[lbo-talk] Once again, food prices

brad babscritique at gmail.com
Wed Feb 9 08:36:38 PST 2011


This is some what succinct :

"Wheat is up 75% in the last 12 months, corn up a little more. Coffee is up 85% and cotton a spectacular 140%.

While flooding in Australia, a drought in Russia and weak harvests in India and China are the fundamental drivers for this upwards trend, there is little doubt that investors and traders looking to diversify and capitalize on the supply shortages are moving these prices much more significantly and faster. Commodity index investment increased an estimated and whopping $80B dollars last year, bringing total long-only commodity index investment to $350B, according to Barclays. Another $30B of commodity ETF investment is also overwhelmingly long-only, as short commitment in these instruments is normally well under 5% of float.

Financial buying of commodities in indexes and ETF's, with the speed that these instruments operate, overwhelm the futures mechanisms and cause much greater volatility and overall higher prices. We've seen this roller coaster ride play itself out once already in oil, moving from 2005-2008 to $147 a barrel, only to collapse to $32 dollars in March of 2009, before re-initiating its upwards trajectory." from http://www.huffingtonpost.com/daniel-dicker/food-commodity-speculatio_b_815949.html


>>>>>>>>>>>>>>>>>>>

Basically the huge swath of money from over-the-counter markets and ETF/commodity index funds trading has rendered the futures markets nonfunctional.

No, there isn't a sale on each side that equals out. There is currently sheer domination by long-only positions (ie: promises to buy in the future at a given price which is a bet that the price will rise), which is driving the price up by creating the image of an artificially large demand.

There is a great Senate report on the 2008 food price run up that basically says that the lack regs (there were actually exemption letters written to a handful of big bank and investment firms to override limits for non-commercial purchases and there were changes that allowed the over-the-counter markets to not report the size of their holdings) led to financial speculation that drove the price far beyond what it should have been.

Brad

P.S. No one want's to argue about the role of QE?



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