I have to admit that this doesn\’t fill me with a great deal of optimism:
The World Development Movement is one of the most dynamic and successful NGOs I have known. I salute WDM!\” – John Pilger, journalist
Nor does this:
We do not give aid, and we do not run projects;
A talk shop for teenage Trots then. Still, let\’s have a look at their report on futures speculation in food markets.
At this point in this blog post I haven\’t read any of it. My assumption though is that we\’re going to find out that people having been using money. Yes, lucre. Fat people, bankers. Hey, some of them are men and Eeek! there might be some white ones too.
Thus, what it is that they\’re doing is bad M\’Kay and everything would be better if they didn\’t exist.
So let us read on…..
Nowhere was this more clearly seen than during
the astonishing surge in staple food prices over
the course of 2007-2008, when millions went
hungry and food riots swept major cities around
the world. The great hunger lottery shows how this
alarming episode was fueled by the behaviour of
financial speculators, and describes the terrible
immediate impacts on vulnerable families around
the world, as well as the long term damage to the
fight against global poverty.
Already, we wonder….will they say that it was the speculation that started it all or was the speculation a resonse to idiot behaviour by governments? Hold your breath to find out!
But at its heart, The great hunger lottery carries a
very straightforward message: allowing gambling
on hunger in financial markets is dangerous,
immoral and indefensible. And it needs to be
stopped before any more people suffer to satisfy
the greed of the banks.
Seems unlikely that they will blame the biofuels thing really, doesn\’t it?
In this report we argue that part of the reason
for the spike in food and other commodity prices
was financial speculation. Speculation rides on
the back of underlying changes in supply and
demand, amplifying their impact on price.
Rilly? worth looking up onion futures don\’t you think?
Between 2006 and 2008 it
is estimated that speculators dominated long
positionsi in food commodities.
How interesting….remember this little point.
In 2007, Goldman Sachs research was
telling markets that increases in food prices
were due to structural reasons and prices werelikely to continue rising;22 ie. putting money into
commodities would be a good idea.
And that one.
Ooops, naughty me. I did them a disservice:
Financial speculation is not the only cause of
high food prices, and certainly was not the sole
driver of the 2007-2008 crisis. Changes such as
increased use of biofuels, changes in crop yields
and the fall in the value of the dollar have all
affected prices in recent years. Certainly, these
factors affecting the ‘fundamentals’ of food
prices had a significant bearing on the events of
2007-2008.
OK, we agree there then.
But an examination of the evidence
during and since the 2007-2008 crisis leads to the
inescapable conclusion that speculation rides on
the back of these underlying changes, amplifying
their impact on price.
Not sure about that last clause but would agree with the rest, yes.
Donald Mitchell at the World Bank argues that the
main trigger for the spike in food prices was the
increase in biofuel production from grains and
oilseeds in the US and EU. He argues that without
the increase in biofuel production “global
wheat and maize stocks would not have declined
appreciably, oilseed prices would not have tripled,
and price increases due to other factors, such
as droughts, would have been more moderate.”
However, he acknowledges that speculation was
part of the reason for the price spike, but that
without increased biofuel use it “would probably
not have occurred” because it was a response
“to rising prices.”93
Biofuels have certainly increased demand,
particularly for maize. The proportion of maize
used for bioethanol increased from 4 per cent in
2001/02 to 12 per cent in 2007/08.94 Biofuels
have therefore had some impact on the general
rise in food prices. Biofuels would be particularly
expected to impact on the price of maize, although
this would then have knock-on impacts on other
foods. However, the price of wheat actually
increased first in 2007 (see Graph 4 on page 22).
Demand for biofuels remained strong and
continued to increase throughout 2008 and 2009.95
It is therefore difficult to see how biofuels can
explain the sharp fall in food prices in mid-2008,
and so the sharp increase in 2007 and 2008.
Increased use of biofuels does cause food prices
to rise, as well as having large negative impacts
on local communities and increasing greenhouse
gas emissions. But increased demand for biofuels
does not explain the huge swings in food prices of
recent years.
Again, they\’re right here. Increased demand for biofuels dosn\’t explain the swings….and speculation does explain the swings.
Global grain production did fall in 2006 by 1.3 per
cent, though increased by 4.7 per cent in 2007.96
Shortfalls in wheat production were higher,
with a fall in production of 4.5 per cent in 2006,
followed by an increase of just 2 per cent in 2007.
