Darn those evil speculators in food! You know, them, those men in offices playing with futures and derivatives in wheat and corn: they're starving the poor you know! For there is evil in the marketplace and we know where evil comes from: men in offices playing with money. Therefore the evil must be caused by said playing with …
More usually the name for the predominant grain crop, hence in UK wheat, US maize.
Is any grass based crop including Rice, wheat, maize, oats etc.
Only in American do they associate it with maize.
Beer in the English speaking world made from Corn.
In the American speaking world, warm cat's piss.
Missing the point,
Price / Money ... The lot!
It's all anti human. Have you lot not worked out yet that there is a better way to do things?
Profit over people, at every turn; it has to be that way. No matter what, companies have a "God" granted "right" to make a profit. It is how it is. It is the only way. Everyone knows that. Well, everyone that's never done a days thinking in their lives that is.
Sort it :)
[[ URL Removed - Just in case ]]
What else will cause someone to store up a load of food to feed the lazy who couldn't be bothered to store any? The lazy currently aren't hungry because someone stored it all up to sell another day.
The motivation won't be the gratitude of the lazy, because they don't have any and don't appreciate the effort it takes.
Self-profit is a good motivator. But if you want to remove that as anti-human, then it will come down to hunger, which means people need to start being hungry and start starving before they start having their own personal store.
Just as a reality check - do you have a large store of food ready to feed hungry people? Or are you just whining at those who do, but do it for "profit"?
except that it's not anti-human if you take the definition of "human" as how people will act when allowed free-will. I don't think anyone is relying on a "God granted right" to act one way or the other.
But what people really need is someone to appoint themselves as the arbiter of how we should all behave - for the common good, of course. Someone who is themselves closer to God, if you will. Morally more pure, fairer, altogether nicer and just generally better.
Is that it?
Where will we find such a person?
An article on the Food Prices Scare based on actual knowledge of economics as opposed to knowledge of inflammatory politicking?
A THOUSAND TIMES YES!
Whenever I hear “How banking speculation causes food crises” I know that in the end I would like to loosen a few teeth of the author with well-targeted punches to the face. Not in this case.
Words of wisdom
Excellent article, I'm sure anyone with even pass lay knowledge of economics would realise this.
Also, food is much more expensive to store/hoard than other commodities. A lot of foodstuffs degrade over time, are consumed by pests (try keeping a grain silo free of mice without tainting the grain), run the risk of being infected and rendered worthless by moulds or insects and are an extremely bulky way of storing value.
Indeed, it is more likely that prices are rising as more and more 3rd World residents move out of abject poverty and can afford to feed themselves and their families (i.e. China).
Let's hope Nicolas follows suit Gordon Brown. That guy neither had a clue about economics.
I'm all in favour of wheat price rises
As a coeliac sufferer, there is an awful lot of convenience (JUNK) foods that I cannot eat due to the wheat content.
If wheat becomes more expensive it is less attractive to food manufacturers as a cheap filler/binder/thickening agent so they find a cheaper alternative, corn or potato starch for instance.
Which leads to me being able to eat pringles again!
Spot price != purchase price?
What is missing in this analysis is the extent to which end-users of commodities (food manufacturers and distributors) buy long when they acquire stock. Since continuity of supply, and predictability of price is valued more than the price right now, I would contend that the losers in the "zero sum game" are thus the buyers who turn commodities into actual food. The stuff still goes from farm to factory, but ownership may have changed several times before then, so physical hoarding isn't necessary.
Remember when there was a flush of diddy petrol companies undercutting the majors? Apparently that was because they "bought on the spot market".
Oh, and shall I say "silver" and "cocoa"?
If the sum is zero, do half of the commodity speculation companies go bust?
"If the sum is zero, do half of the commodity speculation companies go bust?"
Because a significant proportion of the futures market is not speculators but hedgers.. I.e. organisations looking to ensure predictable cashflows in the future. e.g. company x agrees to buy 5000 bushels of wheat in June at a price of $900 a bushel.
