a symptom of a larger disease: the abstraction and financialization of food.
Critics are quick to assert that speculators have long been important players in commodities markets, their added capital partially facilitating the perpetual dance of buying and selling that is responsible for historic price stability. Both of the bankers-turned-farmers I interviewed were skeptical of the assertion that these Commodity Index Funds could actually impact the price of food in the long term. “There is always going to be a buyer and a seller,” Carlson, the Pennsylvania-farmer-nee-banker, said when asked to explain how increasingly short-term volatility in prices could mean price stability in the future. “Often, the bank not only buys the future, they also sell the future contracts, kind of canceling itself out.” Carlson is right—that is exactly how these markets have historically worked. But traditionally, in order to make money trading a commodity you had to have some kind of intimate knowledge, and often dependence upon, the thing itself—inherently limiting the number of speculators who would want to get involved. By subverting masterful experience with computer screens and complex interagency relations that promise a return even if the stock drops, commodity indices have opened the floodgates for investment well above and beyond that which commodity markets have normally seen.
I asked Kaufman why the Chicago Mercantile Exchange had purchased the New York Mercantile in 2009 and the Kansas City Mercantile Exchange just last year. What had that meant for the future cost of food? Is New York the new epicenter of everything commodity related? “No, he replied. “It’s simpler than that, it doesn’t matter if you are in New York or Mumbai, or Jersey City. We don’t need to be close to or understand the thing we sell anymore; just find what you want and trade it in cyberspace.”
Farming is a complicated calculation, an intricate system of inputs to reach a single, universally desired goal: Good, healthy eating at a price that people can afford. It doesn’t happen in cyberspace—food flows from the ground. But the bigger that “Big Ag” grows and the more involved the financial institutions’ become in the price of food, the further we get from realizing just what it takes to feed the planet.
Carlson argues that for way too long oil has been our saving grace. Oil, he says, is the only way that American farmers, who account for just one to two percent of the national population, can feed the other 98 percent of us. But the oil used to sew, reap and ship food, “is finite and as oil goes away we are going to be at a loss for how to feed ourselves,” he says with a not altogether unfamiliar urgency. Carlson suggests that now is the time to start figuring out how to cut back on our agricultural reliance on oil. The idea seems at first simple, but it requires rethinking the agricultural system from the ground up—forgetting about government subsidies and the corporate farms entities that grow nearly eighty percent of our food supply and truck it around in eighteen wheelers.
Last year, Carlson planted traditionally fat-rich fruit trees like persimmon and mulberry to feed his pigs, and rotated his cattle to a fresh pasture each day, making their diet local and organic. He is working toward sustainability in the long term, which, in his definition, means food that is neither tied to economic futures nor to oil for production. But reinventing the modern agricultural wheel is full of misfires for a man who once turned a profit not by turning soil but by swapping stock. Last year, Carlson purchased dozens of handsome Scottish Highland cattle, which he had to sell after one of them horned his farm manager in the chest. And the market that he runs on the premises where he sells handsome slabs of his grass-fed meat has yet to make him money, signaling the difficulty most small farms face: Staying in business.
“I think it is close to impossible to begin a successful farm without a significant capital investment. And banks don’t lend to farms because they are seen as risky business,” says McConaughy. “I want to be the proof that opening a small farm is no longer as volatile as it once was. I am not the only one, although some are less ethically driven. There are loads of Wall Street people buying up farmland. Does that make us farmers or investors? I think it’s a little bit of both.”
I recently heard that a single banker bought up a considerable portion of the Canadian wilderness, betting that a warming planet will extend the length of the growing season, turning typically chilly Canada into a new grain belt. Sandy Lewis, an ex-broker whom I read about in Kaufman’s book, sunk millions of his Wall Street-derived capital into an expansive 12,000-arce plot of land in upstate New York, just west of Lake Champlain. For now, buying up giant pieces of what we are most reliant upon, and what is becoming ever-more expensive—the cost of farmland is rising at about twenty percent a year—is restricted to the few who have money enough to make the leap.
- For some the added difficult is enough to make them consider illegally crossing the India-Bangladesh border in search of work in Kolkata.
Finished just two years ago, 200 West Street, as the building is known, has attracted a fair amount of controversy. There was a public outcry over the $1.65 billion dollars it received in tax-exempt government bonds earmarked for stimulating economic development in the financial district after 9-11. Just to put that number in perspective, Goldman Sachs’ net earnings average about one billion per quarter, meaning that without government help it could have financed the new construction in less than half a year. According to Paul Golderberg, the longtime architectural columnist for The New Yorker, unlike many of Goldman’s financial institution predecessors, who built the tallest, most ostentatious buildings money could buy and then painted their names all over the things in bright neon lights (as with Chase Manhattan Bank’s skyscraper) Goldman has opted for understatement, if not invisibility.
As we circle the building, Kaufman’s hyper speech slows down for the first time all day. “It’s truly amazing how they got their hands around such big things,” he says. One of the first to create and invest in CIFs, Goldman liquidated a large percentage of their holdings just before the first controversy surrounding CIFs broke in 2009. Commodities have rebounded nicely, and if investment bankers take the advice of Jeremy Grantham, the bubble-prediction specialist, as so many do, another rush to buy up wheat, and corn, cattle, and cotton seed oil, lies in wait.
Kaufman and I stroll past the Tribecca branch of Shake Shack, a favored stop where where youth soccer players gather with their families after a Sunday tournament. Bankers’ kids, and writers’ kids, and celebrities’ kids all co-mingle, slurping down “fair” milkshakes and hormone-free burgers. For the first time all afternoon, Kaufman runs into people he knows: A big-wig editor at Slate, a banker buddy, and the stay-at-home mom the neighborhood calls “the Queen of Lower Manhattan.” It occurs to me then, for the first time, really, that the financial district is actually a neighborhood all its own. Kaufman has lived down here his entire adult life, since graduating from Yale in 1983. He even coached his daughters’ soccer teams on the same fields these kids are fresh from.
But the more Kaufman chats with his neighbors the more I sense a subtle tension. Through his research and writing, he has exposed a not so desirable back alley of our wealth production and consumption machine, the epicenter of which is right here on these Astroturf fields in the shadow of Goldman Sachs. The price of food is determined in his friends’ and neighbors’ own backyard, where the twin towers fell and where their kids can pay a hundred dollars for a donut during a class presentation. Of course, they probably don’t think about the global ramifications of the financialization of food all that often, certainly not as often as Kaufman. Still, what they might not understand is that Kaufman is writing of a disaster that has already taken place elsewhere and that he is trying desperately to prevent that disaster from coming home.
On our way back to Wall Street we pass through City Hall Park, where a giant inflatable ketchup bottle jiggles from the in-rush of compressed air. This tribute to America’s favorite condiment is just one of many art objects scattered across the grounds by the city’s Public Art Fund. The yellow label splashed across the bottle reads “Daddy’s,” in antiquated 1950’s-style script—a relic of a seemingly simpler time, before the invention of that first Commodity Index Fund, back in 1991, before food stopped being food, and its economic inflation became a practice too obtuse for most people to swallow.
Out of earshot from his Wall Street friends and acquaintances, Kaufman turns to me. With the half-ironic tone of a man trying to cloak significance in humor he says, “When hamburger meat costs eighteen dollars a pound, and the middle class can’t afford this luxury anymore, it’s going to be the end of world.”
read more at http://mondediplo.com/blogs/the-futures-of-farming
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