The UK government will fight the bank’s corner, of course.

By the bankers, for the bankers, of the bankers.

Speculation only drives commodity prices when commodities are physically held – such as when oil traders purchase oil stocks. Derivative contracts – which is what you’re talking about here – don’t involve physical purchase of the goods in question, and therefore don’t act to drive up prices.

But inflation only mattered to the global elite,when workers had power to gain pay increases. With high unemployment, and slave workers in the far east this is not a concern for them.
If the poor have to pay more for their food and heat,the elites are quite happy.

@Tim J – That’s not correct, I’m afraid, speculation in futures markets can drive the physical price of commodities. It does this in three main ways:

1. By influencing the expectations of buyers and sellers in the physical market.
2. Through the incorporation of futures prices directly into contracts for food.
3. Through traders taking advantage of differences between prices in futures and physical markets (arbitrage).

More information on how it works can be found in WDM’s new report on financial speculation and food price rises: http://www.wdm.org.uk/broken-markets

4 – I’ll stick with Paul Krugman on this point thanks

Well, a futures contract is a bet about the future price. It has no, zero, nada direct effect on the spot price. And that’s true no matter how many Joe Shmoes there are, that is, no matter how big the positions are.

Any effect on the spot market has to be indirect: someone who actually has oil to sell decides to sell a futures contract to Joe Shmoe, and holds oil off the market so he can honor that contract when it comes due; this is worth doing if the futures price is sufficiently above the current price to more than make up for the storage and interest costs.

As I’ve tried to point out, there just isn’t any evidence from the inventory data that this is happening.

http://krugman.blogs.nytimes.com/2008/06/23/speculative-nonsense-once-again/

Selectively using Krugman huh Tim J? That’s useful. How about his views on whether austerity works then?

@5 – Direct.

So, that leaves indirect and externalities then.

If I were a farmer, I would want to forward-sell my produce priced for a slightly-below average year because a local storm could wipe out my crop the day before harvest and my family would starve. I don’t want to take that risk.

If I were a banker/insurer/whoever holds capital, I would happily forward buy lots of crops across lots of geographies priced slightly-below an average year because I expect to get average results.

Everybody wins.

Calvin M Schwabe wrote a book titled: Unmentionable Cuisine which includes recipes for just about every living creature.
Perhaps in his next edition there will be advice on how to cook and eat the ‘rich’, it would seem a natural progression when the poor can’t afford a bowl of rice.

@Tim J – Sorry to say that Krugman’s wrong on this one. Krugman’s argument is based on a situation of perfect information. Unfortunately today’s futures markets are so opaque and distorted that we see a lot of herding behaviour, for example.

More details here: http://www.wdm.org.uk/blog/krugman-misses-mark-food-speculation

I also recommend that you read our report that I linked to above.

6 – There are heaps of examples of economists making the same point as Krugman – I just thought you chaps might prefer him, because he’s basically on your side on so many things.

If you like we could take Jeff Frankel instead?

The evidence does not support the claim that speculation has been the source of, or has exacerbated, the price increases.

http://content.ksg.harvard.edu/blog/jeff_frankels_weblog/2008/07/25/commodity-prices-again-are-speculators-to-blame/

8 No farmers will starve in this country. They will be bailed out like the bankers.

See the elites have no problem with welfare, just as long as they are getting the welfare.

11 – There are also heaps of others making the opposite argument. In a way this could go on for ever.

The UN Special Rapporteur on the rights of food:

Instead, a number of signs indicate that a significant portion
of the price spike was due to the emergence of a speculative
bubble. Prices for a number of commodities fluctuated too
wildly within such limited time-frames for such price behaviour
to have been a result of movements in supply and demand.

http://www.srfood.org/images/stories/pdf/otherdocuments/20102309_briefing_note_02_en_ok.pdf

Or the ECB:

We find that up to 2004, movements in oil futures prices are best explained by underlying fundamentals. However, since 2004 regime switching has become more frequent and the chartist regime has been the most prominent.

http://www.ecb.int/pub/pdf/scpwps/ecbwp1371.pdf

UNCTAD:

While these market participants have no interest in the physical commodity, and do not trade on the basis of fundamental supply and demand relationships, they may hold – individually or as a group – very large positions in commodity markets,
and can thereby exert considerable influence on the functioning of those markets. This financialization of commodity markets has accelerated significantly since about 2002–2004, as reflected in the rising volumes of financial investments in commodity derivatives markets – both at exchanges and over the counter (OTC).