Wheat production then increased by 14 per cent in
2008.97 Such changes, and their knock-on impact
on grain stocks, offer some explanation for
gradually increasing prices in 2006 and 2007. But
they offer little explanation for the huge changes
in grain price in 2007 and 2008, compared to 2006.98
The UK government argues that low wheat yields
were a key factor behind the 2007 and 2008 price
spike. They argue that earlier in 2008 food prices
continued to rise because of uncertainty over the
2008 wheat yield. The bubble then burst in mid-
2008 once it was clear wheat production was high.
However, early in 2008 it was still expected that
the wheat yield would be 7 per cent higher than
in 2007.99 There was no sudden moment which
would explain the rapid fall in wheat and food
prices in mid-2008. Yields offer an explanation for
a general rise in price through 2006 and 2007, and
a fall in 2008. But it is unclear how they explain
the large spikes and fluctuations in price.
Yup….and speculation does explain all of those price moves. Perhaps they\’re not as dumb as I thought?
The knock-on effects of speculation can be seen through a range of commodities. Very little rice
is traded on international commodity exchanges or in futures contracts. Yet the price of rice
increased far more than that of wheat in 2007 and 2008. This is given as a key argument by those
who argue speculation had little impact on the price of food in 2007 and 2008.
The international market for rice is very small; about 6-7 per cent of global production.102 As the
rice price rose, key rice exporters such as India, Vietnam and Thailand introduced export bans
to protect rice availability for their own people, making the international market even smaller.
The rising price also probably prompted households to buy and store more rice, in anticipation
of rising prices, but also causing prices to rise further. Intervening to protect the food supply of
their own people is a necessary and legitimate response from governments to wildly fluctuating
global markets.
Some commentators point to rice to show that financial speculation was not a problem, but
rather blame ‘protectionism’. It is undoubtedly the case that the reason the global rice price went
so high was due to the factors listed above.
Snigger. They seem not to realise what they\’re saying here. OK, so something, whatever it was, set off food price rises in 2006. On the back of that various speculators turned up trying to make (or avoid losing) a buck off this. In those commodities where there are deep and wide markets for financial speculation there was price movement x. In those commodities in which there are not deep and wide markets for financial speculation, in markets where such hedging and speculation could only be done by actual spot purchases, spot hoarding and spot storage, the price movement was x times some positive integer.
That is, the presence of these deep and wide financial markets for financial speculation reduced price volatility.
Yes, they are as dumb as I thought they were.
Their actual demands, that derivatives all be traded through exchanges rather than over the counter….well, sorta. No real objection, other than that there are some people who need OTC because they\’re trying to hedge something which an exchange simply doesn\’t offer. Longer horizons perhaps (say you were developing a thousands of hectares farm in Africa. You\’d like to hedge a few years out to start with….then you might be happy to go to 12 month contracts as you go from harvest to harvest) or even contracts in something which an exchange doesn\’t offer contracts in: say tea versus coffee prices?
The other one is position limits which is simply nonsense. Position limits for any one trader, sure, you don\’t want market corners (do note that their suggestion wouldn\’t have stopped Anthony Ward as he took delivery) but not over a market as a whole.
But the real problem is that they\’ve simply not thought through what the value of having speculators around is.
That is all fully explained here.
Yes, the food markets were fucked up by greens, Greens and governments insisting that food should be put into cars not people. That meant, as they agree, a possible shortage of food for people in the future. Loadsamoney knobjockeys then piled in to try and profit from this. The end result was what we all actually wanted to happen. Higher production, lower consumption and food prices fall back. This isn\’t despite speculation, it\’s because of speculation.
Those fat, white, male bankers, thinking of nothing but filthy lucre, managed to undo, in only 24 months, the damage inflicted upon the poor of the world by the fuckwits that thought up biofuels.
No, I really didn\’t expect teenage Trots to understand that. But wouldn\’t it be wonderful if more did? Manage to grasp that markets unadorned do indeed work around, solve, remove the sting from, the cretinous plans of teenage Trots?
“…2007-2008, when millions went
hungry and food riots swept major cities around
the world. “
Do they name those ‘major cities’?
Or are they missing the word ‘third’ out of that sentence?
Because a majority of speculation is on commodity deals that never transpire, and are never intended to, this is like saying that betting on a horse makes it run faster or slower.
It’s a bit like praying for something to happen, really.
What is the exact relationship between current price and future price? There is lots of stuff around alleging that speculators control commodity prices by buying futures contracts but I’m not sure how it works exactly.
As I understand it higher future prices shift demand into the present (people want it now, stockpiling happens), while shifting supply into the future (producers gear up to produce more to take advantage of the high future price). So you get a price spike followed by an adjustment of supply and demand to take account of the new conditions.
