REPORT 27
he history of food took an omi-nous turn in 1991, at a time when noone was paying much attention. Thatwas the year GoldmanSachs decided our dailybread might make anexcellent investment.Agriculture, rootedas it is in the rhythms of reaping and sowing, hadnot traditionally en-gaged the attention of Wall Street bankers,whose riches did notcome from the sale of real things like wheat orbread but from the ma-nipulation of etherealconcepts like risk andcollateralized debt. Butin 1991 nearly every-thing else that could berecast as a
nancial ab-straction had alreadybeen considered. Foodwas pretty much all thatwas left. And so withaccustomed care andprecision, Goldman’sanalysts went abouttransforming food intoa concept. They selected eighteencommodi
able ingredients and con-trived a
nancial elixir that includedcattle, coffee, cocoa, corn, hogs, anda variety or two of wheat. Theyweighted the investment value of eachelement, blended and commingled theparts into sums, then reduced whathad been a complicated collection of real things into a mathematical for-mula that could be expressed as asingle manifestation, to be knownthenceforward as the Goldman SachsCommodity Index. Then they beganto offer shares.As was usually the case, Goldman’sproduct
ourished. Theprices of cattle, coffee,cocoa, corn, and wheatbegan to rise, slowly at
rst, and then rapidly.And as more peoplesank money into Gold-man’s food index, otherbankers took note andcreated their own foodindexes for their ownclients. Investors weredelighted to see thevalue of their ventureincrease, but the risingprice of breakfast, lunch,and dinner did not alignwith the interests of those of us who eat.And so the commodityindex funds began tocause problems.Wheat was a case inpoint. North America,the Saudi Arabia of ce-real, sends nearly half its wheat productionoverseas, and an ob-scure syndicate known as the Min-neapolis Grain Exchange remains thesupreme price-setter for the continent’smost widely exported wheat, a high-protein variety called hard red spring.Other varieties of wheat make cakeand cookies, but only hard red spring
Frederick Kaufman is a contributing editorof
Harper’s Magazine.
His last article forthe magazine, “Let Them Eat Cash,” ap- peared in the June 2009 issue.
REPORT
How Wall Street starved millions and got away with it
By Frederick Kaufman
Illustrations by Tim Bower
28 HARPER’S MAGAZINE / JULY 2010
makes bread. Its price informs the costof virtually every loaf on earth.As far as most people who eat breadwere concerned, the MinneapolisGrain Exchange had done a prettygood job: for more than a century thereal price of wheat had steadily de-clined. Then, in 2005, that price be-gan to rise, along with the prices of rice and corn and soy and oats andcooking oil. Hard red spring had longtraded between $3 and $6 per sixty-pound bushel, but for three years Min-neapolis wheat broke record after re-cord as its price doubled and thendoubled again. No one was surprisedwhen in the
rst quarter of 2008 trans-national wheat giant Cargill attrib-uted its 86 percent jump in annualpro
ts to commodity trading. Andno one was surprised when pack-aged-food maker ConAgra sold itstrading arm to a hedge fund for $2.8billion. Nor when
The Economist
announced that the real price of food had reached its highest levelsince 1845, the year the magazine
rst calculated the number. Nothing had changed about thewheat, but something had changedabout the wheat market. Since Gold-man’s innovation, hundreds of billionsof new dollars had overwhelmed theactual supply of and actual demand forwheat, and rumors began to emergethat someone, somewhere, had cor-nered the market. Robber barons, goldbugs, and
nanciers of every stripe hadlong dreamed of controlling all of something everybody needed or de-sired, then holding back the supply asdemand drove up prices. But there wasplenty of real wheat, and Americanfarmers were delivering it as fast asthey always had, if not even a bit fast-er. It was as if the price itself had be-gun to generate its own demand—themore hard red spring cost, the moreinvestors wanted to pay for it.“It’s absolutely mind-boggling,” onegrain trader told the
Wall Street Jour-nal
. “You don’t ever want to tradewheat again,” another told the
Chi-cago Tribune.