Even Javier Blas:

Until recently, most economists said that fundamentals were the main reason; now, new studies are painting a more nuanced view, blaming both fundamentals, but crucially speculative activity too for the rises, particularly over short periods of time.

http://www.ft.com/cms/s/0/e1ac96fc-cd5b-11e0-b267-00144feabdc0.html#axzz1Y86bNtjM

Sally – What do you mean “will be bailed out”! They continue to be bailed out year on year in the EU – it’s called the Common Agricultural Policy.

“Inflation is almost universally accepted as a bad thing.”

Erm, no. Hyperinflation is universally accepted as a bad thing. Moderate inflation (in practice, anything below double digits) is not.

“It reduces the value of savings, assets and wages.”

It reduces the value of savings, yes. And, importantly, also, debts. Given that the UK’s main problem is its enormous private and public debt burden, this aspect of inflation is actually a positive. It helps redistribute wealth away from mostly-wealthy savers and from foreign investors, towards ordinary indebted people (and the government).

It doesn’t reduce the value of assets or wages, because they’re both set by markets. The thing it *does* do is get rid of the psychological illusion of sunk costs. At the moment, houses aren’t selling because they’re worth less than people are willing to sell them for (partly because they’re in negative equity, and partly because it feels wrong to sell a house for tens of thousands of quid less than you paid for it). A few years of mid-single-digit inflation deals with that adjustment, at which point the housing market works again.

@ 12:

Given that average income for farmers is just £20,600 (lower than the average income for the UK as a whole), and that this figure fell pretty consistently for the 40 years following 1960, I’m not sure how you can describe farmers as an “elite”.

Let’s get a few things straight here;

100 billion USD is peanuts for the commodity markets. Hedge funds and banks are inn general very small players in the greater scheme of things for the common and important commodities.

Speculation in futures has no effect in driving prices materially higher as these futures contracts are written in a way where the underlying commodiity has to be physically delivered. Banks aren’t in the business of storing grain etc. What in reality happens is that the future rolls into the physical price and the specs move into a longer dated future.

In a nutshell, the physical price drives futures prices, not the other way around, yet the speculators almost exclusively trade futures.

So what is driving commodity prices?

Food stuffs are going higher because of larger and richer populations (eating more meat, which means more grain for animal feed). Oil is higher on global/north african tensions and some supply issues. Gold is a safe haven bet.

All are being driven higher by the debasement through Quantative Easing of fiat currencies.

So maybe the WDM should first asks governments to stop following policies which will inevitably cause price inflation before blaming speculators. It does tend to help if you understand *how* the markets work, rather than how you *think* they work before you draw your conclusions.

@14 – We have moderate debt levels. Inflation also erodes spending, leading to the actual cuts from “austerity” becoming magnified.

The BoE 2% inflation target isn’t just there for laughs, although by the Bank’s policies you’d think it was.

@16 “All are being driven higher by the debasement through Quantative Easing of fiat currencies.”

You really think that there is so much difference between bonds and money? One is a piece of paper that the state promises to redeem, the other is …

@leon

We don’t have moderate debt levels. If you add governmet debt, private debt and then other liabilites we are one of the most heavily indebted nations in the world.

This subject is totally impervious to evidence so the likes of Murray Worthy will continue believing what his preconceived prejudice wants to believe. The small minority who agree with him will be cherry picked and the vast body of literature against his premise will be ignored because it does not fit with what is wanted to be believed. Since this ‘ speculators causing price rises ‘ has gone on since ancient Greece, the moral is do not expect any change soon. The Jews used to get the blame, which is kind of ironic with bankers being the new Jews in our society that they now get the blame.

” Inflation is almost universally accepted as a bad thing. ”

No it is not is the simple answer to that assertion. In fact, quite the opposite. Moreover, commodity price changes are not inflation, they are price level changes. A commodity price change is a change in that commodity price in relation to all other goods. Inflation is a general rise in all prices. Commodity driven changes are one off changes to the price level.

Inflation is a pretty meaningless term. The only reason that we currently believe that it is harming us is because RGDP is growing slower in relation to NGDP. The solution is to get the RGDP part of NGDP larger and as if by magic wages will rise. Then no one will be worrying about ‘ inflation ‘ of a few per cent.

Commodities are priced in dollars. If the dollar depreciates and the nominal price of commodities consequently rises, then the real price of the commodity in currencies other than dollars should be unchanged. Therefore, any countries who peg their currency to the dollar only have themselves to blame for dollar weakness commodity price rises.

