Just a brief diary about a very interesting article from today's financial news:
By Jeff Wilson
April 28 (Bloomberg) -- As farmers confront mounting costs and riots erupt from Haiti to Egypt over food, Garry Niemeyer is paying the price for Wall Street's speculation in grain markets.
Commodity-index funds control a record 4.51 billion bushels of corn, wheat and soybeans through Chicago Board of Trade futures, equal to half the amount held in U.S. silos on March 1. The holdings jumped 29 percent in the past year as investors bought grain contracts seeking better returns than stocks or bonds. The buying sent crop prices and volatility to records and boosted the cost for growers and processors to manage risk.
(jump below the fold for more...)
Niemeyer, who farms 2,200 acres in Auburn, Illinois, won't use futures to protect the value of the crop he will harvest in October. With corn at $5.9075 a bushel, up from $3.88 last year, he says the contracts are too costly and risky. Investors want corn so much that last month they paid 55 cents a bushel more than grain handlers, the biggest premium since 1999.
``It's the best of times for somebody speculating on grain prices, but it's not the best of times for farmers,'' said Niemeyer, 59. ``The demand for futures exceeds the demand for cash grains.''
Surging food costs have sparked protests and riots in countries including Haiti, Indonesia, Mexico and Egypt. Rice, corn, soybean and wheat prices have climbed to records this year, partly because of droughts in Australia, a freeze in Kansas and increased demand for livestock feed.
The divergence between CBOT futures and the underlying commodity is so great that some grain merchants have stopped bidding for new crops, said Niemeyer, a member of the National Corn Growers Association board. Others won't guarantee a price for more than 60 days.
``We have a fundamental problem with the markets,'' said Kevin McNew, president of researcher Cash Grain Bids Inc. in Bozeman, Montana, and a former Montana State University economist. ``It is very difficult to operate a grain business when the cash prices are below the futures'' by such a wide margin, he said.
The article is worth reading and re-reading, as it illuminates a troubling reality: as the traditional stock market becomes more volatile, investors put their money into commodities, agribusiness and commodity futures, which in turn helps drive up the price of grain, etc. It appears something like a vicious circle ensues, similar to the demand for oil, and the increase in demand for grains for biofuel, etc, puts further strain on the food market. What's that proverbial Chinese curse--"may you live in interesting times"?