Commodity Speculation and the Food Crisis

Just a brief diary about a very interesting article from today's financial news:

Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin

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.''

(snip)

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.

(snip)

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"?

•  But will Al Gore be blamed?

  You can see how the neocons are going to blame the fight against Global Warming and Al Gore for the food crisis.  That may be why he is now considering stepping into the democratic presidential mess.  If he's going to be attacked for the work he's doing, he might as well be in a political position where he can make a difference rather than be marginalized by the corporate media which has been against his Climate Change message from the beginning.  Watch for the "Denver Plan" to unfold so he can get his message out, since everyone else is ignoring the Global Warming problem.  

  by Vern Marcus on Tue Apr 29, 2008 at 10:05:02 AM PDT

•  tips

  for getting someone in the White House who is willing to think outside the box, and to take on the speculators and the vested corporate interests before they sacrifice us all to their increasingly dangerous speculative bubbles.

  by gnat on Tue Apr 29, 2008 at 10:05:39 AM PDT

•  What I'm not sure about is

  how  the futures market action affects actual grain delivery.

  Somewhere a commenter on an econ blog said that "spot" prices are for actual delivery, whereas "futures" prices do not involve actual delivery.  

  Like you, I found this story alarming, but if the futures speculation doesn't involve actual grain being hoarded, then I'm not sure about its impact on actual food stocks or prices.

  Cheers.

  by New Deal democrat on Tue Apr 29, 2008 at 10:06:33 AM PDT

  •  yes it's difficult, given the economic complexity

    and inter-dependence of the world commodities market, to ascertain direct correlations or even figure out the basics of how this system operates. I don't claim to be an expert here, and would welcome some insight from others on this thread.

    by gnat on Tue Apr 29, 2008 at 10:10:42 AM PDT

    •  Here's a discussion that may help

      I'm no commodities trader either, but this seems like a good explanation:

      Commodities are bought and sold in various ways. Day-by-day sales of commoditiesthemselves are conducted on the spot market. Speculators can also trade commodities options, which give their owners the right, but not the obligation, tobuy or sell a given amount of a commodity at a set price during a given period ofdays, weeks or months....the multi-trillion-dollar futures markets. These involve contracts that commit the buyer and seller to trade a given volume of a commodity at a set price -- the futures price -- on a specific date, typically within three months.....

      Farmers and other commodities sellers use futures to lock in prices for crops andother commodities that are not yet ready for market, protecting themselves from thekind of price drops that come when supplies suddenly soar -- at harvest time, for example. Futures buyers, such as cereal makers or oil refiners, use the contracts to protect against price spikes. Futures contracts also are traded among speculators, who hope contract prices willchange as deadlines approach. If the spot price moves higher than the price in a futures contract, the contract's value will go up, since its owner could use the contract to buy the commodity at the lower price and then sell it at the higher one on the spot market. A futures contract is a bet on the movement of spot prices. .... Futures investors do not make any money on spot-price changes that everyone expects, such as the rise in heating oil prices in winter. Expected changes are reflected in contract prices when the contracts are created, much the way an airliner's stock price today would reflect big ticket sales expected in next summer's vacation season....

      Link

      So, it appears the article is saying that there are massive bets being made by speculators, that may or may not pay out.   If food prices reverse (like gold has recently, or wheat for that matter) the speculators may sustain huge losses (good, **** them!).  So, apparently the actual crop harvest is not being hoarded.

      by New Deal democrat on Tue Apr 29, 2008 at 10:24:29 AM PDT

  •  food stocks vs food prices

    (not an expert, either)
    Prices go up following (in part) supply and demand, but that simple law isn't always so simple. Supply may be constant, yet prices still go up. Remember Cabbage Patch dolls? The hype surged the price long before the shelves were emptied. There was anticipation of a shortage (created by the hype), so all the dolls went up in perceived value, before the actual shortage. It is possible for the same mechanism to occur in any commodity, even if the anticipated shortage never comes to pass.
    That's my layman's description of a 'bubble'.

    In this case, there is less food being produced than before, demand is going up with population and increased affluence (albeit short-lived) in Asia, costs of production are skyrocketing.

    And as for hoarding, Thailand and Indonesia stopping exports of rice could be considered hoarding, no?

    by kamarvt on Tue Apr 29, 2008 at 10:19:27 AM PDT

•  Greedy speculators are doing to food prices...

  what they did to housing prices. Only this time the victims will not be millions of small-time homeowners and their families who get thrown out of their homes, it'll be a billion or more people who starve to death.