” There are varying degrees of truth in many of these ideas…”

You know it is a demand and interrupted supply story. Yet, still cling to fairytales.

18. gastro george

” You really think that there is so much difference between bonds and money? One is a piece of paper that the state promises to redeem, the other is …”

A piece of paper redeemable in another piece of paper of equal denomination. So government bonds and government currency are almost perfect substitutes. Just easier to use currency in everyday transactions.

I’m with Richard W and almost with John B….inflation is a general increase in prices. prices of individual things such as petrol, chicken, peas fluctuate in accordance to availability and desire – or supply and demand. Availability can be altered by government policies effected through taxation. A lot of food production has been shifted to grow bio-fuels….food prices rise if harvests are poor.

Inflation is bad in the sense that it encourages governements to drive inflation so they can spend spend spend.

But futures markets work very well for farmers. Farmer A sells a crop at £200. if the weather is bad and he only delivers half his crop, he still gets his £200. However, the counterparty has lost out big time. How does he get the lost money back if he has not taken delivery of the crop? If he has taken delivery, he can try to sell at a higher price and recoup his losses. If he hasn’t, he has just lost out big.

This should not be controversial but it still gets trotted out by people on this site and Sally.

Oh this is such tosh. It’s possible that speculation in responsible for some portion of the price increases, perhaps making them change faster, or overshoot [1], but commodity prices are only a component of the price increases the UK faces on imports, which are more about exchange rates and Chinese wage rates. And as Richard has pointed out, an increase in the price of a good, or set of goods, is not the same thing as inflation, which is annual increases the price level.

[1] the WDN give every impressions of blaming price changes entirely on speculation, which is too stupid for words.

@21 Quite. So QE does not lead to currency debasement (see @16), it’s just an asset swap.

@19 – Government debt is quite moderate. The effect of the government ‘s stance on debt (although it it, if course, ending up trapping itself into borrowing more) is to increase private debt for the basics of living, as well.

This is, somehow, fine with you…and of course inflation sinks, rapidly, the value of wages.

So what you are basically saying is that if enough money is placed on a bet then it will actually happen. Can I do this with horses too?

Commodities are a zero sum game with winners and losers and unless the amount of commodities changes then it doesn’t make sense.

Lordy, this is getting boring having to push the WDM back into its box all the time.

Yes, of course Krugman is correct, you have to have physcial hoarding of commodities before commodity speculation changes spot prices. No, we didn’t see any rise in stocks therefore commodity speculation did not cause the rise in food prices.

The attempt to get around this in that report (which I have read, yes) is to say that households stored food and that’s where the stocks went. Could even be true: but then that’s not speculation in the commodity markets which can be curbed by regulating the commodity markets is it?

To change that you’d have to ration food at the supermarket to make sure that no one stocked up on 10lbs of sugar.

Oh, and by the way, the law was not changed in the US in the 1990s. What did happen was that a law was passed which confirmed that the law was what everyone was already assuming was the law.

And you at the WDM are still entirely ignorant of the most basic thing about commodity prices. If commodity prices are going to rise in the future (That demand from emerging economies will drive up prices. That the economic recovery is driving up demand. That there are simply too many people consuming too much.There are varying degrees of truth in many of these ideas, but the end result has been a self-fulfilling prophecy forcing up prices across commodities.”) then we’d actually like them to rise now, not later.

Go and read your Adam Smith, Book IV, Chapter 5 start at para 40. We’ve known this for 235 years now: why are you still ignorant of it?

And finally: “while the price of basic foods like maize have tripled. ” Yup.

40% of the US maize crop now goes into cars not people. Might have a little something to do with it, no? Do we see you taking to the streets ademanding that the absurd biofuels nonsense be torn apart?

No, we don’t, we see you parading your teenage trot misunderstandings about markets across the media. Grow up, wash and get a job would you? And stop trying to impoverish farmers by killing their insurance system, the forward marklets for agricultural commodities.

Leon, the point is that the private/public balance of debt is irrelevant – when you add the two together, the UK is one of the most highly net-indebted nations.

It doesn’t matter whether you think austerity is a fuckwitted idea (I do), or whether you think it’s the best thing since sliced bread – the fact is, if the nominal value of the GBP were to fall by 50%, we’d be better off (and our external creditors would be worse off).

@25

How is buying bonds with money made out of thin air an asset swap? Before the gilts were bought this money didn’t exist. surely this must be an increase in money supply?

If the market bought the gilts they would pay for it with cash which would indeed be an asset swap. However under QE new cash is created for the Government to spend which didn’t exist before.