When it comes to june perhaps the price of wheat is actually $850 a bushel so whoever the entered into the agreement with x is able to make a profit (by buying the wheat for 850 then selling to x for the agreed price of 900), company x in theory though does not care, because the point of agreeing to buy at a certain price in the future (for them) was to know with certainty the price they would be paying and be able to budget and balance their books accordingly without having to worry about the risk of the price of wheat going up too high
An opposing viewpoint
It seems that some people think the Prof. Krugmann is speaking b0ll0x
He's an imbecile, but occasionally he gets something right. I have a theory that it only happens when he's lifting passages out of an introductory economics book that someone else wrote.
Kudos on a great article. Printing, mailing to my local politician, with a note attached saying "read this, there will be a test on your understanding of it at the next election". Beer (not American carbonated cowpiss) for the author.
Nobel prize-winning imbecile, to you. But of course, you know better than everybody --especially those Scandanavian boobs .
These Scandinavian boobs of which you are speaking;
Their standards have fallen over the years to the point that a disinterested observer can make a very good case that their approval is a political payout for having the "right" attitude, rather than recognition of any accomplishments of a meaningful nature. While they do get it right occasionally, blowing their credibility on political meddling (that incidentally, has *nothing* to do with bringing peace to anybody anywhere) brings them to the utility level of a broken digital clock.
I'd take the money, but leave the prize on the podium. Got enough door stops as it is.
Krugman's just more proof of their tarnished image. If he'd grow himself a pair and declare that he's not an economist, but a social engineering advocate thinly disguised as an opinion columnist, then I'll give what he says all credence due a somewhat bombastic but malinformed opinion columnist.
Board Game Brokers
"Derivatives speculation, using futures and options, has less effect on prices."
Only if the market is healthy, which is to say only if large financial institutions avoid cornering the market via thousands of small, covert, bids in an attempt to buy up 80% or 90% of the market before anyone notices. With a cornered market, bought on the cheap, in what people foolishly thought of as a competitive market, the monopolising company use the power of the 80/90 percent ownership to drive up prices to suit their profit margins.
The general trend in food prices is an upward path due to India and China starting to take a western share of resources, but complete freedom to speculate is being abused and is responsible for spikes in prices... unless we believe the third world has sudden crazes where every kid must have a bag of rice/grain.
It's all very well cornering the market...
and owning 80/90% of the stock, but if you are going to realise that profit, you actually need to sell some of it and thus drive the price back down again.
...and for markets selling raw materials for electronic goods there would be a risk unless the monopolising company also runs hedge funds to ensure a certain level of return (see comment above), but people got to eat.
Anywho, such naked and bloodless greed might not have been all bad, it might have indirectly motivated some democratic movements in North Africa.
Am I missing something?
On one hand speculators don't starve people, they help them (but all those large fees and profits are payed by the consumer in the end aren't they?), and on the other hand starving them is good because it leads dictators being ousted?
You can't have it both ways.
My guess is that starving them will lead to speculators being ousted, and it won't be pretty.
title is in the post
Good sensible explanation of how commodity markets can be beneficial and speculation can lead to more stable, predictable prices rather than just the opposite. If economics became more like a real science perhaps ideological kneejerk reponses would become less common. NGOs need to consider how the world *actually* works, not how they think it ought to do, and Adam Smith's name certainly needs rescuing from the totalitarian simpletons of the Adam Smith Institute. Unfortunately, common sense is anything but common!
"and Adam Smith's name certainly needs rescuing from the totalitarian simpletons of the Adam Smith Institute."
Thanks for that, says your humble author, who is himself a Fellow at the Adam Smith Institute.
Yves is not saying he's talking bollocks there, rather that he's being a little simplistic. Measuring how much haroding is going on is indeed very complex: who actually is hoarding? The guy with the extra loaf in the freezer? The baker with two week's flour instead of one? She's not disagreeing with hte basic point, that only if hoarding is happening can we say that speculation is increasing spot prices, rather, that measuring this is complex.
For example, fun fact (although possibly apocryphal) the petrol tanks of the US have more storage space than all of the oil industry in the US. I'd say it was equally possible that the larders of the UK have more storage space for baked beans than the entire industry produicing them does.
@ Tim Worstal
"Thanks for that, says your humble author, who is himself a Fellow at the Adam Smith Institute."
Then you of all people should know that Adam Smith was in fact Scottish / British, not English.
As an economist, Tim naturally speaks in terms of averages.
On average, speculation generally stabilises the price of resources. On average, but not always.
