On Monday, August 2nd, the Wall Street Journal wrote that the price of pork bellies - used to make bacon - had jumped 53% in one year to $1.35 a pound. On August 5th, Bloomberg published an even more in-depth article on the situation. According to Tom Cawthorne, who bears the illustrious title of Director of Hog Marketing at R.J. O’Brien & Associates in Chicago, “there are just no stocks now” of that porcine manna enjoyed by so many of us.
In the same article, Bloomberg mentions that pork bellies have been traded on the Chicago Mercantile Exchange since 1961. I know a bit about commodities and a lot less about futures trading. My mind was flooded with questions: who the hell is betting on pork bellies, and why? How could this betting possibly affect the price? When you bet on a horse at the racetrack, it doesn’t make the horse more expensive. What is the secret link between the futures trading and the product’s price?
I immediately flashed back to Trading Places, the Eddie Murphy movie whose primary plot twist (SPOILER) involved a phony advance report on the Florida orange crop. The bad guys were made to believe that the crop would perform differently than the actual report suggested, and they lost their fortune in the process, making Eddie Murphy rich.
Oddly enough, I found some answers in the film’s script, most notably in this scene, where the Duke brothers explain to Billy Ray Valentine (played by Eddie Murphy) the nature of their…ahem, profession:
Commodities are agricultural products. Like coffee, that you had for breakfast. Wheat, which is used to make bread. Pork bellies, which is used to make bacon, which you might find in a bacon, lettuce and tomato sandwich.
Aha, bacon! I’m on the right trail. He continues:
Then there are other commodities like...frozen orange juice...and gold. Though, of course, gold doesn't grow on trees like oranges.
Very true, gold does not grow on trees like oranges, which are food and therefore essential to life. But I’ll come back to that…
Now, some of our clients are speculating that the price of gold will rise in the future. We have other clients who are speculating that the price of gold is going to fall. They've placed their orders with us and we buy or sell their gold for them. The good part is that no matter whether our clients make money or lose money, Duke & Duke get the commissions.
All of this has been explained to our hero, the fast-talking con man from the streets who might lack an economics degree but can still follow this scam:
Well, what do you think, Valentine?
Sounds to me like you guys are a couple of bookies.
I told you he'd understand.
Billy Ray is not as stupid as they thought, and screenwriters Timothy Harris and Herschel Weingrod do a great job of making us laugh while explaining the nature of the commodities market in the language of the “average” citizens who are unwittingly affected by it.
You see, in the movie of our lives that is Trading Places, you and I are Billy Ray. We don’t think we understand the commodities market, but in fact we know it all too well. We see the prices of grain skyrocket until bread seems to become a luxury item. We listen fearfully to news of rice shortages. And now we may decide that bacon isn’t so tasty after all and just roll our carts past the tempting displays.
The global rice shortage of 2008 was a complex situation aggravated by the very existence of the futures market. An SF Gate article named “drought” and “hoarding” as the main causes of lowered exports. A reduced harvest and a dip in domestic supply levels in producing nations led to a cutback in rice shipped overseas. Such fluctuations are to be expected and should have been met with understanding by trade partners.
Yet as Raj Patel explained to SF Gate, “speculation on food prices fuels spikes,” which is exactly what happened in the futures market. Mainstream US media outlets, never missing an opportunity for fear-mongering, reported on foreign food riots, insinuating that we would be next, without contextualizing the situation. Big box outlets like Sam’s Club and Costco limited rice sales. For the first time in our generation, we were told we couldn’t have an unlimited supply of something we wanted.
But the real American food shortage never happened. Food prices rose and continue to do so, yes, but due to speculation, not lack. In the US we experience an abundance that many other countries would never dream existed. Take a stroll around the hot food bar at Whole Foods. Look on Google Maps and count the restaurants in your town. There is no food shortage in the US. There is only food mismanagement.
The commodities market is as old as trade itself and was created in an effort to centralize and to streamline agricultural sales. Sadly, over at the Chicago Mercantile Exchange, the real money is in futures, predicting what will cost how much, and at what time – so much so that rather than serving as an impartial clearinghouse where merchandise is bought and sold, it is a haven of price-gouging. Just as some cynical Wall Street brokers collect bonuses for losing money, this market is oblivious to the starvation of US citizens. They simply conduct their transaction and the cash register rings merrily. The worst part is that the futures contracts influence the actual prices of the goods sold on the Exchange.
Case in point: after the Bloomberg article of August 5th, six days later they reported that hog prices were tumbling, “signaling U.S. animal supplies may top consumer demand for meat.” A spokesman for futures broker Allendale, Inc. informs us that “we’ve got this large supply of hogs starting to show up.” The article is unclear as to how there can be more hogs at lower prices, yet less frozen bellies for bacon production. Are Americans are eating more bacon than ham, driving up the price of that part of the hog? This ticker for wholesale-pork cutout products raises more questions than it answers.
If you find this confusing, it’s because you’re supposed to. The moral of the story is that the word on the street is what sets the prices, and we consumers at the end of the money chain must endure the caprices of the middlemen standing between farmer and table. Analysts are being paid top dollar to roll out pearls of wisdom such as “more people also eat bacon, lettuce and tomato sandwiches at this time of year.” All of this is done with a mathematician’s impartiality to the fact that we are talking about food – not a luxury item, not a paper stock, but a staple of survival for all humankind.
Shockingly, no one seems to find it unreasonable that this perverse game is allowed to flourish. No matter the outcome, someone gets rich every day, with every miserable transaction, until we stop them. But that will take more firepower than the US government even has. The CME is just a Midwestern outpost of Wall Street, and I think we’ve learned how deep their hooks are in the hide of our governing structure. If we’re going to save that patient, we might just need to amputate the whole arm.
For now, let’s get back to bacon: how can we enjoy our pork on the cheap?
If you have an independent butcher shop in town, ask them how much it would cost for you to buy a whole pig and to have them prep it. My butcher gave me some killer prices and he was willing to make sausage, pâté, etc. from the organs at no extra charge. Split the costs with another family in your neighborhood (or, if you are single, with a group of friends) to make it even more affordable. You can also locate pig farms on the internet and ask them how much butchering and preparation they do.
Food imports from overseas are not an inevitability. We as US citizens are entirely capable of animal husbandry, farming and a host of other things that we no longer do, but our grandparents or great-grandparents might have needed to do. We have been manipulated into forgetting the old ways, and it has put us at the mercy of corporate thugs. But it’s always a good time to learn new tricks.
And now I’m suddenly craving a BLT…