Commodity prices and inflation:

http://www.imf.org/external/pubs/ft/weo/2011/02/pdf/c3.pdf

@29 – No different. Right. Oh look, a pig with wings!

No, interest rates vary. Wildly. The government is trying to get people to take on more personal debt, at far higher rates than the government would have to pay, to get the economy moving again. Why is this a good idea, again?

And if the GBP fell by 50%, since we’re hardly self-sufficient in many basic foods, we’d face a humanitarian crisis which would be VERY expensive to solve.

@28 – They can buy insurance like any other industry then. No, they have to be special snowflakes and the corporatist unfree market gets to raise food prices.

“They can buy insurance like any other industry then. No, they have to be special snowflakes and the corporatist unfree market gets to raise food prices.”

Are you actually ignorant or do you just play it on hte internet?

Forwards, futures markets, are where people do buy insurance. Insurance against changes in price. The baker can buy wheat now for delivery in 6 months: he klnows how much his flour is going to cost him in 6 months time. The farmer can sell his wheat before he plants it and know what price he’s going to get: he knows he’s going to cover the cost of seed, fertiliser. etc. An airline can buy aviation fuel forward so that it knows the cost of its fuel in 5 months time for that flight you’ve just booked online.

This is what the futures markets do, allow people to buy insurance about *price*. Whether buying or selling. All the speculators in the middle are the people who take the risks. That’s what the whole damn system is for!

And no, you can’t go to an insurance company and buy insurance on the price of your wheat crop, the value of aviation or heating fuel in 6 months. Because insurance companies work on statistical probabilities of something happening, not on prices.

There just isn’t any other way of providing insurance against price changes than futures markets. That’s why we have them of course and why we’ve had them for hundreds of years (yes, really, hundreds at least).

Yes, yes, keep arguing for that rather than normal risk-spreading, because you most certainly CAN buy insurance in equivalent production fields. So, so manipulatable in the hands of wealthy speculators… Coca, Armajaro.

Keep up your “good” work on the corporatists behalf!

“because you most certainly CAN buy insurance in equivalent production fields.”

Not on price you can’t. You can insure your mine against a cave in, against production problems, but you can’t insure the price of the metal that you’re digging up. That’s why you’ve got to go and sell production forward on a futures market. That’s what the London Metal Exchange does for crying out loud.

Re Amarjaro, you do know that they *lost* a fortune on that latest attempt to corner cocoa, don’t you? And you do know that for the speculators, futures are a zero sum game? For every £1 made by one speculator, another must, by definition, have lost £1?

You do, yes?

They caused a price spikes which had massive knock-on effects for the people actually using that coca. That the speculators themselves are playing a zero-sum game (which is another good reason to point out how dangerous it is, and the minimal “benefits” involved) does not mean that there are not major indirect effects, or externalities involved.

And you certainly CAN buy insurance for just that, in equivalent fields. Based on historic data.

No, pure corporatism ra ra ra!

even if you could go to an insurance company and buy insurance against prices falling, I suspect that would be because the insurance company is going to the futures market and doing the same thing there.

Tim W

> The farmer can sell his wheat before he plants it and know what price he’s going to get: he knows he’s going to cover the cost of seed, fertiliser. etc.

That protects him in the case that after harvest he has:
i) enough crops
ii) but the market price is too low

But it opens him up to a new risk, that at harvest:
* his harvest was poor
and that he is unable to deliver what he promised -so he has to buy on the spot market to make good his contract = huge loss for him!

Or have I missed something?

But it opens him up to a new risk, that at harvest:
* his harvest was poor
and that he is unable to deliver what he promised -so he has to buy on the spot market to make good his contract = huge loss for him!

Quite, which is why we have options, which are the right, but not the necessity, to buy or sell at a price and volume.

Leon:

“And you certainly CAN buy insurance for just that, in equivalent fields. Based on historic data.”

Care to prove this? No, not a troll bit, I’m genuinely unaware that you can, without futures markets, get price insurance. So you would be aiding my education by pointing me to that historical evidence.

Just one thing: that the government was providing the guarantee isn’t what I mean. That a market does, other than through futures, is what I do mean.

Care to share your evidence?

30. Fungus

” How is buying bonds with money made out of thin air an asset swap? ”

Technically it is an asset swap. A Treasury liability is exchanged for a central bank liability.