Is it possible for speculators to take advantage of the price spike?
You’re obviously an awful lot more right than they are. But what about the point I made under your cocoa-related post?
You may not have bothered responding as you thought it was too daft (unfairly, of course) – but, hey, that doesn’t usually stop you does it?
Anyway, here it is again:
If cocoa farmers do respond to this particular price signal by increasing production it would probably be a bad thing. After all, in itself, it’s not an indication that demand through consumption has increased. Therefore, any consequent increase in production would be more likely to result in a glut and a collapse in prices. For the producer who hasn’t had a great harvest this could be disastrous. So thanks for that Mr Ward!
You seem very Panglossian about markets in foodstuffs. Agriculture is one area where their operation is perhaps most often problematic. Supply is sticky and exposed to industry-specific risks. This means price signals don’t always produce an acceptable equilibrium in an acceptable time period – and because the end product is food that can be a disaster. In the long run things are more likely to work out – but JMK’s dictum was never more accurate than in this instance: by that time the consumer may be dead.
Hedging is obviously a huge boon to farmers and a way to address these farming-specific risks. But when the item being hedged becomes too much a financial commodity and ends up being chased all round the place by a wave of liquidity, price signals can get screwed.
Please don’t get me wrong: I’m very much in favour of free markets. But I don’t have any ideological conviction that they can do no wrong. After all, they’re people.
Tim adds: I would never try to claim that markets could do no wrong: nor that they never fail. However, what gets me here is two things.
1) The clear and obvious attempts to blame spculators, markets, for the food price rises a couple of years back. When it was, in fact, the people doing the blaming who were at fault. The FoE’s, the Greenpeace’s, the idiot politicians.
2) The immediate assumption they make that, even if they’re correct (which they ain’t) that “regulation” by omniscient and well meaning people/bureaucrats is the answer. It’s not just that that’s exactly how we got into this mess it’s that the whole of history is littered with proof that the usual alternative to market failure is not good government but bad government.
I broadly agree with both your points.
However, the cocoa speculation seems so huge that it’s bound seriously to distort price signals (at least to the extent that they’re an expression of supply and demand for the commodity as consumed). Farmers, not being stupid, may well therefore ignore this spike in planning their production – but then perhaps the underlying demand suggests we do need more production. Who can know in this situation?
Re a couple of years back, I think the problem as a whole was as much to do with excess liquidity as with biofuels, etc. So many markets went so bonkers back then – and under so many different regulatory regimes, from light touch to, er, heavy touch – that there must be a common explanation.
God knows how one would try to address this in the future. More cynical and sadistic central bankers? Or stop rigging the market for money? (But then that really would be the day you might consider putting your feet up…)
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 in 2000 (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.
David Kane:
Why not simply elinate markets in such things entirely? It would seem a logical extension of the “regulation” process (and, moreover, the only way to actually eliminate what are seen as “abuses” of the system).
I hesitate recommending that all fluctuations in either “supply” or “demand” simply be criminalized and those responsible subjected to harsh penalties. But that makes as much sense, if one’s goal be equilibrium (and why souldn’t it be–it’s only “fair,” ain’t?)
Gene,
I would agree that commodity indexes and ETFs should be banned. Limited, traditional speculation is helpful to commodity markets. It’s when they grow to dominate the market, or use commodities as long term investment tools that they throw the markets off.
You may agree, David, but only with yourself and others who are suspicious of markets with all those speculators driving up the prices of all those things that so many poor folks need to exist and driving down the prices of all those thing upon which worthy farmers and peasants depend upon for their livelihoods. Mostly, I see winners makin’ a pile and losers emptying their pockets into that pile, while meanwhile, both consumers and producers get some advantage in the form of more predictable prices around which to arrange their varied activities. Who is being discomfitted by the ability of more, rather than less, people to express their opinion–put their money where their mouth is, so to speak, even if its no more than a sporting- wager kind of action. Getting right down to it–isn’t an epitome of democracy in action with respect to other importanrt things than laws to give as many as possible their shot at moving the market right where they’d like it (whether they actually can or not?).
Truly, I cannot see a sound reason for regulation whatever of markets beyond assuring fulfillment of contracts and a reasonable freedom from the little fleecings commonly enjoyed by auction professionals. Even the latter is subject to the market. Suckers who don’t know they’re suckers wouldn’t see any need for regulation anyway, and, as long as there’s competition in market-making, the more knowledgeable will seek the better, straighter outfits. What’s not to like?
I lost my blind faith in the market long ago…
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