A number of of studies by respected institutions such as MIT, Yale, University of Chicago, Citigroup, Deutsche Bank, Oppenheimer, IMF, UNCTAD, OPEC, G8 finance ministers and more have shown that excessive speculation in commodity markets was an aggravating factor in the 2008 food and energy commodity bubbles.

A partial list of these studies is at http://accidentalhuntbrothers.com/?p=661.

Yes, there were clearly supply and demand factors involved, but the deregulation of the commodity markets, especially in the U.S. in 2000 with the CFMA led to out of control commodity markets.

The U.S. financial reform bill does a decent job of addressing the problem, but more needs to be done.

Tim adds: CFMA having anything to do with it sounds most unlikely. I mean, have you actually bothered to read the Act? Firstly, it largely simply codifies the ad hoc arrangments that had grown up before its passage. Secondly, those few departures from previous practice did not extend to agricultural products or derivatives.

Further, the list you direct us to is specifically about oil prices, not agricultural or soft commodites.

Finally, you absolutely have failed to understand the important part of my critique. Which is that even if it was all simply a bubble driven by financial speculation (caused, as you agree, at the beginning, by real supply issues but which then got out of hand) this is exactly what we actually want to happen. We want speculators to move prices in time, we want prices to rise in the face of supply problems so that consumption is constrained and supply encouraged.

Even if it was a bubble driven by speculation, what happened is exaclty what we wanted to happen.

So should we just take your word on that?

“We have put our faith in something most people don’t understand.”

Are you talking about global warming again?

Bio-fuel production shouldn’t be allowed when it is just to provide luxury for the west at the expense of people eating in the global south. Also, most bio-fuels actually use more energy than to produce than they provide.

Another point is that it is the food corporation middle men that make money. The markets do not protect the farmer.

http://vimeo.com/12258201

Adam Smith’s invisible hand doesn’t always work and isn’t always appropriate. Otherwise we wouldn’t live in a world where people starve even though there’s enough food.

Finally, part of the point of the article is that economics has become so convoluted is hard to understand. We have put our faith in something most people don’t understand.

In fact the government has been discouraging this for centuries

http://en.wikipedia.org/wiki/Poitín

… of the futures price of wheat, corn and soy when:
“The 2005 Energy bill mandated that 4 billion gallons of renewable fuel (mostly corn-based ethanol) must be added to the gasoline supply in 2006. That amount rises to 4.7 billion gallons in 2007 and 7.5 billion in 2012. This still represents a small fraction of the estimated 140 billion gallons of gasoline the US consumes every year. But it is the subsidies and tax credits that have made this ethanol market what it is – without government interference, consumer-driven demand would be nothing and the ethanol market would be SIGNIFICANTLY SMALLER.”
http://www.dailyestimate.com/article.asp?id=8756

It is always amazes me how historical facts are seemingly “forgotten” in pro-Green arguments.

- There is a market for financial products as well as a market for foodstuffs. All sort of funds started ‘diversifying’ into soft commodities derivatives around about the period under discussion for a number of reasons (China demand, biofuels, liquidity looking for a home). Expectations were that prices were going to go up. These expectations backed by speculative demand helped ensure they did. (As an aside, financial and physical markets can move out of sync for periods and for that reason price signals in futures markets don’t always tell you what you think they might. In this instance, farmers may have been sceptical about investing on the back of a bubble. Similarly, oil companies never discounted their projects on a $150/barrel basis).

- The supply of agricultural products is sticky, i.e. it takes up to a year for supply to respond to demand (growing stuff takes time). In this delay people can starve: prices remain high and consumers can find themselves unable to buy as much as they need. In the medium term there may well be plenty; but in the medium term they’re dead.

For these reasons Hari is on to something. He might not be able to express why but nevertheless, he is.

However, if one were to decide the state of affairs prevailing at the that time was unsatisfactory, it’s not easy to work out what should have been done. Put up interest rates and restrict credit would be one solution – as we know to our cost, the liquidity that was sloshing around the world back then fuelled a number of speculative frenzies. Not all of them killed people, however.

Who the f*** is Hari to object?

But people did starve. So I think saying that having a futures market provided “exactly what we wanted” is clearly a little off base.

“They’ve reduced demand, increased supply and thus solved the looming shortage of wheat.”

Well, they managed to ‘solve’ the shortage without solving the problem of people starving. Well done them I guess?

Equally the production of potatoes is a specialised affair. You need a) particular type of land (deep stone free soils) and b) large expensive machinery. So from year to year the area of ground under production remains pretty constant.

Whereas grain production is easier – all you need is a plough and a seed drill, and any old bit of land can be put into production, if the price is good enough. Grain is traded internationally. there are facilities to import/export grain at all major ports. So the demand for grain is international, and the supply also. Grain used in the UK for bread making may come from Canada (harder milling varieties are easier to grow there) whereas softer animal feed varieties grow well in the UK, and are exported elsewhere.

Thus the grain crop is subject to much greater international demand/supply changes than the UK potato crop, making its price much more volatile.

Also no-one was suggesting using potatoes as the feed stock for ethanol production, as was not only the suggestion in 2006, but actual reality – several plants have been built in the UK, and many others planned. I’m not sure if they have made it into production yet, or ever will do, but they actually exist. This was a driving force behind the rise in grain prices.

Why would you expect him to know anything about finance and economics other than how big his paycheck is?

As Professor Ghosh points out, some vital crops are not traded on the futures markets, including millet, cassava, and potatoes. Their price rose a little during this period – but only a fraction as much as the ones affected by speculation. Her research shows that speculation was “the main cause” of the rise.

Also, can you explain why the losers in this case are not the farmers selling the grain and the bakers buying it, surely they have to participate in market at some point?

Tim adds: You’ll note that those are three crops that no one is trying to turn into petrol perhaps? And why are the farmers losing? The price they get for their grain has just gone up!

through the 1990s, Goldman Sachs and others lobbied hard and the regulations were abolished. Suddenly, these contracts were turned into “derivatives” that could be bought and sold among traders who had nothing to do with agriculture. A market in “food speculation” was born.

I seems to remember a slightly amusing movie called trading places. It was all about people with absoloutely no connection to agriculture who speculated on the prices of certain agricultural products (pork bellies, wheat, frozen concentrated orange juice) . It was made in 1983 and implied the practice was quite long established even then.