Grocery StoreOver the past 10 years, prices for basic food commodities like meat, dairy products, grains, oils and fats, and sugar, have increased by an average of more than 125%.

Part of the increase is due to rising production costs and changes in supply and demand. But you also have Wall Street traders to thank for the higher price tags.

With no intention of buying the underlying food commodities, Wall Street dumps massive amounts of money into commodities futures in hopes of profiting from fluctuations in food prices. In the process, it's moving the market in its favor -- and emptying the pockets of consumers.

So what the heck is a future, and how does it affect your grocery bill?

The Fable of the Farmer and the Speculator

Wheat and speculationSuppose Speculator Smith thinks the price of wheat will go up in the future, and wants to make money off the price change. Smith can do this by purchasing a future in wheat. This future buys a specific amount of wheat at a pre-determined price to be delivered at a set date in the future, when the wheat future matures. If the price of wheat goes up, Smith's investment in his wheat future is worth more, and he can sell it at a higher price without taking delivery of the wheat.

So far, so good. The farmers benefited from the security of knowing they would be able to sell some portion of their crop at a set price at the end of the season. Smith's gamble paid off once the wheat price increased, but he also took on the risk of losing money if the price of wheat went down in the interim.

Here's where it gets hairy. Frequently, instead of a farmer being on the other end of the speculator's contract, there is another speculator.


In such a case, neither side owns the commodity and neither wants to own it. They are just on opposite sides of a bet on whether the price will go up or down. Before the contract expires, the loser simply pays the winner, and no commodities change hands.

But this speculation actually causes the prices of the underlying commodities to move. As the demand for futures rises, the price for those futures rises, causing the prices of the underlying commodities (including food commodities) to increase.

The problem has only grown in recent years, as financial companies have nearly doubled their investments in food commodities over the past five years, which has helped push food prices to 30-year highs.

And these price increases are passed on to consumers like you. Commodity speculation also pushes up prices on energy, among many other products we rely on.

Fuller Pockets for Wall Street, Emptier Fridges for the Rest of Us

The importance of this issue is magnified by the fact that about 46 million Americans -- about one in seven -- turn to food stamps to help them pay for food.

The effects of rising food costs are even more alarming in Third World and developing countries, where there are many poor people who already spend more than 60% of their income on food. According to the UN World Food Program, 115 million people have fallen into hunger as a result of sharp increases in food prices since 2008 and the global economic recession, which has caused food riots to erupt in countries like Mexico and Bangladesh.

While the recently passed Dodd-Frank Act calls for stronger regulation of commodity trading, Wall Street has been fighting tooth and nail to defang the regulations, and has undertaken legal challenges that have prevented the regulations from coming into force yet.

Until they do, don't expect your grocery bill to get any leaner.

Motley Fool contributor M. Joy Hayes, Ph.D. is the principal at ethics consulting firm Courageous Ethics. She doesn't own shares of any of the companies mentioned. Follow @JoyofEthics on Twitter.


Increase your money and finance knowledge from home

Portfolio Basics

What are stocks? Learn how to start investing.

View Course »

What are Penny Stocks

The lucrative and dangerous world of penny stocks.

View Course »

Add a Comment

*0 / 3000 Character Maximum

296 Comments

Filter by:
biffbifford

The reason for food inflation is due to monetary policy and little to do with speculators. If this were the case what is your answer for gold, silver and distillate's? Demand for oil is way down but oil prices are way up. Bernake quantitative easing has diluted the dollar and caused price inflation. This article is meant to push a political agenda and blame Wall Street so the uninformed will not look towards the administration and it's bad monetary policy and excess spending as the culprit.

April 23 2012 at 2:09 PM Report abuse rate up rate down Reply
bfgry484yerhdbv

Wall Street, Goldman Sachs, and other companies like them control our goverment. Hmmmm sounds very familar to what happened in Russia and look what hapened. Our country turning into a dictatorship and communist country? Look back in history people. Stand up and say that we have had enough!! Take our country back Term limits, no benifits after leaving office, no per diams(using of taxpayer money to pay there office bills in there district or state.) Come on wake up people.!!!!! Close down our borders to the South for a while. Put our military every mile across our Southern border and coast with warning shots first. then all bets are off after that.

April 23 2012 at 10:45 AM Report abuse -1 rate up rate down Reply
2 replies to bfgry484yerhdbv's comment
Nat

You do realize corporations controlling a government is the OPPOSITE of communism, right?

Like, the literal opposite.

April 23 2012 at 4:48 PM Report abuse rate up rate down Reply
Nat

You do realize that corporations controlling the government is the literal opposite of communism, right?

Like, the LITERAL opposite. Not using it for emphasis, the actual definition of literal.

April 23 2012 at 4:55 PM Report abuse rate up rate down Reply
bfgry484yerhdbv

Wall Street, Goldman Sachs, and other companies like them control our goverment. Hmmmm sounds very familar to what happened in Russia and look what hapened. Our country turning into a dictatorship and communist country? Look back in history people. Stand up and say that we have had enough!! Take our country back Term limits, no benifits after leaving office, no per diams(using of taxpayer money to pay there office bills in there district or state.) Come on wake up people.!!!!! Close down our borders to the South for a while. Put our military every mile across our Southern border and coast with warning shots first. then all bets are off after that.

April 23 2012 at 10:42 AM Report abuse rate up rate down Reply
bigdmahon

If operation " fast & furious" happened on Bush's watch they would have impeached him by now.

April 23 2012 at 10:13 AM Report abuse rate up rate down Reply
bigdmahon

Term limits & no benefits thereafter. They atre all scum of the earth.

April 23 2012 at 9:51 AM Report abuse rate up rate down Reply
Craig

WALL STREET IS DISTROYING THIS COUNTRY. A simple fix NO More margin. Purchase at full price.

April 23 2012 at 8:25 AM Report abuse -2 rate up rate down Reply
siderman

they will get more money one way or another ,soon there will be no money left to get
a million dollars won't buy a strip of toilet paper to wipe there greedy ass

April 23 2012 at 8:18 AM Report abuse rate up rate down Reply
mikcl1

This is an easy fix, get rid of the speculators how ever we can, with or without the government.

April 23 2012 at 8:05 AM Report abuse -1 rate up rate down Reply
imavege

The new reforms would make these type of transactions better for the people but seems one political party has fought hard agains these reforms.

As for "Oil" we can lower prices in 24 hours and the solutions are simple:
1) When purchasing oil you must not be able to finance more than 50% of the purchase price.
2) You need to physically take the oil. No reselling the oil before you take possession. You need to
fill your own storage facility.

Currently they purchase oil that is still in the ground and resell it over and over till we pay at the pump price.

April 23 2012 at 7:39 AM Report abuse +2 rate up rate down Reply
Eileen

And so who is really surprised about the Occupy Wallstreet Movement? We, the People, are being royally screwed. The Stock Market is a fraud that preys on hardworking Americans and rewards lazabouts for guesswork.

April 23 2012 at 7:30 AM Report abuse rate up rate down Reply