Speculation and World Food Prices

Yesterday was World Food Day, and NPR has a good piece about the role of speculation in food prices:

The economists argue that increased trading is a significant part of the reason grocery prices are higher this year.

And grocery prices are indeed up this year. For example, in August, the average price of bread in U.S. cities was up 17.4 percent over last year, while milk was up 12.4 percent, according to the latest report from the Bureau of Labor Statistics.

Brandon Kliethermes, an agriculture economist with the forecasting firm IHS Global Insight, agrees that speculators do increase volatility -- exaggerating price moves up and down.

"These markets have been bouncing around quite a bit for the past year now," Kliethermes said.

But not everyone agrees price speculation is the root of the problem. Economists have yet to find clear evidence that financial speculation can change food prices over time. Searching data for any meaningful price manipulation is very hard to quantify, Kliethermes said.

i think there's definitely a case to be made for restricting food speculation, but I also think that trying to separate out market speculation from the role of energy prices or fundamentals in a tight market is somwhat hopeless - the reality is that investors will probably always be attracted to things people still need to buy in tight economies - oil and food are essential, and when other parts of the economy are unstable, good old food and energy are going to be draw.

My own proposal here would be not to outlaw commodity speculate, but simply to mandate that all buyers take delivery of what they purchase on commodity markets, and to determine that food commodity sales cannot take place until the previous purchaser physically holds the goods. My guess is that in many cases the problem would be obviated simply by requiring that speculators actually take delivery of, say, 100,000 tons of soybeans.


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I think a better way to curb speculation would be to impose a per-transaction charge of 0.1% and use the funds collected that way to subsidize food or fertilizer supplies to impoverished regions.

For those who need to use futures markets to mitigate fluctuations in prices, a 0.1% fee is negligible compared to the fluctuations they are trying to mitigate. For speculators who churn their accounts when prices go up or down a fraction this per-transaction fee would be a killer.

The fluctuations in the wheat and flour markets are much more than the profit margin of turning wheat into flour. What flour mills have to do is when they contract to provide flour at a certain price in the future, they have to buy wheat futures for delivery at the right time to make that flour.

The cost of turning wheat into flour is the capital cost of the flour mill and the labor to operate it. That is much smaller than the fluctuations in the wheat market.

Defined loosely enough, your requirement that the physical purchaser "physically hold" the goods just means that warehouse or silo lease just transfers with the commodity contract. And wouldn't change a thing other than legalities. Defined strictly enough, not even the final purchaser "physically holds" the goods. They have the goods shipped to a processing site, possibly leased, that produces end products sold on down the chain.

This argument that speculation and trading/over trading of futures contracts drives up prices makes me crazy.

We *always* have speculation and greed in a market. We had speculation in the late 1990s when oil prices were virtually at historic lows. Were we to believe that there was less greed and speculation in 1998 than say, 1991, or 1980, when oil prices, (adjusted to contemporary dollars) were much higher?

Speculators only push prices around short term, at best. If a market is supplied to over-supplied with a commodity then the price goes lower and speculators can't do a thing about it.

Imposing limits on who can trade commodity contracts might even out the very short term price blips a bit, but doing so might also create unforeseen, localized shortages and surpluses of a particular commodity.

I don't have any skin in this battle. I mean, it's not as if I flipped 100 crude oil or wheat contracts last month. :-) I'm just saying....!

By Stephen B. (not verified) on 17 Oct 2011 #permalink

Stephen, that's a rather silly and simplistic attempt at rebuttal. Forget speculations about whether people were "more greedy" in the past. Tight supplies and greater power and concentration of wealth allow speculators to have more harmful effect. And in any case, I'd rather tax their worthless flipping to some extent than raise earned income rates, etc.

It seems to be closely connected to the fact that US/EU governments are providing massive subsidies to tirn perfectly good grain into unnecessarily expensive oil.

This particular ecofascist wheeze probably appealed because the farming lobby also liked rising prices. Yet another instance of how the entire ecofacist scare story is of considerable benefit to the relatively small number of beneficiaries at the cost of hunger and poverty for their victims.

Since "sciencblogs" continuously censors in the ecofascist cause clearly its owners are among the beneficiries.

By Neil Craig (not verified) on 18 Oct 2011 #permalink

You know one of the things I like about my blog is that I almost never have to enforce my civility policy, because y'all *are* civil. Let's keep it that way, ok?


I'm miffed! You missed the fact that my current post is on this same topic; as well as peanuts.


Also; historically- speculative money in futures markets was legally limited, and the limits were removed just a few years ago; under Clinton or Bush the Least, I'm not sure which. It wouldn't be at all difficult to simply go back to the limits we used to have- and see if that helps. Wouldn't hurt a soul.

Neil said: "Tight supplies and greater power and concentration of wealth allow speculators to have more harmful effect."

That's *exactly* the point I was making Neil. I simply was making the additional point that people pointing to too much/too little greed are making a silly/simplistic argument.

You didn't miss and/or disagree with what I said. Rather, you have it exactly.

By Stephen B. (not verified) on 18 Oct 2011 #permalink

I'm glad you have a civility policy Sharon. Sorry I am used to "scienceblogs" sites where ad homs and obscenity are the normal method of debate and where the site owners encourage it, at least up until they have resort to censorship of the victim. I will not use the e--------t term again though I believe it factually supportable.

However the point I made seems unanswerably correct - that government sunsidies in rich countries for turning grain into oil have pushed up food prices for the world's poor and that they have no genuine "environmental" benefit, but are supported by subsidy lobbyists.

So - unanswerably correct indeed.
Thank you for your politeness policy Sharon. It is so refreshing to see a "scienceblogs" site where the author disallows the sort of name calling the others encourage. Real points can be made and refuted, or not as the facts prove. Real science requires such an atmosphere.

By Neil Craig (not verified) on 20 Oct 2011 #permalink