The example of "hungry weeks" is all well and good, but this is a predictable cycle. The future state of the world grain market is not predictable, thus there is no guarantees here. Speculation in the truest sense of the world.
Tim seems to be suggesting that value is determined by simplistic supply and demand. But isn't there also the notion of "perceived value" that we take from not only current prices, but future predictions as well?
OK, so the biggest factor in the high price of grain is overconsumption in rich countries, but that doesn't mean speculation has no effect whatsoever.
you would have thought....
that the arrogance of economists, with all their smart risk mitigating strategies, that mere mortals such as my self could never hope to understand, would have diminished somewhat _WHILE_ the world economy was still disappearing up it's own arse - as a result of all their cleverness...
Everything Tim has written is quite correct (as befits someone who knows economics), however, part (most?) of the reason for the rise in rice prices in 2008 was because producing countries closed their borders to exports, exacerbating the fear of shortages in importing countries and fueling local price inflation in those countries.
This is an issue relatively specific to rice because, although the vast majority of the crop is consumed locally, export trade is critical to provide the shortfall in a few importing countries and the traded price ends up being translated into the local price. if you go back and look at where there was unrest in 2008, it was only in a few countries which were importers of rice and this followed the closing of export markets from countries such as India and Thailand.
At the same time, Tim points out that the traded price is not the same as the futures prices and should not have affected them. It is only when politicians start reacting to futures prices that trouble happens!
Some derivatives are...
...zero sum: "[snip] For everyone going long (betting on a price rise) someone else must have made an equal and opposite bet going short (betting that prices will fall)...."
...unless I buy an option contract on the price of a commodity rising or falling. I can exercise the option or not. If the price goes in the direction I bet it would I re-coup the cost of the contract and buy/sell the contract at the current price and make money. If the price doesn't go that way I don't exercise the option and lose the money to place the option but nothing more and no one else gains/loses.
So kind of a wager (or insurance policy!?) based on my knowledge of the market, but no zero sum dynamics anywhere to be seen.
Just to say....
Paris, because she might..... or might not :-/
"If the price doesn't go that way I don't exercise the option and lose the money to place the option but nothing more and no one else gains/loses."
If you don't exercise the option, then whoever you paid for the option now has what was previously your money. You've lost, they've gained.
If the money simply disappeared in a puff of smoke, then that would reduce the supply of money without reducing the demand, thus increasing the price of money (admittedly by an infinitesimal amount), which would make the money that people still have increase in value (again, by an infinitesimal amount, but an increase just the same, and therefore a gain).
"unless I buy an option contract "
But someone has to sell you that option contract which means, by definition, that they are taking the opposite bet. You can only make the profit that they lose and vice versa: zero sum.
Maybe if Niko didn't support the turning of a large proportion of the grain crops into ethanol 'green' fuel then he wouldn't have anything to dance about.
Actually I recall reading an article which showed the price increases
in wheat more closely followed the increase in the price of gas/petrol than its conversion to ethanol, and that the quantities of grain sold for food production didn't vary much.
But I suppose many people find it more satisfying to blame it on ethanol. Not that I myself think ethanol is a good fuel additive (it actually increases certain pollutant emissions, reduces the energy density of the fuel, and primarily seems to benefit ADM, not the farmers producing the corn). I just prefer to keep my facts straight.
Where the rubber meets the road
All well and good, from an economics and monetary point of view, but reality has a harsh way of dealing with (some) people who mistake the map (money) for the territory (food, etc.). Others profit handsomely.
There is no way to accurately predict, say, a drought in Russia, floods in Australia, political turmoil in Ivory Coast (re: chocolate), etc. ttuk speaks of hedgers, as opposed to speculators, who (IMHO) do provide that valuable economic service. The rest are just trying to run up the price, so as to profit. In the US, the price of wheat has little effect, since it's a very small part of processed food (other costs include other ingredients, packaging, distribution and advertising). But if you are living on, say $300/year, such price rises affect you deeply. The profit of someone in Chicago matters not to you, and you will see such a person as hurting you — despite other natural causes, diversion to other uses (biofuels, etc.), demand growth, etc.
Supply, as regards food especially, is not infinitely elastic. (Reminds me of a client of mine who learned that virtual memory can increase usable RAM space. He converted his whole drive to VM and then wondered why his system ceased to function.)
