The Food Bubble (2010) | Hacker News Reader

The Food Bubble (2010)

theglobalrealm.com

204 pointssmilliken121 comments

I usually don't do this, but this article is long. The summary (tl; dr) is as follows:

1) Large institutional long investments in a certain type of wheat future (Chicago soft red winter) started crowding out the real customers of physical wheat, such as bakers.

2) Because wheat varieties are moderately fungible/exchangeable, the downstream bakers started to use a different brand of wheat (Minneapolis hard red spring) and changed their recipes accordingly.

3) This second class of wheat is very widely consumed, and bidding up its price caused riots and food shortages around the world (or so the reporter states. He didn't provide specific examples, as this predates the Arab Spring).

The overall effect is if a particular food staple suddenly became a fashion item, with wealthy people buying it off the market for non-dietary purposes at such a rate that poor people could not afford it.

However, the key bit I don't understand, and which the reporter doesn't explain, is how commodity fund investors didn't lose their shirts by betting on wheat to keep going up. If they did lose their shirts then this bubble is unlikely to repeat in the near future.

He did mention it somewhat. Since the funds were only required to store 5% of their clients' money in the actual commodity, they could stash the rest of the money somewhere else safe, and then on top of that make money on transactional costs.

From another article I'd read before (which I linked to down below, and which is gone now), the funds made quite a bit of money in the rollovers by charging a fee to every investor who wanted to roll it over. Since none of their investors actually wanted a dump truck of grain showing up in their driveway, and since the price kept going up and up and up, they paid the fee to roll it over each time.

Somebody probably did lose their shirts, but it sure wasn't the funds, and the funds won't have any trouble doing this again, because there will always be more customers eager to park money somewhere to make more money.

People lost some money after 2008, although prices are now approaching the peak levels again. However, the key point is that your pension fund may not care, they are buying because of the negative correlation with other assets, and positive correlation with inflation, as the 2005 paper mentioned demonstrated. Pension funds are where this money is coming from now, and where the trillions of dollar figures talked about would come from, as they get persuaded that this is a real investible asset.

Food didn't get harder to make, but the price of food went up around the world, and it still hasn't gone down to what it should be.

Is there really any confusion as to who lost their shirts?

There's an old economist joke that goes like this:

What happened whe the Soviet Union gained control of the Sahara desert? For five years, nothing, then a shortage of sand.

It seems we can replace Soviet Union in such jokes with Investment vehicles.

I don't see any reason to distinguish them.

A free market means a free market. When one monolithic organization with access to controlling capital makes its goal not to preserve the freedom of the market, but to extract value from the rest of the market for itself and its shareholders, that's not a market. That's a centrally planned economy.

The bankers have turned Communist oligarchs in all but name.

> When one [...] organization with [...] capital makes its goal [...] to extract value from the rest of the market for itself and its shareholders

Nope, just a regular capitalist enterprise

And fascism is just a regular government, and secret police are just regular police, and martial law is just regular law... You know -- since I've got you here anyway -- I've always wanted to tell you how much I loved your novels, Mr. Orwell.

Actually you are incorrect, a free market is one in which people voluntarily interact for mutual gain, i.e. it is not coercive. If their is government interference then it is not a free market, cornering a market does not make it any less free if done solely through voluntary trade.

So if I'm born into a world where someone has cornered the market on, let's say, food, and their perfectly rational strategy is to choose not to sell food to anyone who competes with them, I'm not any less free to compete than if one person didn't get to make that decision?

Get outta here with that.

> So if I'm born into a world where someone has cornered the market on, let's say, food

Then you can ride away on your unicorn.

The western world doesn't have food monopolies. The 2nd world occasionally does, but they're created by their govts.

Of course, it doesn't help that the US govt decided to raise corn prices by subsidizing corn ethanol.

Why is it that a subsidy (which pays farmers to grow one thing, then collects money from taxes progressively) is bad, but an investment (which pays farmers to grow one thing, then sells it at a high price once someone gets hungry enough to buy it, and pocketing the cash) is good?

Huh? If you're going to claim two things are the same, it's good form to refer to them by their proper names before arguing similarity. And, if you're going to attribute a position to someone, you might want to have some evidence that they actually hold that position. (The fact that Hitler was bad does not imply that he killed puppies.)

I'm against payments to farmers other than by folks voluntarily buying said farmer's output. That's a special case of a more general rule that applies to every work product.

So I'm against "pays farmers to grow one thing" if it isn't money paid by folks who want and get said thing in exchange for said payment.

And yet I note you haven't actually challenged my point: A subsidy is when the government pays for food, then gives it out for free (it costs less to the consumer than it would otherwise.) An investor pays for food, then sells it at a higher price, extracting the value for himself (it costs more to the consumer than it would otherwise.)

That's the only difference; in neither case do the people who wind up actually eating the food, i.e. everyone else, have a choice what to pay.

