Will Osborne vote to rein in the obscenity of food speculation this week?


by Guest    
12:01 pm - November 11th 2012

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contribution by Stuart Rodger

On the 13th of November, George Osborne will make a decision which could, quite literally, determine whether millions of people around the world starve to death, or not.

On that date, EU Finance Ministers will meet to discuss the proposed regulation of the food commodities markets, or so-called ‘food speculation’.

So far, the European Parliament have watered down the proposals put forward by the European Commission, with the World Development Movement and Oxfam complaining that traders will still be able to ‘corner’ the market in food commodities, meaning prices will still rise, and people will still go hungry.

There used to be strict regulation on the food commodities markets, but after the de-regulation mania of the 90s and early 00s, traders could buy and sell as many contracts as they liked. Upon the collapse of the property-bubble, investors rushed to invest in agricultural commodities. As demand increased, the price rose, and the incentive to invest rose – thereby creating a vicious cycle.

We feel the effects here in the UK, but the effects are felt far more severely by people in the developing world – who spend between 50 and 90% of their income on food. The results were food riots across the world, and the number of chronically malnourished people rising by 75 million in 2007, and 40 million in 2008.

Even by the banks’ own admission, food speculation has driven up prices. A Goldman Sachs research paper of 2008 stated that ‘without question increased fund flow into commodities has boosted prices’. The pressure for profit-making is so great that only strict government regulation will rein in this practice: banks cannot be left to regulate themselves.

British banks are some of the worst offenders. Barclays alone have made over £500 million from food commodity trading.

The World Development have been leading an excellent campaign on this issue and teamed up with the stars of BBC 3′s The Revolution Will Be Televised for this spoof video:

Given that Osborne is the leading architect of British government’s attempt to punish the massed ranks of ordinary British people for an economic crisis caused by the recklessness of Big Finance, and persistently resists calls to implement a Robin Hood Tax, I wouldn’t bet on it.

So for the sake of the global hungry, we must force him to make the right decision. Signing, sending, and sharing the World Development Movement’s template email is the very least we can do. You can find it here.

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“There used to be strict regulation on the food commodities markets,”

No, there wasn’t. The Commodities Trading Act (or whatever the name was) did not deregulate the markets. All it did eas confirm, in statute, the common law position that was already there. And that’s about it.

“traders will still be able to ‘corner’ the market in food commodities”

Have you any idea at all how much money you need to be able to do that? Have you any evidence at all that anyone has even tried?

“Upon the collapse of the property-bubble, investors rushed to invest in agricultural commodities. As demand increased, the price rose,”

We’ve been through this so many damn times now. More speculation does not equal higher prices. Because people speculate both long and short.

“The results were food riots across the world,”

No, the food riots were a result of the withdrawal of food subsidies by various governments.

“Even by the banks’ own admission, food speculation has driven up prices. A Goldman Sachs research paper of 2008 stated that ‘without question increased fund flow into commodities has boosted prices’.”

This could be true of investment into physical commodities. In which case we would see increased stocks of those commodities. It would not be true of futures. But I’d be fascinated to see a link to that paper.

Do read your own bloody links will you?

“The World Development Movement report estimates that Barclays made as much as £529m from its “food speculative activities” in 2010 and 2011. Barclays made up to £340m from food speculation in 2010, as the prices of agricultural commodities such as corn, wheat and soya were rising. The following year, the bank made a smaller sum – of up to £189m – as prices fell, WDM said.”

See? Speculation is about both up and down in prices.

“The World Development have been leading an excellent campaign on this issue”

They’re idiots who know nothing about the subject.

“So for the sake of the global hungry, we must force him to make the right decision. ”

Given that this would be that speculation reduces price volatility and removes risk from producer and consumer to place it with the speculator, the right decision would be not to regulate the market.

Was that the first post?

I’ll get my WWII war raid helmet on!

It is articles such as this that makes one despair for the left.

Cornering the market in food commodities. Presumably some of these food commodities are perishable. How the hell can you corner the market without storing and keeping the perishable commodity off the market?

