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Will Lucas van Praag's Rebuttal To The Preposterous Claim Goldman Sachs Is To Blame For The Food Crisis Get The Carnival Barkers Out Of His Hair?

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Or will he be forced to get fellow vegan Natalie Portman to vouch for him? (That photo of LVP up to his elbows in ribs at Dinosaur BBQ was a fake!)

Don't Blame Goldman Sachs for the Food Crisis: Blame the meat-loving middle class.

By Lucas Van Praag

Frederick Kaufman's article "How Goldman Sachs Created the Food Crisis," ignores a number of important facts about the underlying economic, social, and political factors that have driven the rise in food prices.

The assertion that Goldman Sachs introduced speculation into commodity markets is incorrect. The Commodity Research Bureau (CRB) Index has been investible since the early 1970s, and futures on the CRB Index have been traded since 1986, five years before the creation of the Goldman Sachs Commodities Index (GSCI). Gary Cohn, the president of Goldman Sachs, was not involved in the creation of the index, contrary to the article's assertion. The GSCI was purchased by Standard and Poor's in 2007 and retains a connection to Goldman Sachs in name only.

More importantly, the article does not present any credible evidence that commodity index investing is responsible for the rise in food prices. Serious inquires, such as one conducted by the OECD in the wake of the 2008 price spike, have concluded that "index funds did not cause a bubble in commodity futures prices." Rather than destabilizing futures markets, commodity index funds provide them with a stable pool of capital, improving farmers' ability to insure themselves against the risks inherent in agricultural prices. This, in turn, can allow farmers to produce more food at a lower cost. The pension and endowment funds providing this vital capital are investing the savings of individuals. They are not faceless "speculators." They represent people, often pensioners, who seek to protect the value of their savings against inflation and rising food prices.

Finally, the article suggests that because commodity indices are "long-only" they, therefore, inflate prices. This is not the case. Futures contracts expire on a set date, meaning that "rolling" them over simply involves a re-investment of the original funds by selling one contract and buying another. This "roll-over" is akin to renewing home-owners insurance from year to year and is not like purchasing a second or third home, which could inflate prices.

The real drivers of food inflation and food shortages are long-term trends, like increased meat consumption by the growing middle class in emerging markets and greater use of biofuels in the developed markets. Monetary policy, climate change, and protectionism also play key roles. Historical facts and demonstrable economic trends cannot be disregarded if there is to be a productive discussion about this vital issue.


Lucas van Praag
Managing Director
Goldman, Sachs & Co.