On the merits of speculation in food

It looks like the world\’s largest farm didn\’t do enough speculating:

Ivolga now controls 800,000 hectares of land in Kazakhstan, and 700,000 in Russia, most of it wheat-growing land developed as part of the Soviet Union\’s 1950s Virgin Lands campaign, when vast areas of previously barren steppe were brought into production.

\”They are the largest single entity in the world, but they have very low productivity,\” said Dr Selby. \”They got caught by that perfect storm in 2008 and 2009. They bought all their fertilisers at the top of the market and then sold all that crop into a very deflated market and made massive losses.\”

To be more specific, they didn\’t do enough hedging.

The difference between hedging and speculating is a fine one. Hedging refers to the actual producer (or consumer, or possibly transporter or storage peeps, if they are shipping or storing without fixed price contrats) making sure that they\’ve got a fixed price.

Speculating is just people playing around with money trying to make a profit, with no intention of producing, consuming, transporting or storing anything. Playing with pieces of paper.

As this story goes, wheat prices in 07/08 roared up. So, as of course we would want the world\’s largest farm to do, they planned to increase their production. One way of which is of course to raise the inputs like fertiliser (ie, intensify their production).

OK. But by the time that crop came to market, the price had collapsed. That world\’s largest farm is now near bankruptcy and needs an equity injection from an investor.

*Shrug*. You get it wrong, you go bust, somone else takes over the assets, that\’s capitalism.

Now what they should have done (easy in hindsight of course) was hedge that crop. With yields about 2 tonnes per hectare (extensive, not intensive agriculture here) that\’s a crop of perhaps 3 million tonnes of wheat.

And that\’s where our speculators come in. They would be the ones who took that price risk. The farm sells the wheat forward (\”we\’ll deliver 3 million tonnes in September but we\’ll fix the price now\”) and if the price crashes in the interim, the farm still gets the money. The speculators, of course, are shit out of luck.

That\’s what they\’re for, the speculators, to carry these sorts of price risks.

And, as you can see, when people don\’t pass risks on to speculators they risk going bust.

That\’s the problem with the world today you see: not enough speculation in food.

2 comments on “On the merits of speculation in food

  1. Food is one of the great issues that causes countries to collapse – food price instability has caused problems in the past – famine often precedes regime change both in the ancient world and here in the modern world.
    Farmers like to have a guarantee for their crop the interesting question is how much do they value their security – what percentage can the “insurer” / “speculator” take for his/her share of the risk?

    Tim adds: Quite: and the more speculators there are, the less they can charge.

  2. Yes, but the various Guardianistas, TJNers et al never publish the losses only the profits, which allows them to continue in full flight upon their banker bashing hobby horse.

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