“We have never seen anything likethis before,” Jeff Voge, chairman of theKansas City Board of Trade, told the
Washington Post
. “This isn’t just anycommodity,” continued Voge. “It isfood, and people need to eat.”The global speculative frenzysparked riots in more than thirtycountries and drove the number of theworld’s “food insecure” to more than abillion. In 2008, for the
rst time sincesuch statistics have been kept, theproportion of the world’s populationwithout enough to eat ratcheted up-ward. The ranks of the hungry hadincreased by 250 million in a singleyear, the most abysmal increase in allof human history.Then, like all speculative bubbles,the food bubble popped. By late 2008,the price of Minneapolis hard redspring had toppled back to normallevels, and trading volume quicklyfollowed. Of course, the prices worldconsumers pay for food have not comedown so fast, as manufacturers andretailers continue to make up for theirown heavy losses.The gratuitous damage of thefood bubble struck me as not merelya disgrace but a disgrace that mighteasily be repeated. And so I traveledto Minneapolis—where the realityof hard red spring and the price of hard red spring
rst went their sepa-rate ways—to discover how such athing could have happened, andif and when it would hap-pen again.
he name of the MinneapolisGrain Exchange may conjure imagesof an immense concrete silo toweringover the prairie, but the exchange is infact a rather severe neoclassical steel-frame building that shares the down-town corner of Fourth Street andFourth Avenue with City Hall, thecourthouse, and the jail. I walkedthrough its vestibule of granite andItalian marble, past renderings of wheat molded into the terra-cotta car-touches, and as I waited for the wheat-embossed elevator I tried not to gawkat the gold-plated mail chute. For morethan a century, the trading
oor of theMinneapolis Grain Exchange hadbeen the place where wheat acquireda price, but as I stepped out of the ele-vator the opening bell tolled andechoed across a vast, silent, and chillychamber. The place was abandoned,the phones ripped out of the walls, theoctagonal grain pits littered withsnakes of tangled wire.I wandered across the woodenplanks of the old pits, scarred by theboots of countless grain traders, andI peered into the dark and narrowrecesses of the phone booths wherethose traders had scribbled downtheir orders. Beyond the boothsloomed the massive cash-grain tables,starkly illuminated by rays of sun-light. In the old days, when brokersand traders looked into one anoth-er’s faces, not computer screens,they liked to examine the grainbefore they bought it. Now an electronic board beganto populate with green, red, andyellow numbers that told the priceof barley, canola, cattle, coffee, cop-per, cotton, gold, hogs, lumber,milk, oats, oil, platinum, rice, andsilver. Beneath them shimmered theindices: the Dow, the S&P 500, and,at the very bottom, the GoldmanSachs Commodity Index. Even thevideo technology was quaint, a relicfrom the Carter years, when tradewith the Soviet Union was the
nalfrontier, long before that moment in2008 when the chief executive of
cerof the Minneapolis Grain Exchange,Mark Bagan, decided that the futureof wheat was not on a table in Min-neapolis but within the digital in
ni-tude of the Internet.As a courtesy to the speculatorswho for decades had spent their work-days executing trades in the grain pits,the exchange had set up a new spacea few stories above the old trading
oor, a gray-carpeted room in which afew dozen beige cubicles were availableto rent, some featuring a view of aparking lot. I had expected shouting,panic, confusion, and chaos, but nomore than half the cubicles were oc-cupied, and the room was silent. Oneof the grain traders was reading hisemail, another checking ESPN for theweekend scores, another playing soli-taire, another shopping on eBay forantique Japanese vases.