You're trying to draw this distinction between "voluntary" and "involuntary" payments which doesn't exist in the real world. I guess taxes are supposed to be involuntary, while food purchases are voluntary? Except that in the real world, if you don't buy food you die, and when one group of people who know they will never be hungry have the power to raise food prices across the board... That's a very twisted idea of "voluntary."

> And yet I note you haven't actually challenged my point

That's because, as I pointed out, you didn't actually express a point to challenge. You blathered some vague description and an accusation.

Now that I can see what you were trying to say, the error is clear.

The "food investor" spends his money, not mine. If he's wrong, he loses his money. Moreover, the food investor doesn't stop someone else providing food. Govts do that all the time.

Moreover, govts tend to go all-in on their decisions - so the amount lost when they get it wrong is much larger. Investors aren't monolithic - some get it right, some get it wrong.

Yes, you need food, but unless govt gets involved, you have considerable choice about how to aquire it.

> Except that in the real world, if you don't buy food you die

Speak for yourself. The "square foot" folks have shown that it's possible to grow an amazing amount in a very small area. And yes, poor people have the time.

> when one group of people who know they will never be hungry have the power to raise food prices across the board

Govts are the only group with that power. If I don't like the prices from ADM, I can buy elsewhere. If I don't like the food prices set by govt, there is no "elsewhere".

Oh, thank God for that then.

For some reason I thought I read this article about how between 2005 and 2008 investment into grain futures pushed the price of real grain high enough that hundreds of millions of people across the world starved, while hundreds of millions of bushels of grain sat in silos, resulting in inflated food prices everywhere which still have not returned to what they should be, meaning people at the margins who starve every single day.

But I guess I must have imagined that. It's good to know only governments have that kind of power here in Bizarro World.

> thought I read this article about how between 2005 and 2008 investment into grain futures pushed the price of real grain high enough that hundreds of millions of people across the world starved

Starved? Exaggerate much?

What, exactly, kept them from buying something else instead?

> which still have not returned to what they should be

What is this price "that should be"?

If you think that wheat should be sold at a given price, what is stopping you from providing it at that price?

You're claiming that "investors" are buying grain for less and waiting for the price to go up. What stops you from buying at the same price that they buy and selling at a lower price than they demand?

Exaggerate? Not really, no. For the first time since we started counting, food insecurity increased as a proportion of the population. 250,000,000 more people went hungry in 2008, the worst increase ever-- while the grain harvest itself was one of the most bounteous, filling up silos and going to livestock feed instead of bread. But of course this is all in the article you didn't read.

Never mind that, though. If you are seriously trying to draw some kind of moral distinction between a child "literally" starving and a child who goes to sleep every night not having had enough to eat, having a little bit less every night... I don't say this a lot, but God damn you, sir.

Free markets are where you buy unicorns, aren't they?

A free market also implies some transparency does it not? If it's crystal clear what is being bought & sold, then everyone can make informed decisions and take their gains/losses honestly. When things like derivatives are created specifically to obscure the product and mislead potential buyers, then is it truly a free market? Shouldn't the government's roll be oversight (aka interference) if deception is creating a clear advantage for one party in the transaction? Your premise of mutual gain falls short in these cases.

> When one monolithic organization with access to controlling capital makes its goal

The only organization that controls enough capital is govt.

Regarding point number 3. There was a food crisis story reported back in 2008 about Haitians eating dirt to suppress hunger. Before the earthquake. Truly the worst luck in the past decade to affect a single group of people.

http://m.npr.org/story/18767313?storyId=18767313&from=mo...

This article is basically shooting the messenger.

The roiling agricultural commodity prices in the last decade were largely the result of dollar currency devaluation by the Federal Reserve. The same patterns occurred across other global commodities like copper and oil.

Agreed. Price growth is natural when you increase the money supply. It's one of the reasons that the CPI index is flawed, as it does not include food costs directly.

Increases in the money supply don't reach everywhere at once; inflation is not evenly distributed. It's distributed, often, through hedge funds that can borrow large amounts of money from banks. You're looking at the effect and the mechanism of easily-borrowable-money actually being borrowed to bid up a particular sector of the economy; much as, earlier, it was borrowed to bid up real estate.

Disagree. The fed does not devalue currency. They set interest rate policy on reserves aka the federal funds rate. Biggest factor in supply and demand for a currency is fiscal policy. Second biggest factor is trade balance and the desirability of foreigners to save the given currency.

Increasing the money supply devalues the currency even if that's not the intended goal; that is basic economics.

"Debase" is probably a better word than "devalue" in this context.

Devaluation of the dollar shouldn't have been a problem for foreigners who want to buy wheat. They would have had more favorable exchange rates (their own currencies would have appreciated) that would have covered the higher USD-denominated wheat prices.

Did the article explain why that second class of wheat wasn't replaced with another (cheaper) staple food?

