Paul Krugman notes that we are in the middle of a major food crisis, with the prices of staples such as wheat, corn, and rice skyrocketing, and he blames, along with weather and energy prices, biofuels.

As he so eloquently states, “People are starving in Africa so that American politicians can court votes in farm states”.

It’s a nice sound bite, but it is incomplete, which may be an unfortunate fact of life when one has only about 800 words to put forth an idea.

Simply put, there is much more to this problem than simply the currently minuscule demand for feed stock for bio-fuels.

First, he misses the very real possibility of worries regarding social unrest, possibly to the level of failed nation states from food riots, that may very result from this, which may be far more lethal the direct starvation deaths.^*

Major exporters, such as China, India, Egypt, Vietnam and Cambodia have introduced export restrictions to forestall this, which, of course, worsens the problem for net food importers.

More interisting is a Bloomberg article showing the problems in the market being akin to the current credit crisis. The reporting is mind boggling simple here telling , “Bad countries interfering with the free market by regulating their exports so that poor people don’t starve“, story.

The reality, and it can be teased out from the article, is that there is a lot of arbitrage generating volatility. The quotes are from rice traders, and they are wringing their hands. Let’s look at the various non-producing players in the market that were listed:

• Pfaffikon, Switzerland-based Mother Earth Investments AG
• Morgan Stanley Global Wealth Management
• Singapore-based rice broker Hermes Investments Pte Ltd.
• Padiberas Nasional Bhd.
• Global Commodities Ltd. in Adelaide, Australia
• Diapason Commodities Management SA

To the best of my knowledge, ot one of these companies owns a farm, nor processes the grain, they make their by extracting fees on trades, and while that can be useful to buy a contract for future delivery, the reckless Anglo-Saxon trading model that is at the core of the current credit crunch, where numerous people buy and sell contracts to generate trade profits is making things worse.

In fact, until we move back to depression era regulators to reign in this activity, it will continue to get worse.

^*Yes, I’m looking at this cold blooded construct, and realizing that it means for many people the end of the world as they know it.