” Before the gilts were bought this money didn’t exist. surely this must be an increase in money supply? ”

Definitions matter a great deal here. What QE does is add to the ‘ quantity of money. ‘ Adding to the QoM increases the money supply because it adds to the level of bank deposits. Bank deposits are effectively the money supply. Moreover, it need not be ‘ increasing ‘ anything. If money is being destroyed, then QE is only replacing destroyed money.

” However under QE new cash is created for the Government to spend which didn’t exist before. ”

The government do not need QE to spend. Yes, QE creates new money. The point of the UK QE was to create a situation where the non-bank institutions had an excess of money holdings to total assets. Cash not being much use to them and earning a negligible return, they would all try to dispose of the cash by buying assets. However, as a system this is not possible as they are all buying assets from each other so as the buyer reduces their cash holdings the seller finds theirs increasing. The result is that asset prices rise and the institutions find that their money-to-total-assets ratio falls. This sets off a virtuous cycle for people far removed from the QE transactions. It is second order effects that is being spent rather than QE money.

This is how it worked in the UK by preventing a bad situation from being even worse. Note that this was about the quantity of money and absolutely nothing to do with credit expansion. It was the BoE who were at fault for talking about the money supply that allowed the media to believe that QE was about bank lending. Any mention of the money supply and understandably people think about banks’ supplying money.

@39 – As you’re not willing to consider governments as the guarantor, no, never mind it was on commercial terms in both examples I’m thinking of.

@40,

I’m afraid I still don’t get it and therefore would appreciate further clarification.

“Technically it is an asset swap. A Treasury liability is exchanged for a central bank liability.”

What is the central bank liability? I thought the central bank simply purchased gilts with made up cash, and therefore purchases an asset out of thin air?

“Moreover, it need not be ‘ increasing ‘ anything. If money is being destroyed, then QE is only replacing destroyed money.”

What money is being destroyed? All I can see is new money being created, increasing the money supply and therefore devaluing the pound.

42. Fungus

” I’m afraid I still don’t get it and therefore would appreciate further clarification.

What is the central bank liability? I thought the central bank simply purchased gilts with made up cash, and therefore purchases an asset out of thin air? ”

A gilt is a liability of the UK Treasury. Say the BoE purchase the gilt from Legal & General who bank with Barclays. The BoE credit Barclays reserve balance at the BoE with the equivalent of how much the BoE paid for the gilt. That sum is a liability of the central bank to Barclays who have a liability to Legal & General. Central bank money called high-powered money is always a liability of the central bank. The gilt then appears as an asset on the central bank balance sheet. Because the central bank is an agent of the state the private sector has swapped a security claim on the state for cash. You are getting too caught up in the ‘out of thin air ‘ part, all that has happened is the BoE have expanded their balance sheet.

In normal times the BoE conducts open market operations of buying or selling assets from the commercial banks’ to maintain the BoE policy rate. They do this to tighten or loosen monetary policy in line with their remit. Normal OMOs could best be described as credit easing as the buying or selling is from banks’. The zero bound means that interest rates can’t go any lower. If the BoE feels that monetary policy is still too tight to meet their remit, then they need to do unconventional OMOs, beyond what would be required to maintain the policy rate. QE UK style was just an extension on a much larger scale of normal OMOs, with the important difference being that the BoE bought assets from non-bank financial institutions.

” What money is being destroyed? All I can see is new money being created, increasing the money supply and therefore devaluing the pound. ”

If the quantity of money is falling then money is being destroyed. The monetary aggregates in freefall was a fair indication that money was being destroyed. Different people will have different ideas about the importance of the QoM. However, those who see money driving the economy attach a great deal of importance to the QoM. Sterling depreciated before the onset of QE in the UK, which commenced in March 2009. In fact, sterling appreciated after QE because easier monetary policy improved the economy and with sterling being a risk asset there was more demand for sterling. In theory, QE should depreciate the exchange rate. In practice, sterling went the opposite way.

Here is an old Tim Congdon article that might interest you. Being a former Mrs Thatcher advisor means he is not everyone’s cup of tea. However, he is probably the monetary economist in the UK. As can be seen, Governor King, Mr Darling and Mr Brown running around like headless chickens was causing havoc with expectations 2007-09. The coalition government had a similar effect on expectations last summer. During 2007-08, if they had concentrated on the QoM from the beginning things would have worked out much better.
http://www.standpointmag.co.uk/node/1577/full

However, he is probably the * best* monetary economist in the UK.

This is an excellent explanation of QE for anyone interested.

http://bilbo.economicoutlook.net/blog/?p=661

And if the GBP fell by 50%, since we’re hardly self-sufficient in many basic foods, we’d face a humanitarian crisis which would be VERY expensive to solve.

