Streams

Follow Up Friday: Commodities Speculation

Friday, May 09, 2008

A commenter on our website chided us for not exploring the connection between speculation in the commodities market and the world-wide food crisis. We follow up and explore this under-the-radar factor with James Galbraith, Professor of Government at the University of Texas.

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James K. Galbraith
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Comments [8]

Matt Siegel from Brooklyn, NY

I understand how speculation in the futures market could push up the price of non-perishable commodities such as oil, because sellers might see the high futures prices and decide to hold their oil in inventory for a few months, hoping to cash in when those futures prices become actual -- i.e., when the futures contracts come due. This, in turn, would lower the current supply driving up current prices. But it seems to me that this sort of thing could never happen with perishable food, because sellers cannot put off selling their inventories indefinitely, since their inventories will rot. Perhaps things like corn and rice can be stored for a while -- much like oil. But very perishable items, such as fruits, vegetables and milk, shouldn't be substantially affected by futures prices. (Of course, in the very long term, even these perishable products could be affected, e.g., if farmers were to change their planting decisions for next season based on their expectations about prices in the distant future. But once the planting decision is made, if you are dealing with perishable food, then you cannot hold inventories against expected future price increases, no matter how much you may want to do so.) I am not an expert in this area. Am I missing something?

May. 10 2008 01:51 PM
jeff from brooklyn

unfair to say NPR hasn't covered...
just this morning Marketplace celebrated
the ingenuity of these opportunists.

May. 09 2008 10:45 AM
sdf

Tom Keene on Bloomberg radio -- covers this in delightful detail w thought leaders daily. Podcasts.

May. 09 2008 10:41 AM
hjs from 11211

but if factors are seen on the horizon (ie bio fuel) why shouldn’t futures prices go up?

May. 09 2008 10:40 AM
sdf

Given the emasculation over the past couple yrs of the US dollar value, US bonds and US stock market -- in combination of the huge jump in value of petroleum -- the fact this speculation is happening only now demonstrates how dumb and slow investors really are. Food has been too cheap for many many years -- compared to real estate, which has NO inherent value by contrast yet accounts for 4x consumers' spending.

May. 09 2008 10:39 AM
Daniel from Brooklyn

For what it's worth, the WSJ had a story on this subject yesterday, reporting on a survey of economists the paper conducts periodically:

Bubble Isn't Big Factor in Inflation: Economists Blame Food, Fuel Run-Ups On Fundamentals

http://online.wsj.com/public/article/SB121026120931177437.html

Not that economists are never wrong, but...

May. 09 2008 10:39 AM
RJ from Brooklyn

And what about the simple profiteering of agri-business? The general principle of supply and demand that allows massive corps to make as much money as they can grab out of the desperate needs of people for food?

May. 09 2008 10:39 AM
JoshL

On this note, are governments (such as Singapore, Dubai etc.)-backed investment funds purchasing US farmland for export-only to China and Asia? If so does this dynamic relate to commodity prices, either by lowering or raising them?

May. 09 2008 10:05 AM

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