The same reason it wasn't in the Soviet Union. When a centralized planning authority makes farmers grow one thing, that's what people eat. They don't have a choice.

I thought this was a pretty poor article.

For one, there's debate over what actually drove up the price of wheat (http://www.economist.com/node/16432870?subjectid=2512631&...). The author glosses over or fails to acknowledge some of the major counterpoints.

He also seems to have a pretty superficial understanding of futures markets. For example, there's nothing inherently "hysterical" about contango (future prices higher than current prices). It's a perfectly natural state for many commodities (browse some prices on http://www.cmegroup.com). He also paints a pretty rosy picture of the history of futures markets, but people have complained about speculators causing wild price swings since the beginning, long before index funds came on the scene. And there's nothing new about the way index funds maintain their long positions. Speculators have always had the option of rolling their contracts forward.

Index funds have opened up investment opportunities for a lot of people. Imagine if you had to buy and maintain a server for every app you wanted to put on the web (this is like buying a futures contract directly). Now compare that to a VPS/shared server (this is like buying an index fund). Not a perfect analogy but pretty fitting.

Speaking generally, if people are investing foolishly (i.e. mispricing something) well then they're investing foolishly. This can happen in any market. They'll either adapt or get weeded out. What's the alternative? Does Big Brother or anyone else know what the "correct" price of something is at any point in time?

It is a bit disconcerting to me that commenters here are fascinated by the technical analysis of this system and appear quite oblivious to the problem of starving human beings.

Perhaps I am not intellectual enough to appreciate the empathy hiding behind this analytical ruminating about the problem - but I wish that I got the impression that there was more reaction happening than "Wow, what an interesting phenomenon in the commodities market- how do all of these moving pieces fit together?"

To quote the sometimes poignant Jack Johnson: "Why don't the newscasters cry when they read about people who die? At least they could be decent enough to put just a tear in their eyes"

For what little it's worth, a lot of my commentary on HN for quite a while has been centered around the effects of things on real people -- whether it's UI, buggy software, or poverty.

And those conversations have generally not gone very well.

So I've recently started giving up. HN is just not the place for that sort of thing. It's a place where the audience-participants want analysis, they want technical details, they prize expertise, and they can't discuss value unless there's a hard real-world number involved.

That's not altogether bad, but I do hope that somewhere there is a group of smart people who actually think about the real-life problems that other people have, and try to do something about it. If there is, I don't know of it yet.

Thanks for your insight and for your past championing of a more "ground level" approach to improving some crucial systems.

The sort of community of which you speak does certainly sound like an exciting and powerful one. I hope that it exists, and I hope that it finds you - and maybe me.

I can't speak for others on HN but I come here seeking knowledge, to understand. Not as forum for activation. This knowledge is then to be used to take action in the real world.

That may not be through pushing a cause or donating to a charity, but by getting myself into a position of greater power and authority to make a real impact when I can make an impact.

I see articles like this as cards at my disposal, that I will refer back to when the time is right and the chance is there, to make a dent.

I think we all realize it's a terrible thing, but repeating how sad it is will get us nowhere. Understanding what caused it and how it works, on the other hand, can help us prevent further people from starving. I'm personally happy that HN often takes an analytical, rationalist point of view, rather than an emotional one like eg. Reddit tends to do.

Exactly - if you don't understand a system, how can you fix it? You risk making it worse, rather than better, or shunting the problem elsewhere, but not really fixing it.

...exactly.

The sentiment seems to be that "we" need to somehow control these prices and markets, which has worked horribly in the past (and present).

The creation of the index isn't the problem. Wild speculation is. When you speculate the wrong way, you need to lose. But the precedent has been set --not only on the top level with the huge banks, but with main street citizens speculating on second homes and mortgages-- that the bet should be upside only.

This community is exactly the type of testosterone-driven money-obsessed community that would create a Goldman Sachs Commodity Index that will cause starvation, and then absolve themselves of responsibility due to some free market arms-length ideology.

It's not a coincidence that you're disturbed by the comments. Wall Street entrepreneurs and Silicon Valley entrepreneurs are fundamentally very similar in mindset and outlook.

Entrepreneurs are trained to have a laser focus on their own issues and to look at everything in terms of dollar value.

Recently, it is becoming more clear to Silicon Valley entrepreneurs that short-term windfalls are preferable, so they try to pump up the speculative value of their companies and dump them before anything bad happens. Pumping and dumping your own Silicon Valley start up is surely one of the easiest ways to get very rich right now.

The not-so-small difference is that tech-entrepreneurs (in SV or anywhere else) are creating real value and "WS entrepreneurs" (which I guess you mean brokers and similar) are just betting and not creating real value.

I said they were similar in "mindset and outlook". Would Silicon Valley hesitate to cause humanitarian crises in the name of profit? What if those crises were very only indirectly linked to their behaviour?