I
T WAS AS IF THE PRICE OF WHEATWAS GENERATING ITS OWNDEMAND. THE MORE IT COST, THEMORE INVESTORS WANTED TO PAY
REPORT 29
“We’re trading wheat, but it’s wheatwe’re never going to see,” Austin Da-miani, a twenty-eight-year-old wheatbroker, would tell me later that after-noon. “It’s a cerebral experience.”Today’s action consisted of a gray-haired man padding from cubicle tocubicle, greeting colleagues, suckinghard candy. The veteran eventuallyambled off to a corner, to a batteredcash-grain table that had beenmoved up from the old trading
oor.A dozen aluminum pans sat on thetable, each holding a different sam-ple of grain. The old man brought apan to his face and took a deepbreath. Then he held a single grainin his palm, turned it over, andfound the crease.“The crease will tell you the vari-ety,” he told me. “That’s a lost art.”His name was Mike Mullin, hehad been trading wheat for fiftyyears, and he was the
rst Minneapo-lis wheat trader I had seen touch agrain of the stuff. Back in the day,buyers and sellers might have spenthours insulting, cajoling, bullying,and pleading with one another acrossthis table—anything to get the rightprice for hard red spring—but Mullinwas not buying real wheat today, norwas anybody here selling it.Above us, three monitors flick-ered prices from America’s primarygrain exchanges: Chicago, KansasCity, and Minneapolis. Such geo-graphic speci
cities struck me as ar-chaic, but there remain essentialdifferences among these wheat mar-kets, vestiges of old-fashioned con-cerns such as latitude and proximityto the Erie Canal.Mullin stared at the screens andasked me what I knew about wheatfutures, and I told him that whereasMinneapolis traded the contract inhard red spring, Kansas City tradedin hard red winter and Chicago insoft red winter, both of which havea lower protein content than Min-neapolis wheat, are less expensive,and are more likely to be incorpo-rated into a brownie mix than intoa baguette. High protein contentmakes Minneapolis wheat elite, Itold Mullin.He nodded his head, and we stoodin silence and watched the desultorymovement of corn and soy, soft redwinter and hard red spring. It was aslow trading day even if commodities,as Mullin told me, were overpriced 10percent across the board. Mullin
g-ured he knew the real worth of abushel and had bet the price wouldsoon head south. “Am I short?” heasked. “Yes I am.”I asked him what he knew about thecommodity indexes, like the oneGoldman Sachs created in 1991.“It’s a brainless entity,” Mullin said.His eyes did not move from the screen.“You look at a chart. Youhit a number. You buy.”
rain trading was not alwaysbrainless. Joseph parsed Pharaoh’sdream of cattle and crops, discernedthat drought loomed, and diligentlywent about storing immense amountsof grain. By the time famine de-scended, Joseph had cornered themarket—an accomplishment thatbrought nations to their knees andmade Joseph an extremely rich man.In 1730, enlightened bureaucratsof Japan’s Edo shogunate perceivedthat a stable rice price would protectthose who produced their country’ssacred grain. Up to that time, all thefarmers in Japan would bring theirrice to market after the Septemberharvest, at which point warehouseswould over
ow, prices would plum-met, and, for all their hard work, Ja-pan’s rice farmers would remain im-poverished. Instead of sufferingthrough the Osaka market’s perenni-al volatility, the bureaucrats preferredto set a price that would ensure a liv-ing for farmers, grain warehousemen,the samurai (who were paid in rice),and the general population—a pricenot at the mercy of the annual cycleof scarcity and plenty but a smoothline, gently
uctuating within a rea-sonable range.While Japan had relied on the au-thority of the government to avoiddeadly volatility, the United Statestrusted in free enterprise. After thecombined credit crunch, real estatewreck, and stock-market meltdownnow known as the Panic of 1857,U.S. grain merchants conceived anew stabilizing force: In return for acash commitment today, farmerswould sign a forward contract to de-liver grain a few months down theline, on the expiration date of thecontract. Since buyers could neverbe certain what the price of wheatwould be on the date of delivery, theprice of a future bushel of wheat wasusually a few cents less than that of a
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