Perhaps we should add Malthus to our reading list, along with Smith...
Stupid story - reminds me why I prefer the Inquirer
Kudos to who wrote this comment:
"I would contend that the losers in the "zero sum game" are thus the buyers who turn commodities into actual food. "
Since these buyers are not in it to lose money, the real losers are us all, especially the poor.
This story is flawed on so many levels. It basically ignores the fact that injecting too many traders, *all* (on the whole) making money through speculation, into a supply chain eventually results in the actual end-buyer paying much more than they should. Remember the money the traders earn *has to come from somewhere*.
The second silly part of this story is the lauding of the same overloaded market processes -- criticised in the GFC-- as necessary for people to watch what they eat!
Does the author think everyone in the world is an overweight American (or Briton)? This is food we are talking about -- there isn't much elasticity of demand - remember, we're talking wheat not caviar. The overweight people of the world will simply get cheaper ingredients in their junk food. The ones who will suffer the most are the poor and hungry of the world.The author just glossed over this.
Finally, a small quibble --what's with the comparison with DRAM markets (don't we have a glut there? is that caused by speculators too).
Speculation adds to market, er, efficiency
All right-thinking commentators assure us that the speculative markets did wonderfully well in ensuring that demand and supply for housing in the USA ended up stable too. They did, didn't they? :-o
On the other hand, some foolish observers would have us believe that they ended up in many people losing their homes in the USA, and landed major financial institutions in a global financial crisis that almost set off another global depression. Really! Some people do have extraordinarily overactive imaginations.
Price != Value
I know Wilde was talking about cynics "knowing the price of everything and the value of nothing", but it always struck me as being more aptly applied to economists. And speaking of quotes about economists, here's my favourite:
"An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today." - Laurence Peter (he of the Peter Principle.)
And Perlcat, for someone who scorns bombast in Krugman, try taking out the beam in thine own eye.
So what you're saying is that even though hundreds of thousands of normal, innocent people's lives were ruined by the greedy few who caused the recent housing crash, those who caused the crash are saints, because what they really wanted to do was bring down the price of housing, which was going too high?
They screwed billions out of ordinary Joes as an act of kindness, because the Joes needed their lives to be ruined, right?
The argument you put (not very lucidly or well, by the way) has been put time and time again -- but only ever by people who want to get rich at the expense of other people.
Greed is /Never/ a good thing, because a way has never been found to stop it becoming excessive -- the more you get, the more you want; and the brakes don't work.
Well, I just hope that the next crash -- which might well be caused by people who read your words and take them to heart -- doesn't leave /You/ as one of the people who loses his home, his livelihood, and his family because of it.
No. I take that back.
I hope that the next one /Does/ get you. Maybe that way you'll learn.
Interesting, millions got screwed out of houses they couldn't afford, but was that caused by speculators?
I dont know about Euorpe, but in the US there was a concerted governemnt policy to try to put people into homes (without regard for ability to fullfill the end-terms of the loan). (In the US atleast) This was caused by a series of failures of leadership, in all administrations (both parties) since atleast Bush Sr.'s term in 1992 (when he signed a bill to try and enforce "affordable housing goals"). In 1999 under Clinton, pressure was applied to encourage provideing loan in the inner-cities. Then Cliton, wisely forseeing the problems he had created, made an attempt to reign in "preditory lending practices." Had this survived Bush Jr. in 2004, it probably would have controlled the meltdown somewhat. But the Bush Jr. administration favored a full overhall, which likely would have also midigated the houseing crisis had it been able to pass. There was bright-spots in the efforts of both parties, but not enough to overcome the mistakes.
Yes the meltdown lead to callateral damage (those who could afford their morguages, but lost their jobs).That is unfortunate, but equally unfortunate is that it was caused by billions of "ordenary joes" who couldn't put together a proper budget.
Now here is my personal history throughout the whole situation:
Throughout the lead-up, I never considered my income enough that I could afford to buy a home. The only way I would have been possible, would be with a "balloon loan" or an Adjustable Rate Morguage., which I (rightfully, in retrospect) concluded would result in my being unable to pay eventually, so I never bothered (My thought was that a home should be I intend to live in, I didn't want to speculate on it's value rising when I went to sell it (hmm... my boss says I'm old-fashtioned. Maybe he's right)). I COULD, I just came to the conclusion that I SOULD NOT.