What if Silicon Valley discovered today that they were putting millions of low-skill Americans irreparably out of work. Would this motivate them to modify their libertarian ideology, or lobby for free educations for the poor?

I could not disagree with you more.

SV Entrepreneur types, as a generalisation, are more like the farmers in this article selling there wares than the WS Bankers. Sure people are money obsessed but they do it either by being profitable or by selling equity in value creating businesses.

I think the Google slogan of "Don't be evil" is the best summation of the average tech entrepreneur these days, generally because they are smart respectable human beings. They are looking to solve a problem that exists, for people willing to pay.

Of course there are always bad apples.

There is nothing broken about demand and supply, only the steps in between are broken, which the financial institution's such as Goldman saps on.

I think "Don't be evil" is a slogan of tech employees, not tech entrepreneurs.

I single out Hacker News as being psychologically different from normal software engineers. The focus on Hacker News is money, and many people here see profit as inherently virtuous. Social darwinism, eugenics, authoritarianism, and other extreme right political views are overrepresented on Hacker News, and given surprising amounts of leeway considering the swiftness with which other views are scrubbed away here.

Something which has always disturbed me about the community is the macabre fascination with funding and exits.

Obviously these are healthy steps in the progression of some businesses, but at times it seems HN focuses on them to the exclusion of whether a startup actually contributes something worthwhile. It is probably arguable that those things represent a reasonable proxy for the value created (or expected to be created) by the business. Then again, there are plenty of funded (and acquired) business models which are based on cynical exploitation of the less-educated for the benefit of the business owner, at a net cost to society as a whole.

If an SV entrepreneur-type is more focused on getting funded or making an exit than creating net value to society, I think it is fair to draw ethical comparisons with the WS banker-type.

I'm not sure I can agree. Sometimes there is an emphasis on acquisition, but companies that sound overvalued or negative to society tend to be disliked on HN as well. Groupon, for instance, gets flak in about every thread that mentions it.

Middle-men are often seen as ethically compromised in any supply-and-demand scenario. this is not new.

The whole GS franchise is built on their role as a go-between. Need hyphens? You might not understand the hyphen farmer's strange accent, but the merchant has been dealing with him for a long time.

I am currently drunk; but i think that if every newcaster drop a tear for everyone who dies in the news they read, they would eventually die of dehydration (so to speak).

One of the things markets are supposed to do in theory is to route resources to where they are needed, and financially punish people who move resources in stupid ways.

The technical analysis I've seen here seems to hover around the question of why the investors were not automatically screwed. In a more efficient market the price collapse would have been obvious, the bubble would not have happened, and no one would have starved.

This doesn't directly address the inhumanity involved, but the analysis is important.

>One of the things markets are supposed to do in theory is to route resources to where they are needed, and financially punish people who move resources in stupid ways.

How many more people have to die needlessly before this theory is reexamined by those who practice it?

Planned economy has been attempted in several countries. Their death record isn't exactly shining.

I thought the human angle of the piece was far overblown. The underlying story being presented is "Goldman Sachs raises prices and people starve as a result". I think that was mostly to add a dramatic point to the article. In reality it's a "look at how all of these pieces fit together, and here's how Goldman Sachs hacked the system" story. While hackers love that kind of thing, we're a relatively small market and a story with a spin about the evil of corporations is so in right now.

The reason people aren't reacting to human suffering is because we can see that it isn't a real factor in this story. We're talking about a small change in the world's supply of food here. It would be very difficult to image (or prove) that anyone actually died of starvation as a result of this. It's more like a loaf of bread that used to cost $4.50 now costs $6.00. That extra $1.50 can be enough to make an unpleasant life significantly less pleasant (believe me, I know), but I don't think it equates to the starving human beings.

tl;dr - Capitalism is a dick move. Don't blame the flaws in the system on the people who benefit from them.

Food prices have tripled since 2005, roughly. That makes a huge difference in many countries, and to the poor in many more. It is a very real factor.

Unfortunately, people at the margin DO starve. All economic activity happens at the margin.

What usually happens is a country at a large scale imports less subsidized food commodity, and this limits government distribution of that commodity -- they usually stop some feeding centers, which makes the marginal trip more difficult or impossible for some people.

It might also lead to scaled back or eliminated aid programs.

So what happens when you've to live with $5 a week? This $1.50 blocks you from buying any bread.

>It is a bit disconcerting to me that commenters here are fascinated by the technical analysis of this system and appear quite oblivious to the problem of starving human beings.

Your emoting and four bucks will buy a cup of coffee. It's not going to help anyone eat.

You have to understand what's going on before you can make things better. So yeah, how the "moving pieces fit together" matters more than how much anybody cares.

>how the "moving pieces fit together" matters more than how much anybody cares.

It takes both to take any meaningful, equitable, decisive action. Analysis without motivation leads us to scholarly indifference.