No, because there would be a parallel doubling of nominal GDP measured in pounds (because we’d still be doing the same stuff as before) which would mean we’d be able to afford exactly the same volume of imports as before.

@46 john b

You are quite wrong there….GDP in pure nominal terms would not change a great deal, and a massive weakening of the pound would push prices higher….

….In fact, much as we have seen over the last few years.

@46 – Er, that’d rather break the point of devaluing…wages wouldn’t change.

Firstly, futures markets do have a direct link to the price of physical commodities, and physical commodity prices are not determined simply by supply and demand. Due to poor transparency in the physical market, and the fact that most trades take place bilaterally the futures price (which is transparent and multilateral) is used as a benchmark for physical auctions. It influences the expectations of both buyers and sellers. Also futures prices, for example CBOT Wheat, is incorporated directly into basis contracts for wheat – commonly used for agreeing physical market transactions.

@28 – WDM has never said that households hoarded commodities. Instead we point out that if futures prices are high, buyers will be more willing to pay a higher price now. Indeed if the influence of futures prices is stronger on buyers than sellers prices could rise due to the influence of futures prices while inventories fall.

@24 – WDM does not say speculation is the only cause of rising food prices (see p20-24 of The Great Hunger Lottery, http://www.wdm.org.uk/food-speculation/great-hunger-lottery , p31-32 of Broken Markets http://www.wdm.org.uk/stop-bankers-betting-food/broken-markets-how-financial-regulation-can-prevent-food-crisis , and in here: http://www.wdm.org.uk/sites/default/files/Tricky%20questions%20food%20speculation%208.11.pdf)

I also wouldn’t have thought I’d need to spell out how increasing the costs of commodities (e.g. food and oil) would lead to higher prices for items such as food and oil…

@27 I am not saying that if you put enough money on a bet it will come true. I’m saying if enough money pours into one side of the market it can change prices. In the words of George Soros “institutional investors are piling in one side of the market and they have sufficient weight to unbalance it”

@28 The World Bank, the UN Food and Agriculture Organisation all agree that biofuel demand is only partly responsible for maize price increases

@33 Price insurance doesn’t just come from relying on markets – marketing boards anyone?

@28 Tim Worstall

It doesn’t actually seem like you’ve read the report from your comment. The report clearly shows that futures prices impacts on spot prices in three ways:

1. Influencing the expectations of buyers and sellers in the physical market.
2. The incorporation of futures prices directly into contracts for food.
3. Traders taking advantage of differences between prices in futures and physical markets (arbitrage)

Can I just ask you – do you not believe in bubbles? The chairman of Goldman Sachs Asset Management definitely does (talking about the 2008 food price bubble):

“I see so much focus on food, and it seems to be so trendy in the investment
world. … The markets seem to me to have a bubble-like quality.”

http://www.guardian.co.uk/business/2008/apr/20/globaleconomy.food

At the moment prices are overshooting and, yes, in the long term the bubble will probably burst and prices will drop down again. However, in the short/medium term the price rises are having a devastating effect on food consumers, especially in poor countries.

How would you explain the 2008 food price bubble if you don’t believe that speculation had an effect? Do you really believe that prices could double in a few months because of ‘increased demand from emerging markets’? No, it’s pretty clear that there was loads of cash lying around that could no longer be invested in the housing bubble and it had to go somewhere.

By the way, we know how futures markets work, which is why we’re not campaigning to completely stop speculation, we just want regulation that limits the amount of it. For example, as a minimum, we want there to be better information in the markets. Presumably something that you would support as a firm believer in classical economics?

Luckily, more and more policymakers are agreeing with us and it looks increasingly likely that these markets will be regulated, which I guess is why you’re sounding increasingly shrill.

Pontus,

I with you (and against Krugman and Tim) here – I would not rule out future prices affecting spot prices, even in the absence of physical hoarding.

however, of course prices could double in short periods of time in the absence of speculation – there are plenty of examples. It’s a mistake to think large changes in prices require large changes in supply and demand – it’s all about how steep those curves are, not how much they shift.

there’s more than a touch of shrillness in the WDM emphasis on speculation over other reasons why commodity price move.

@50 Luis

Nice to hear some sanity. Sorry to hear that you think we sound shrill, from our perspective we’re simply trying to win this particular campaign.

We’re sure that regulating speculation will improve the way these markets work and reduce the bubbles that we’ve been seeing, which is why we are campaigning on it.