When the crash hit, suddenly there was a large influx of cheap housing. Mostly (at the beganning atleast) of people who should not have purchaced houses at all, at least not under the terms they did. Suddenly the cost of houses had fallen to the point where I could get one, under a Fixed Rate Morguage. I've had people ask " well what if the people who hold your note fail?" To which I reply "Then someone will buy it when they fold, my terms don't change. If noone wants to, I might offer them pennies-on-the-dollar for it. I've fullfilled my part of the terms, They have no rights to foreclose."
Maybe I'm an evil speculator, maybe I'm just old-fashtion. I'll leave determaning that as an exersize to the reader, but maybe, too, some more of the averice, needs to be attributed to main-street (where "Ordenary Joe's" lust for possessions overcame his sense), and less to to wall-street (who still have some blame for not properly realizing they where trading in junk bonds).
"So what you're saying is that even though hundreds of thousands of normal, innocent people's lives were ruined by the greedy few who caused the recent housing crash, those who caused the crash are saints, because what they really wanted to do was bring down the price of housing, which was going too high?"
the actual _cause_ of the crash was surely the boom that preceded it. That was caused by banks lending without checking whether people could pay and also by government policy of keeping credit cheap. But lets not forget all those millions of people who joined in the boom willingly by buying to let, getting interest only mortgages (in that case the bank really does own your house) and generally living off credit. True, more people have suffered than caused the problems (isn't it always thus?), but more people caused the problems than just the top brass at Goldman Sachs and Lehman Brothers.
I think you want to look a bit more closely at what caused the credit crunch. It wasn't just people irresponsibly taking out mortgages that were beyond their abilities to repay.
Had that been the problem, it could have been solved by rescheduling and/or direct subsidy that would have been much, much cheaper than the bank bailouts. That would have been politically repellent in the US, so may never have been possible. But what blew up was the chained successive fraudulent transactions, derivatives and insurance liabilities and ratings scams that followed on from the (often missold) initial mortgage. That managed to leverage a limited potential liability for bad debts into a financial catastrophe of unknown dimensions.
You cannot blame innumerate ex-trailer-park optimists who failied to read the small print for that. Nearly destroying half the world's banks took the vast perfidy of expert professionals, as they Ponzi-schemed dodgy crap into a bonus-winning mega-wheeze.
I mean, JPMorgan, who invented CDI's, knew it would blow up and got out in early 2007. Goldman Sachs shorted their own customers who were silly enough to buy their fake-rated derivatives. These cynical bastards knew what they were doing and just thought so long as someone else got stuck with the downside, that was fine. The US public, and the great recession [tm] as it turned out.
Oh right, good story.
Dropped the ball here reg. not up to your standards this is a joke. It's not funny though mate, how about this for an angle; we stop profiteering on food altogether so those African kids don't become like sticks and we can all access something to which we have a right. I'd hit food profiteers. Yeah not on lucozade and stuff but those who profit on commodities. I'd just hit 'em when I see 'em.
The poverty of theory
The spot price of oil rose from ~$82 to $102 and then today settled back to $85 over the 18 day period of the Egyptian revolution. That wasn't caused by any significant real disruption to supply nor change in demand..Something is missing from your idealised picture.
I think it was Roubini who assessed a decade ago that the volume of money exchanged daily in the worlds various stock, futures, derivative, bonds and forex markets (then) exceeded by a factor of 10,000:1 the worldwide volume of actual, real trade for goods and services. As he said "that is the economics of the madhouse. All those unreal transactions generate fees and loan interest for banks and brokers that can only be passed on to the real economy one way or another - either as price inflation or currency debasement or debt that must be repaid by someone somewhere.
Unpredictable scarcity is profitable; the more volatility, the more trades and the more profit there is to be made from fees. Specially as the banks have access to basically unlimited almost-free stake money via QE programmes, a speculative bubble here, a small crash there as the majors game the markets. TBTF, they know that if they f$ck up it's our problem and wallets at risk. Far from zero sum, this is now an end game as wealth inexorably flows from the poor to the rich by multiple routes - commodity prices, debt interest, taxation, asset and currency devaluation. All of which chokes real growth which is the only way out of this mess. It will end badly, and it won't be long..