Your point is taken when it comes to empathy without logic.

Wow. I had no idea this happened. I'm surprised this story has not had more attention.

At the time some said that the upstream cause of the Arab Spring was increased food prices.

http://www.pbs.org/newshour/updates/world/july-dec11/food_09...

More controversially, some blamed this on the Fed's inflationary QE2 policy (printing money), as food prices went up across the world in real terms. In the US this was an inconvenience, but abroad it was something else.

http://www.telegraph.co.uk/finance/economics/8492078/How-the...

I used to work at Goldman's. This story doesn't surprise me at all. This is what all good bankers do. I think the story hasn't gotten attention because it is not a story. It is just how things work.

This comment is...amazing.

Much like Paul, most actual people are genuinely shocked about this. It is one hell of a story. The general population does not understand how markets work.

Billions are hungry. The streets are full of protesters worldwide. Retirement funds are gone. Markets are failing. Countries are failing. These are humans, who just want to eat. And for what? To turn $100 million into $200 million?

This is not "how things work". This is not "what good bankers do". This is what greedy sociopaths do. It is reprehensible and disgusting. These people are malicious and should be in prison.

First of all - I wasn't making a value judgement. Personally, I agree with you - it is reprehensible and disgusting. That is part of the reason I don't work at Goldman's anymore. I always found it a bit embarrassing to be associated with them. By "good" bankers - I ment the one's making all the money. Not those who are morally good.

Second - it is how things work. Not just in commodities, but in everything Goldman's does. There is always an angle which greatly reduces risk. That angle might be insider trading, advanced statistics, or just a rigged market. Goldman's is doing nothing illegal that I am aware of or anyone can prove. ...it is just how things work.

Maybe it should be illegal.

Well, it is illegal with Onions, but the prices of those tend to be even more volatile than the ones that people speculate in.

Does it surprise you how many of us are surprised? Even pg?

We don't know how bad it's gotten. If you really think it's reprehensible, it's well past time you (and other insiders, not to single you out) spoke up.

You don't know the half of it! Huge pension funds such as CALPERs, the california public pension fund, invest large sums (go long) passive commodity instruments such as oil and agriculture. These pension funds are insured by the federal government. So the federal government is indirectly subsidizing this activity.

I am not entirely sure but no one has ever called it "Goldman's" in my limited experience.

I thought the same thing when I first came across this info about a year ago. You might be interested in Matt Taibbi's "The Great American Bubble Machine" article. The title refers to Goldman Sachs, and the various bubbles that they have caused and how they did it: The great depression, tech stocks and the dot com bust, the housing bubble, $4/gal gasoline (and other commodities), the bailout, and their next target - the up-and-coming cap and trade/carbon credits market.

http://www.rollingstone.com/politics/news/the-great-american...

Then there is his other article, on why no one went to jail:

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

"Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that."

http://www.rollingstone.com/politics/news/why-isnt-wall-stre...

> Wow. I had no idea this happened.

I worked in commodities and read the article. What happened?

Are you talking about the forced long money? Yeah, we and every hedge fund on the planet skimmed that pool. The dumb money doesn't move the market these days.

We had no idea that bankers literally, directly made people starve to death, which is what happens in the real world when you double the price of bread for a month to make a buck.

The fact that the bankers among us can't see anything odd about this, let alone shocking and disturbing, is still more food for thought for those of us who care to live through the winter.

Something seems wrong with this story. I understand how speculation can push the price up but if the price goes too far above the true value for too long there has to be a drop - the bubble needs to burst at some point. Has there been a drop in price since this article came out? Have farmers adjusted to grow unusual amounts of wheat? Are there parties to the events who have been shielded (bailed out) from any downturns?

The key seems to be the way in which the accumulated long positions were periodically rolled over, but the article doesn't seem to explain how this was done.

capnrefsmmat covered the bursting of the bubble, but the positions were rolled over simply by converting the futures to their equivalent holdings in actual wheat, selling the rights to that wheat for the actual spot price, and using the proceeds to buy more futures for the next term.

This doesn't actually protect the buyer. Rather, the buyer was protected (for a while) by the continuing influx of new capital into commodity indices which led to a continuing rise in prices -- in other words, it was effectively a distributed Ponzi scheme.

I think I understand. The profit is determined by how much the spot price has increased during the term, since the futures are bought for the spot price at the beginning of the term and sold for the spot price at the end. Put that way, this looks much more like all the other bubbles we've read about.

I get the feeling that there's really only one bubble, but it moves from one sector of the economy to the next, leaving destruction in its wake, kind of like Bugs Bunny used to tear up the ground as he burrowed through it.

>I get the feeling that there's really only one bubble, but it moves from one sector of the economy to the next, leaving destruction in its wake

This seems like a nice insight, can anyone with financial experience comment on it?

I'm thinking maybe if you analysed it you'd find the same subset of traders following the bubble around.