However, having said that, we’re clear about the fact that there are also lots of other factors that impact on food price rises: climate change, increased use of biofuels, increased demand from emerging markets and so on. In fact, there is a chapter on it in the report (which Tim still doesn’t seem to have read). These mainly have long-term effects, however.

Does anyone have a good explanation for the 2008 food price bubble that doesn’t include increased speculation?

Pontus @ 51

Rising demand from emerging countries, such as Brazil, India, China and Russia?

Does anyone have a good explanation for the 2008 food price bubble that doesn’t include increased speculation?

some candidates from my bookmarks folder:

FT “Food for thought”
http://www.ft.com/cms/s/0/acf3b70c-ac67-11e0-bac9-00144feabdc0.html#axzz1SxJrCKyg

http://webarchive.nationalarchives.gov.uk/+/http://www.bis.gov.uk/foresight/our-work/projects/current-projects/global-food-and-farming-futures/reports-and-publications

Timmer: “Did speculation affect world rice prices?”
http://ideas.repec.org/p/fao/wpaper/0907.html

The Financialisation of commodities
http://www.voxeu.org/index.php?q=node/5859

Conclusion from that Vox article worth quoting:

“In the aftermath of the synchronised boom and bust of commodity prices in 2006-2008, policymakers in many countries are debating on whether to impose tighter limits on positions taken by financial investors in commodities markets. It is important to interpret the two sides of our findings.

* On one hand, given the previous segmentation of commodities markets, the increasing presence of commodity index investors is likely to improve sharing of commodity price risk.

This means lower risk premia and thus higher prices on average for farmers and producers to sell their commodities.

* On the other hand, their presence also introduces a channel to spill over volatility from outside to commodities markets and across different commodities.

This trade-off requires a thorough examination. Before researchers can develop a reliable measure of the net effect, policymakers need to be cautious about imposing any stringent position limits on financial investors, as such limits also constrain the potential risk-sharing benefit.

Our findings also provide the basis for another more modest policy proposal. From our communications with investment advisers to various endowments and asset management funds, many of them do not fully realise the large increases in return correlations of commodities with each other and with stocks. Consistent with the volatility spillover effect, Figure 7 shows that the return correlation between the GSCI and S&P 500 stock index has also increased from around zero to above 0.5 in 2009.

To the extent that the large inflow of commodity index investment is motivated by the low correlations observed in the historical data, many index investors might have overestimated the diversification benefit of investing in commodities. Thus, simply improving the public awareness of the increased correlations of commodities with each other and with stocks is likely to tame the rapid growth of commodity index investment and reduce the adverse volatility spillover effect.”

@52

It doesn’t explain the rapid rise and fall. See price, supply and demand for wheat and maize plotted on the same graph (p.27):

http://www.wdm.org.uk/sites/default/files/Broken-markets.pdf

Demand is going up in the long-term, what we’re seeing is short/medium-term volatility.

See price, supply and demand for wheat and maize plotted on the same graph

your graphs shows supply and demand stay very close to one another over time. Now if you think that prices move in order to equalize supply and demand, you could read those graphs as showing that very large changes in prices were necessary to equalize supply and demand, the converse of the point you wish to make.

“The report clearly shows that futures prices impacts on spot prices in three ways:”

No, the report doesn’t show that at all. The report asserts that these things happen. There is no attempt, anywhere, to show that these things actually happen. It’s easy enough to think up ways that your prejudices could be true. It’s also easy enough to assert those prejudices. But the next stage, the bit you’ve failed to get to, is going out and doing real empirical research and proving that reality conforms to your prejudices.

Something you’ve entirely failed to do.

“How would you explain the 2008 food price bubble if you don’t believe that speculation had an effect?”

As I’ve pointed out endlessly before, I don’t believe that speculation didn’t have an effect. I just insist that “futures speculation” does not influence spot prices.

And I think it’s absolutely wonderful that speculation does influence prices. That’s the service it performs for us: moves prices in time. For example, if we’re going to face a maize shortage in the future because various governments are insane enough to put food into cars not people then we’d like food prices to go up now.

That means that people will substitute now, farmers will plant more now, meaning that when the shortage comes there’s not so much of a shortage.

And as you note, this really is what happened in the 2008 thing. People woke up to that biofuels nonsense, saw that there would be a food shortage. Prices go up. What happens? As your first report points out, demand actually fell and supply increased….not immediately of course because we’re talking about plants. Growing seasons etc. But a year or two later, we had, as your own report states, higher supply and lower demand and prices fell back again.

