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Larned, Kan., Toronto - Tom Giessel rubs the heel of his palm against his forehead, exhales a moment, and then begins again, trying to make sense of how the global food market has suddenly descended into chaos.
He is seated on a couch in his modest white farmhouse, surrounded by acres of wheat that in a few days will begin to flower, blanketing this central Kansas town with millions of tiny green beards. Beside him, a sheaf of dried wheat spills out of a vase, while across the room, a stylized crucifix looms above the entrance to the kitchen, a solitary stem writhing on the cross.
For three generations, grain has been his family's lifeblood, a source of sustenance and pride, reward and hardship.
Mr. Giessel, 55, lived through the Russian Wheat Deal in the 1970s, when a sudden rise in exports to the Soviet Union sparked a boom in prices. He has endured credit crises, political embargoes, and the vicissitudes of weather and drought.
Yet in the more than 31/2 decades he has been farming, he has never seen anything quite like this. The prices of wheat, corn, soybeans and rice more than doubled in value in the span of several months, sowing equal measures of confusion and fear in the American heartland. Commodities markets, where these prices take their cue, have become so unpredictable that farmers now liken them to blackjack tables in Las Vegas.
At the same time, the costs of fertilizer, herbicides and fuel — all crucial to agriculture — have skyrocketed to record heights: Mr. Giessel's expenses alone jumped half a million dollars in the past year, twice what they normally are.
"It used to be that I could figure on things from year to year," shrugs Mr. Giessel, a stout man with dark eyes, thick forearms and a weathered countenance. "But now it's like driving down the road with no headlights. You can look out the window and see the white lines, but you don't know what the hell you're going to hit. This is the most risk I've been exposed to since I started farming."
The problems here go well beyond the Kansas border. The record escalation of food prices has played havoc with every link in the food chain, from grain merchants to futures markets, from publicly traded food companies to consumers.
Producers such as Mr. Giessel now find themselves on the front line of a mushrooming global crisis, one that has sparked violent protests in some of the world's poorest countries, prompting aid agencies to warn of a pending humanitarian catastrophe.
In the search for answers, pundits have attempted to pin the blame on the usual suspects: rising demand from China and India, bad crop conditions and booming ethanol production.
Yet one major culprit behind these gyrating markets and unprecedented price spikes has been largely overlooked: the deep-pocketed pension and index funds upon which most Canadians and Americans depend for their retirements.
These funds have plowed hundreds of billions of dollars into agricultural commodities as a way to diversify their assets and improve returns for their investors.
The amount of fund money invested in commodity indexes has climbed from just $13-billion (U.S.) in 2003 to a staggering $260-billion in March, 2008, according to calculations based on regulatory filings.
Michael Masters, a veteran U.S. hedge fund manager, warned a Senate hearing this month that this number could easily quadruple to $1-trillion, if pension funds allocate a greater portion of their portfolio to commodities, as some consultants suggest they are poised to do. Because agricultural markets are small — relative to stock markets — the amount of cash pouring in gives these funds substantial clout.
Mr. Masters estimated that that these big institutional investors control enough wheat futures to supply the needs of American consumers for the next two years, and blamed the "demand shock" from these recent entrants to the commodities markets as arguably the primary factor behind the sudden take-off in food prices.