Given Ponzi schemes tend to end in prosecution,(this is probably a forlorn hope) could we eventually see prosecutions for this sort of behaviour? Or maybe as a next best investors slowly beginning to realise that these odd price spikes keep ending with a few investment banks winning and all else losing?

Before the contract is due for delivery, it is sold and the next contract further out is bought. It is trivial.

According to the article, the bubble did indeed burst:

> Then, like all speculative bubbles, the food bubble popped. By late 2008, the price of Minneapolis hard red spring had toppled back to normal levels, and trading volume quickly followed. Of course, the prices world consumers pay for food have not come down so fast, as manufacturers and retailers continue to make up for their own heavy losses.

Thanks, I must have skipped over that part. Also I was able to find a good chart at http://www.wikinvest.com/futures/Kansas_City_Wheat_Futures

The article still isn't clear (at least to me) on who took the losses for the speculators.

The same people who always take the losses - speculators. Some of them are the same people who bid the market up; some of them are people who foolishly bought at the top.

Prices are back up. Not quite up to the peaks of 2008 but not far off. http://www.indexmundi.com/commodities/?commodity=wheat&m...

Speaking as a farmer, these are the prices required to remain profitable. I'm sure it wasn't covered here, but prior to 2008 we were seeing numerous farmer protests against the destabilization of our food sector. And then, all of a sudden, the prices rose. Maybe it was purely coincidence with investor actions, but I have always felt it was something else.

Though it raises some interesting ethical questions. Is it better to have the farmer subsidize the poor by not turning a profit, or is it better to have the farmer turn a profit (the goal of the business) at the cost of starvation of others?

Good point, and of course there are the government farm subsidies too, which could go to the poor instead if the farmers were profitable, certainly here in Europe the subsidies have not necessarily achieved the right goals, as there is still extensive poverty in agriculture. There are also buy side issues, such as concentration of buyers. And in the UK I see farm land prices are rising fast, which will reduce much of the potential profitability long term.

At some point the farmers have to turn a profit. Maybe not every year, but most years. Otherwise some percentage of farmers will get out of the business and do something else. The price will rise until it becomes profitable.

Over the last few decades the real problem has been food is too cheap. First world governments are subsidizing food production to the point that a farmer trying to grow rice in southeast Asia can't compete with imported rice shipped from California. So that farmer moves to the city and gets a job making Nikes.

When there's some disruption in food production thousands of miles away all of the sudden people are starving because everybody is making shoes instead of growing food.

Goldman and other banks profited because they were selling the financial products, not buying them. The sellers always make money.

Investors who bought the Goldman products did eventually lose money, however not soon enough to stop millions of people from starving.

For me, the takeaway here is that tremendous wealth and power inequality creates conditions where the stupidity and inattention of a wealthy elite can easily cause the starvation, death, and suffering of the people they financially dominate.

This story has repeated over and over throughout history. Usually, it happens when a powerful person like a King or Emperor behaves irresponsibly and causes terrible suffering.

I'm reminded of Nero watching Rome burn or Stalin starving the Ukrainians.

Concentrating power and wealth in the hands of the few is a bad idea because their slightest indiscretion causes mass suffering.

I don't have data for the wheat alone, but the index did tumble:

http://www.google.com/finance?q=AMEX%3AGSG

There's a lot wrong with this story. I'm amazed that most people here are just eating it up. Compare to the reaction to science news: if an article claims that X causes Y but the data only shows a correlation but not causation, people will always point it out. Why not be a little more critical here too?

For instance, how do we know the commodity index prices caused an increase in the price of the actual commodities, or if something else caused the price increase and the commodity index price was merely reflecting it?

Other things the article gets wrong or doesn't explain:

* the Goldman Sachs Commodity Index is just an index (and it's not even owned by GS anymore, it's owned by S&P). It's not a fund. There are funds that track it, but just creating an index doesn't do much to the market.

* he says that bankers started making financial products out of food products in the early 1990s, only to contradict (and correct) himself later but without explaining that contradiction.

* "the bankers had figured out how to extract profit from the commodities market without taking on any of the risks they themselves had introduced by flooding that same market with long orders". This is exactly what every mutual fund manager does, whether it's stocks or commodities. There's nothing new here. The fund manager will only flood the market with orders to the extent that his clients are putting money into the fund.

* "By the time the normal buying season began, drought had hit Australia, floods had inundated northern Europe, and a vogue for biofuels had enticed U.S. farmers to grow less wheat and more corn". How in the world does that support the claim in the title? Droughts and floods decrease the supply, prices go up.

I'll stop here, but there's more data about this in the Economist:

http://www.economist.com/node/16432870?subjectid=2512631&...

The article totally glossed over how the long orders were "rolled over" from one trading period to the next. This seems like a critical detail. What happens when all the orders come due and you're holding a bunch of long orders?