Excellent, that’s what we actually want a market to do. Change the price so as to balance supply and demand. Your own evidence is proof perfect that the system worked as we want it to.

Come along now, this is pretty simple stuff. Adam Smith 235 years ago.

But speculation and futures are indeed different things.

As to this:

“Do you really believe that prices could double in a few months because of ‘increased demand from emerging markets’”

You give us the answer in your own damn report. You state that both supply and demand for food have very low elasticities. Thus we only need a small change in either demand (and yes, we got that from emerging markets) and a small change in supply (biofuels) to trigger large price changes. For, as you say, food displays low elasticities.

This is one of the things that annoys me so much with you fools. You don’t understand the implications of the things that you yourself say. You’ve got a couple of graphs showing that supply and demand didn’t change much but that prices did, a lot. And you cannot manage to put that together with your own statement about elasticities. They’re the same damn thing if only you knew enough to realise this!

“which I guess is why you’re sounding increasingly shrill.”

I’m getting increasing shrill because I’m getting very bored with ignorants trying to take over the global economy. As above, you simply do not understand what it is that you are pontificating upon. Yet you take it upon yourselves to attempt to redefine a system that you don’t actually understand.

What am I supposed to do? Shrug my shoulders and say that’s OK, maybe the fools will get it right by chance?

From the WDM report:

“One clear example of the impact of financial
speculators trading on information unrelated to
supply and demand was seen in the cocoa futures
market following the release of US employment
data in 2010. The release of this data should
theoretically have little or no impact on cocoa prices,
as there is no causal link between US employment
and world chocolate consumption. However the
cocoa futures price dropped nearly one per cent in
under five minutes after this data was released.46
If traders based their trading purely on supply
and demand information there would be little or
no change in prices.”

Are you collecting your analysts from the short bus every afternoon or something? The US consumes some 700,000 tonnes out of a 3.6 million crop. Unemployment figures are obviously going to be a guide to future consumption.

You know, poor unemployed people have less money to spend on chocolate?

oh dear, that is very poor. Further to Tim, it’s not just about the chocolate (not) consumed by the unemployed, it’s an indicator of future US economic growth … I’m pretty sure cocoa demand is connected to how wealthy American is feeling.

From the WDM report:

“The short run price elasticity of supply and demand
for agricultural commodities is also very low, in
other words supply and demand do not respond
quickly to changing prices. People need to eat
and will be willing to give up other expenditure
in order to maintain their levels of consumption.
Production of food takes months or years, so
producers cannot react quickly in response to rising
or falling prices. Therefore only very significant and
long lasting price changes could be expected to
change supply and demand sufficiently to produce
a noticeable change in actual inventories.”

Yup, so, low elasticity leads to small changes in supply and or demand requiring large changes in price to balance them. This is what “low elasticity” means.

From two pages up in the same report.

“This view is based on the economic theory that the
pricing of commodities is led only by the supply and
demand relationship of the physical commodity.89
If this theory were correct recent changes in food
prices would be driven by clear and corresponding
changes in the fundamentals of supply and demand.
However this is not the case. Taking data from
the US Department of Agriculture on global
supply and demand for wheat and maize, there
is no significant shortfall of supply or excessive
demand associated with the sharp price spikes
seen in these markets in recent years.”

No, we don’t need “significant” changes in supply or demand to explain price spikes. We’ve already explained the possibility of price spikes by explaining that there’s low elasticity. Our explanation of low elasticity means that we expect, indeed insist upon, large price movements in response to small changes in supply and or demand.

Tell me Pontus. Do you people even read your own reports? Carefully enough to understand the things you’re saying in them at least?

Or are you just incnapable of piecing together the little snippets you’ve picked up elsewhere?

just in case anybody still interested in this topic – I have located the link I meant to post earlier … from Prof Jim Hamilton, discussing speculation and spot prices.

In particular, examples of large price changes in markets with no trade in futures etc. plus explanations of fundamentals moving prices being most important story, combined with explanation of how speculation may have some role.

http://www.econbrowser.com/archives/2011/08/fundamentals_sp.html

you guys at World Development Network need to read that one very carefully.

“it is conceivable to me that speculation could have some real effects. But the conditions under which a theory of commodity financialization could essentially ignore fundamentals– namely, the assumption of a very low price elasticity of demand– are precisely the conditions under which a fundamentals-based interpretation would say that what we have just experienced makes perfect sense.”

In the futures market, for every guy betting on rising prices, you need to have another guy betting on falling prices. Otherwise no trade or bet will happen.
How can this influence how much a farmer charges for soy beans?