” As demand increased, the price rose, and the incentive to invest rose – thereby creating a vicious cycle. ”

A big huge eh? Demand increases, the price rises, and farmers produce more of the crop where prices have risen constitutes a vicious cycle on which planet? You know some areas have droughts destroying wheat crops and non-wheat farmers see the high wheat prices and grow more wheat. What do you think will happen next? Prices will continue to go up or the extra wheat will reduce prices. You know all this volatility between high prices when certain crops are in shortage of supply and gluts when too many respond to the high prices is not really that good for farmers. What they need is some stability and to know what prices they can get for their crops before they plant them. Some middleman that will take both sides of the equation reducing the uncertainty. We could call them commodity traders.

” Increased speculation in paper contracts during the presidential election forecasting that President Obama was going to win meant that he did win “. You see how dumb it is to believe that speculation in paper contracts makes the underlying thing happen. The two things are unrelated and the paper contact market is a forecast of what people believe will happen in the underlying market. Betting that you believe that wheat will rise in price no more makes it happen than betting on Man City to beat Tottenham makes it happen. To corner the market in wheat and profit from a price rise would require building up a huge paper contract position and storing the underlying commodity off market to create a shortage.

” Barclays alone have made over £500 million from food commodity trading. ”

Whopee. What you have neglected to say is that some other people have lost commodity trading, um, somewhere in the region of over £500 million.

Can the market trading liberals give me a hand to understand my experiment?

Hypothetically, I own two healthy farms in Africa. On one farm, I adopt the FairTrade model; my labour costs are higher but I am guaranteed a price for my crop.

On the other farm, I sell my crop on the open market. I don’t do that completely in order to reduce my risk; I sell a guaranteed quantity to a broker at fixed price and sell the rest when I can get a price that works for me.

On either farm, who gets screwed and who gets richer?

On the FairTrade farm, all crop is sold at a guaranteed price. On the open market farm, most crop is sold at a guaranteed price, the rest being sold at a variable price.

5. Derek Hattons Tailor

@ 4 A future is a contract between a buyer/seller to trade a particular commodity at a particular point in the future (hence the name). The 2 parties to the contract buy/sell the right, but not the obligation, to buy/sell at a pre-determined price, say 6 months in advance. At harvest time you, the farmer, look at the open market price and exercise the contract if it’s to your advantage, if not it lapses. If it goes the other way the buyer will probably sell the contract. . The technicalities are quite complicated but that’s the essence.

There’s nothing about fairtrade that would exclude futures use, increased labour costs are relevant to the extent that they decrease margin, but if the price of your crop collapses between planting and harvest, you would be screwed unless you have a future. You could see it as a form of insurance. Fairtrade is effectively a non trade-able future.

It’s worth saying that futures were meant to solve the problem of the producer not knowing the best use of land at the point he to start growing it, given that committing to a particular crop is irreversible in one season. The idea was that futures would stabilise prices and encourage food production. The futures market is independent of actual food production through, contracts to buy/sell food are bought and sold, not food itself.

When will Lefties learn?

It is near impossible for banks to push prices in the underlying commodity up significantly. They simply aren’t big enough to buy and hold enough of the underlying to make a difference. Goldman Sachs is a bank, not a food bank.

What is driving food prices up are the following:

1. More People.
2. Richer people, eating more meat, which requires more grain in it’s production.
3. Transfer of land to other crops – like biofuels.
4. QE. General devaluation of the US Dollar (and other currencies) in real terms leading to inflation in the prices of fixed assets like commodities.

Oops! Tyler forgot the crop failures caused by climate change in his explanation for why everything is tickety-boo really. I wonder why?

@5 answers @4 nicely.

One slight correction, a futures is a contract. But it’s an obligation. It is an option which is the right but not the obligation.

And yes, that Fair Trade contract is a non-tradeable option. And it’s one that depends upon the finances of the fair trade firm and the willingness of the consumer to continue paying the higher prices. If prices for coffee (say, just imagine) really fell, to 50 p a jar of Nescafe, then that guarantee on fair trade coffee at £4 a jar is going to start looking pretty risky.

We might assume that fewer (no, not none, just fewer) consumers would be willing to pay 8 x for their coffee instead of 2x. The finances of the fair trade firm would come under terrible pressure, they might even go bust.