Also, wasn't this on HN a while ago? Or did I see it somewhere else?

Strangely enough, this is a recurring nightmare of mine. I'm holding commodity futures that I forget to close out, and then one day farmers show up at my door with the delivery.

Frustratingly, the post you are probably thinking of was here: http://www.cpeterson.org/2011/03/10/why-gas-is-so-expensive-...

(Aside: this is one reason why I have so little trust in the web as a long-term historical medium.)

Although that article focused primarily on oil futures, it also discussed commodities futures, and specifically addressed the rollovers. Unfortunately, I neither understood it well enough at the time, nor remember it well enough now, to regurgitate it. Maybe someone else will come along with a cached copy.

I think that's the one I was thinking of. I guess I followed the link from that one to this one, and therefore I remembered reading this article.

Nah; the previous version of the article I linked was completely different. For some reason, the author felt the need to take it down and replace it with links to these other articles.

Rolling over is a routine operation. Say you hold a long position on 1 contract of X with expiry in December. At the expiry date, you simultaneously sell a offsetting contract of X (canceling out your long one), and simultaneously buy a new contract with expiry in March.

An understated but key idea from relatively early on in the article is that investment firms like Goldman Sachs have a strong incentive to destabilize markets, since a commodity that never changes price cannot ever yield an investment return. Seems like a bit of a perverse incentive, pitting investors against the common good

While I'm sure that this may be a component, I don't know if it has as deep as an impact as it's implied. With rising worldwide demand due to an exponentially increasing global population, as well as things like Ethanol in the US driving up the price of corn, protectionist policies on things like rice in Thailand, and things like possible inflation from QE2 this may be just a component of a veritable plethora of issues that are effecting the global prices of food. Still though it's fairly interesting to hear about this side of it.

things like Ethanol in the US driving up the price of corn

You can't really drive up the price of an individual crop. If the price of one crop goes up, they all go up. There is only so much land, so if one crop looks to be more profitable, farmers will shift their growing plan to include more of that crop, leading to shortages of the other crops.

Given this article, if true, means that ethanol may have play little to no role in the commodity price increases. I remember at the time it was really only the mainstream media that jumped on ethanol. In the farming communities, investors were thought to be the source of the price increases even then.

Food prices have swelled many times in history, but Goldman Sachs wasn't to blame for those bubbles and I doubt they're at fault for these. See a short list of previous food riots which catalysed political upheavals here: http://en.wikipedia.org/wiki/Food_riot

Derivatives are actually incredibly useful tools in agriculture because they allow a farmer to embark on the long-term commitment of growing crops with the peace of mind that (s)he'll have guaranteed customers for the final product. This is why the MGEX has been running since 1883: http://en.wikipedia.org/wiki/Minneapolis_Grain_Exchange

Current suspected, unpopped bubbles:

Food bubble;

Commodity bubble, esp. the

Gold bubble;

Higher Education bubble, esp. the

Student loan bubble;

Health care bubble;

Tech bubble;

China bubble;

Developing world real estate bubble; and the

Luxury bubble.

Obligatory http://xkcd.com/552/

I read an article in The Economist some time ago about speculative trading in oil markets. People were raising a ruckus about how it raised the costs of heating for the poor. Turned out that the evidence showing causation was extremely flimsy, and many other global trends were much better explanations.

I think burden of proof is on the article to make the case for causation, and I didn't see it (although I skimmed the second half).

This article omits important details and is factually wrong. In its attempt to 'blame the bankers' it glosses over the role of ethanol policy and the federal reserve on food price rises and wrongly presents the link between futures markets and actual prices.

At the end of a futures contract term, an actual delivery of physical product has to take place. "Rolling over" long futures contracts does not mean the holder can get out of physical delivery. Exchanges do not raise prices of physical products by themselves. They also provide valuable price signals for producers about expected future events.

Blaming speculators is easy, but a factually incorrect way to see the situation.

A world bank report written in July 2008 stated that "large increases in biofuels production in the United States and Europe are the main reason behind the steep rise in global food prices responsible for 70-75% of the price rise...with higher oil prices and a weak dollar explain 25–30% of total price rise."

It is a common theme these days to blame bankers and market participants for problems created by government policies. Market actors are agnostic. Governments set the rules of the game and should be the ones held accountable.

I just don't get the point. You buy something if you expect its price it is going up. If the price is going up, it means there is higher demand. If there is higher demand, it means somebody does actually need more food (think of China and India).

I think the whole point of this article sounds a bit ideologic. Also, again, no really good data to prove his point.

You buy something if you think the price will go up, but this also makes the price go up. If a whole bunch of people think a commodity will go up, and start buying up, this will drive the price up a lot. A commodity does not have to change it value, or for there to be an increase in demand for the price to go up, all it needs is some speculation that it will go up, and a whole bunch of people looking to profit.