  But remember: Greed is good.

  by Jimdotz on Tue Apr 29, 2008 at 10:08:39 AM PDT

•  The parasites are finding new hosts

  The effect of too much unearned wealth being aggressively moved to create more unearned wealth has been obliquely referenced in a few articles on the "sudden" explosion of commodities, but hasn'r received nearly the attention it deserves.
  The same parasitic approach to wealth accumulation is a major force behind the corn-to-ethanol move, which aggravates food prices, and behind the real estate bubble, whose collapse was the first act in this horrorshow.
  For that matter, it's a major force behind globalization, deregulation, environmental abuse, depressed wages, gas prices... all in the name of increasing dividends.

  Unfortunately, tapeworms don't die until the host does.

  by kamarvt on Tue Apr 29, 2008 at 10:11:11 AM PDT

  •  Commodities are sinking stock market lifeboats

    There was a commodities bubble after a big recession in the Eighties.

    I forget whether it was the recession caused by the oil embargoes or the later stock market crash.

    by Visceral on Tue Apr 29, 2008 at 11:19:48 AM PDT

•  Congress is about to enact a farm bill

  with a bunch of give-aways to agribusiness -- while the rest of us dig deeper to pay for food.

  by LRT on Tue Apr 29, 2008 at 10:16:42 AM PDT

  •  thanks for this and I would like to learn more

    might I encourage you to consider writing a diary about it?

    by gnat on Tue Apr 29, 2008 at 10:20:09 AM PDT

•  meanwhile, in related domestic economic news:

  Consumer Confidence Slips as Home Prices Drop

  By MICHAEL M. GRYNBAUM, New York Times
  Published: April 29, 2008
  Americans’ confidence in the economy continued to plunge this month as their homes lost value at the fastest rate in two decades, according to reports released on Tuesday.

  The data suggested that the housing slump was far from a recovery and the job market might continue to weaken, ratcheting up pressure on the Federal Reserve, which began a two-day meeting on Tuesday, to take steps to stave off a prolonged slowdown.

  The reports were consistent with a recession, economists said, though some optimists have insisted the economy is growing, albeit at a snail’s pace. President Bush remained in the latter camp at a news conference on Tuesday, where he said the economy was facing “a tough time.”

  Homeowner vacancies hit record high

  By Joanne Morrison Mon Apr 28, 12:58 PM ET
  WASHINGTON (Reuters) - The share of vacant U.S. homes rose to a record level in the first quarter, the government reported on Monday, with homeowners finding it increasingly difficult to find buyers in a collapsed market and more homes in foreclosure.

  The percentage of owner-occupied homes now sitting empty rose to 2.9 percent in the January-to-March period, the third quarter in a row in which the vacancy rate increased, according to data released by the U.S. Census Bureau.

  (snip)

  ...the total number of vacant U.S. properties hit 18.6 million, which was a record, a Census official said.

  Analysts attributed the rising vacancy rate to a surge in foreclosures brought on by the subprime mortgage crisis. They predicted there will be few signs of improvement until the end of this year or early in 2009, when the glut in home inventories is expected to stabilize.

  by gnat on Tue Apr 29, 2008 at 10:30:57 AM PDT

•  I think you are confusing

  a couple issues.

  I am not denying that speculation may exist. It is always prevalent in the market place. Housing prices dropping is the result of a speculative bubble. Food prices rising are not a bubble, when inventory is at record lows.

  Ask yourself, why is the cost of food rising the same time the dollar reaches new lows?

  by joeshwingding on Tue Apr 29, 2008 at 10:40:38 AM PDT

•  Subsistence farming

  It seems like the answer: everyone tries to grow as much of their own food as possible. We protect ourselves from soaring food prices and the collapse of industrialized agriculture due to Peak Oil and climate change, and since you're not selling any of what you produce, then you don't compete against subsidized Big Ag nor are you vulnerable to commodity speculation.

  Then why are so many of the Third World subsistence farmers being harmed by these economic doings?

  by Visceral on Tue Apr 29, 2008 at 11:16:42 AM PDT

  •  Thoughts on subsistence farming

    I'm not an expert, but here's some thoughts:

    True subsistence farming amounts to living outside of the cash economy. You grow, make, or barter for everything you need (or at least, everything you ever get).

    Living completely outside the cash economy seems nearly equivalent to living outside of modernity. No electricity, no gas, no manufactured items of any kind, no medical care, because all those things require money to buy them.

    I'm guessing that very few people can really live that way, or would choose to. How does a true subsistence farmer get the money to pay his taxes? If he can't pay his taxes, how does he keep his land?

    As soon as you decide you want or need something from the cash economy, or if you must pay tribute taxes to a state that is oriented to the cash economy, you need a source of cash. That probably means selling the food you grow, but you are competing against industrial agriculture when you do that. If the products of industrial agriculture arrive in your country via NAFTA-style free trade agreements, and are subsidized in their country of origin to boot, then you can't compete against them in the market place.

    There's your source of harm.

    by DBunn on Tue Apr 29, 2008 at 11:46:57 AM PDT