What the speculation does, the futures and the options, is puts that price risk onto the shoulders of the speculators. If the coffee had been sold forward at £4 (just imagine) then it would be some number among the group of speculators who have to buy it at £4 and sell it at 50p (more accurately, as they never take delivery, they just lose money but the effect is the same).

That’s what we mean by the statement that speculation shifts risk. That it ain’t the poor farmer who has to bear the risk, but the rich speculator.

BTW, looking at those Barclays figures again, it seems that that’s the fees they’ve made for enabling speculators to speculate. Not profits they’ve made on positions (for they say they don’t take any positions at all). Just the fees for handling trades etc for people. Equivalent to stockbrokers getting 0.5% on a stock trade, not an investor getting profits on a rise in the price.

@ 7 Cherub

Because the evidence out there suggests that “climate change” isn’t the big driver of crop yields.

http://www.sage.wisc.edu/pubs/articles/F-L/Kucharik/Kuch2005EarthInt.pdf

As you will see, nicely evidence in this research, US crop yields have been growing at a fairly linear rate since the 30s.

You’ll also notice from this research that because potential yields are now approaching the maximum, variability from weather events is easier to examine against the overall trend, in turn leading to a lot of false positives for so called “climate change” induced events. You’ll also note that the variability of crop yeilds has declined over the century.

“Besides the growing body of evidence that suggests significantly reduced yield
gains in the near future, there are indications that U.S. corn yield variability has
escalated since 1950 in the United States (Naylor et al. 1997; Reilly et al. 2003).
These conclusions suggest that as farmers near potential corn yield ceilings across
the U.S. Corn Belt, they are potentially at a higher risk for catastrophic losses.
Naylor et al. (Naylor et al. 1997) point out that as yield ceilings are approached,
poor weather years can result in more significant deviations (negative) from perceived
average yields (i.e., statistically fitted yield line) than favorable weather
years do, primarily because yields have further to fall from the perceived average.
Additionally, as yield growth rates plateau, interannual variability due to year-toyear
weather fluctuations are easier to detect and separate from the overall trend.
Therefore, this may leave the false perception that the frequency of extreme
weather occurrences (e.g., drought, early frost, spring flooding) that are detrimental
to crop production may also be increasing.”

http://www.zerohedge.com/news/us-drought-context-spot-global-warming

Also gives you a nice picture of the history of drought conditions in the US over the last century. You’ll see that there does not seem to be any trend.

Droughts happen, and the weather changes, but saying raised food prices are due to climate change doesn’t bear out in the evidence. If anything, slightly warmer temperatures tend to *raise* crop yields.

What is really driving food prices are, as I say, more people, getting richer and eating a lot more grain fed meat – which takes about 7 times the arable land needed per kilojoule of calorific content than eating the grian itself. Add in politicians forcing more land to be used to grow biofuels, and flooding markets with newly QE printed money, forcing *all* asset prices up, and you have the basis for your answer.

@ 7 Cherub

By the way, do some research before you open your mouth, rather than just regurgitating lefty claptrap.

Wow, some tasty misdirection here – like how the rich speculators are shouldering all that risk, implying that we should be tewwibly grateful, even when they walk off with a massive wad. And even if they do get even more blisteringly rich there’s nothing to worry about – its all part of the Godlike wonder that is the market, so all you whining lefties should shuffle off and write letters about badgers etc.

Well, those may be the lies they tell themselves to get through day, but we dont have to belive them.

@ 11 Mike

Pull your head out of our behind. You have bought the lefty/Eurocrat view that it’s evil speculators driving up prices and starving the poor hook line and sinker. No evidence foor this of course, short of a bit of Guardianista ranting. You are happy to ignore the effects of demogrpahics and government policy though.

If you bother to look at actual research papers on it you’ll see that speculation has little effect on long term prices. Speculators simply aren’t big enough to materially affect global food price markets.

Frankly, I’d love to see people ban food commodity speculation, if only to watch those people blaming all the evil speculators squirm uncontrollably as they watch food prices climb at just the same, if not faster rate…..not least because food producers, now being unable to hedge their output costs, are likely to produce less.

13. DisgustedOfTunbridgeWells

I see the usual brigade of liars that usually accompany these types of articles are out in force.

