[lbo-talk] Food Prices Again

Gar Lipow gar.lipow at gmail.com
Thu Feb 17 21:19:30 PST 2011


On Thu, Feb 17, 2011 at 10:54 AM, Chuck Grimes <c123grimes at att.net> wrote:
> I haven't been following this thread closely, so a question.
>
> Is there any doubt at all the rise in commodity stable prices is directly
> the result of banking speculator activities? Corner a market in some
> commodity that can be stored, store it, drive up the price, and bet on the
> rise in price in some form of derivative? At some peak, release the store
> at its highest and leave the market after collecting as much cash as
> possible.
>
> There was just a report of this kind of activity over coca by some Mayfair
> Street
> financial firm on Aljazeera about ten minutes ago. There seems to me to be
> no

Not just a matter of "cornering the market" though this happens. A good part of what led to Haitians eating mud over two years ago was the following:

Investors looking for the next big (safe) are sold investment in commodities. But there are only so many commodities to go around, even if we include financial instruments directly related to those commodities which already dwarf (as Doug said) the physical supply. So firms like Goldman-Sachs set up "index funds" which amount to side bets - like betting with a bookie on a football game. The bookie does not need a relationship with the team, and in fact legally is not supposed to have one. But if the GS accepts to many bets that price will rise they are betting that prices will fall. Like any other bookie with too many bets going one way they want to lay off some of that risk. So they buy actual contracts as hedges. And at that point hedging against index funds drives the prices up without any need for deliberate manipulation. Not to say that deliberate manipulation does not happen - but the fundamentals driving this are investors looking for the next big thing and putting money into commodities that dwarfs the existing market including existing speculation. It may have ultimately "cleared" but not before children in Haiti were eating mud to fill their bellies. For that matter I don't know why we the final 'clearing' price ended up the same as it would have been if the speculative bubble never happened. To assume that assumes that supply at the end of the bubble and demand at the end of the bubble were both the same as they would have been without the bubble.

And no this process is not all that happened. One of the fundamentals driving that price bubble was rich nations buying grain and soybeans to make ethanol and biodiesel - in essence power automobiles with food. But the bubble would not have been nearly as bad without index funds and other forms of speculation.

I think the same thing is happening now. We do have fundamentals - global weirding leading to crop destruction and burning food in our cars in the forms of ethanol and biodiesel. But the financial system and speculation makes it much much worse.
> mystery at all about this.
>
> CG
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