I still don't get it. If people are buying and the value is not there, they will loose money, right? Speculators can also bid on a lower price (derivatives), right? So, who are all those crazy people bidding only in 1 direction (higher prices)?

I'm wondering if there's something preventing the government of vulnerable countries from buying futures themselves to shield their own people from violent price fluctuations like these, i.e. hedge against price increase for food commodities that need to be imported. Trading commodity futures may be inaccessible to ordinary people, but I don't see why the government of a country, even a developing one, cannot do it, other than because of some idiosyncratic rules of the game.

That would make the problem worse though, by adding more demand for futures. They should sell futures to take advantage of raised prices now for future production, taking profits and driving prices down...

Maybe what I was suggesting wasn't clear enough.

If you need food in 100 days, you can pay for the futures for that day, or in 100 days the actual spot price, whatever it turns out to be in 100 days. You generate demand for the futures or the actual commodity, not both. By acting early, well in advance, you could get a better price if the price is going to go up. Even if you have zero idea where the price is heading, by buying futures continually well in advance, you could smoothen out the volatility for yourself.

So, why would it make the problem worse?

That is clearer. But right now that would increase demand for futures even more, over the current situation, and if the futures prices are higher purely for speculative reasons, you would reduce volatility but pay a lot for that.

Whereas if you sell future production into the market now, you realise gains from historically high prices, and hopefully make a profit.

Well, I'm not necessarily suggesting it for right now, but as a general strategy.

But, if the governments were to short the futures right now, who's to say the price will not increase? It's a risk. If they can be sure, other entities can also be sure and make money doing the same.

The governments don't need to do it. This is exactly why futures contracts exist. So that bakers who know they need wheat in six months can know today what the wheat will cost them and can price the bread with that assurance.

But maybe your point is that by doing this they would avoid the transient price spike due to the indexes rolling over in the near months. Which might make sense, but that phenomenon was noticed by traders anyway and you would expect it to be smoothed out because of that.

Sure, bakers who know they need wheat in six months can buy some futures for six months from now. Then, what is the problem that TFA is talking about? I thought it was about poor countries being impacted by the price spike resulting from the long speculation. If the people in these countries had bought the futures they needed well in advance, why were they getting impacted? I inferred that the problem was because people there were not sophisticated enough to buy the necessary futures.

It is truly sad to see that some of the smartest minds in the room are using their brains in this fashion. Interesting times ahead.. as a man sows.. and the love of money..

We need to get rid of our highly distortionary tax policy. We incentivize "saving" over 'spending" by taxing capital gains at a lower rate, but we've got too much saving now and all that money is looking for places to go.

At the risk of being the ugly capitalist in the room, it's worth mentioning that farmers have long used financial instruments to help them hedge against very severe volatility in their industry. Volatility caused by Acts Of God[1], like droughts and diseases.

So while I'm all for more regulations, I think we shouldn't demonize an entire sector without considering that some of what it does can and has be helpful.

[1] http://en.wikipedia.org/wiki/Act_of_God

Covered in the article. Begin at "While Japan had relied on..."

Did you read the article?

It talks extensively about how the markets were set up for exactly this purpose, and that the balance of long and short positions for the futures kept the market relatively stable in exactly this way, until the relatively recent (1990s) influx of commodity indices pushed a whole bunch of money purely into long positions and destabilized the market by, effectively, buying far more futures contracts than there was actual wheat.

Edit: and buy not buying any short futures to counterbalance them.

It's not true that long-only funds destabilize the market. Those funds invest only in long positions, but in the futures market a long position always has a short counterpart. It's like stock options: in order to buy a call option you need someone to sell it to you. That seller will be short on the stock.

The author of the article doesn't seem to understand that. He says:

> The managers of this new product would acquire and hold long positions, and nothing but long positions, on a range of commodities futures. They would not hedge their futures with the actual sale or purchase of real wheat (like a bona-fide hedger), nor would they cover their positions by buying low and selling high

But that is irrelevant since there were other market participants selling the futures. The author also fails to understand that rolling a contract implies covering your position at contract expiration and then buying another contract.

Here in the UK I've seen price of bread double, and the price of pasta triple over the last couple of years. It has never dropped. It is like this everywhere.

Perhaps it isn't in america, where you guys have even more ridiculous agricultural subsidies than we do in the EU.

The people responsible for this shit don't ever look at the prices of things at retail anyway.

Thank you for this insightful and informative article. Had no idea!

Most kinds of trading are just fucked up.

Agriculture and trading are inextricably linked. How f-ed up is that?

Care you tell us your opinion of foraging? Also know as ...trespassing... now that almost every acre of land on earth is owned by someone.

My fault for not being a native english speaker. I meant trading as in speculative/electronic/realtime/valueless trading.

The root cause of speculation is cheap and easy money. The cheap and easy money comes directly from the Federal Reserve. They provide it in the misguided hope that it will be put to work in the real economy.

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