14. DisgustedOfTunbridgeWells

@3

I’ve got to be honest Richard, I’m disappointed in you, you’re normally very reasonable (unlike this pair of otiose rentier apologists) but you’re back to telling the same lies you were before our little chat.

Shame.

@ Stuart Rodger
Do you know what a “Hedge” (as distinct from a so-called “Hedge Fund”) is?
It was originally (and sometimes still is) a forward contract that gives the farmer a guaranteed price at which he can sell his harvest. It reduces his risk by half (to crop failure rather than crop failure and/or low prices). As a result farmers are able to borrow to buy seed and fertiliser. So they can grow more food.
The commodity forward contracts that you choose demonise lead to higher global food production and LOWER prices for the poor.

@ Charlieman
In theory I support Fair Trade and occasionally (i.e. when I get the chance) do so in practice (but not their instant coffee because I *really* don’t like the taste). Fair Trade depends upon consumers in rich countries choosing to pay above the market price. The price offered by Fair Trade is the open market price plus the premium that they think they can get supporters to pay. Since transport costs to the UK for a wide selection of third world produce exceeds the amount paid to the farmer Fair Trade can significantly increase growers’ income while charging a tolerable premium to supermarket prices.
BUT your example leaves the farmer worse off selling to Fair Trade if there is a bad harvest and prices go up above the guaranteed price. The guy who gets screwed is the one who is forced to sell to the state trading monopoly instead of Nestle or Brooke Bond or …
Tangent: 30 years ago the WDM attacked Brooke Bond over the wages that it was paying to its Indian tea pickers: so Brooke Bond had to explain that it was paying the *maximum* permitted by Indian law – the state-owned tea plantations were inefficient and could only break-even by legally restricting wages to less than Brooke Bond wanted to pay

17. Derek Hattons Tailor

“otiose rentier apologists”

Get in there, best insult I’ve read in a while, made me spit out my organic yoghurt all over the keyboard

@16. john77

You really think fair trade helps the developing world?

@ Freeman
If you are talking about FairTrade, as Charlieman is : Yes, albeit by less than its most vocal supporters claim. Some extra money is added to the incomes of productive workers (not the political elites) as a reward for their work. A part of this may be transfer from incomes of other third world workers but most is a net addition directed to workers.
If you are talking about protectionism by US unions under the misleading name of “fair trade” of course not.

20. Richard Carey

Liberal Conspiracy doing what it does best: posting a foolish lefty rant, and having it exposed as such by some of the more reasonable commentators, interspersed with the occasional snarling collectivist.


Reactions: Twitter, blogs
  1. Tory List

    George Osborne: http://t.co/Z6ch6Sgq “Will Osborne vote to rein in the obscenity of food speculation this week?”

  2. Marverde

    Helping the world starve > http://t.co/2Kbby8Bf

  3. Marverde

    "British banks are some of the worst offenders. Barclays alone have made over £500 million from food commodity trading" http://t.co/2Kbby8Bf

  4. overhere

    Watch the video! RT @libcon: Will Osborne vote to rein in the obscenity of food speculation this week? http://t.co/Su7v0pbd

  5. Jason Brickley

    Will Osborne vote to rein in the obscenity of food speculation this week? http://t.co/42ZTVObN

  6. leftlinks

    Liberal Conspiracy – Will Osborne vote to rein in the obscenity of food speculation this week? http://t.co/Nl9LVZz8

  7. Nidhi Gupta

    Will Osborne vote to rein in the obscenity of food speculation this week? http://t.co/tnBBhgNA via @zite

  8. Paul Grover

    RT @libcon: Will Osborne vote to rein in the obscenity of food speculation this week? http://t.co/84DPPgq0 #fb

  9. Stuart Rodger

    Written an article about George Osborne's looming decision on food speculation http://t.co/dpR5a2Ra Sign, send and share the petition!

  10. Peter Pink

    Will Osborne vote to rein in the obscenity of food speculation this week? http://t.co/z6cxq0Ra via @zite

  11. Stuart Rodger

    @William_Bain Osborne's making an important decision on that today. Written an article about it here: http://t.co/dpR5a2Ra





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