As food prices reach record highs, how much is the speculation in agricultural commodites to blame?
Zero. Nada. Zilch.
And that\’s not the only stupidity in this piece by Ms. Lawrence.
After intense lobbying, banks won deregulation of commodities markets in the US in 2000, allowing them to develop these new products.
There was no deregulation in 2000.
There was simply a clarification of the pre-existing law. It was confirmed by legislation what the Common Law (or common practice) already allowed.
CME argues that the volume of speculation is not a problem, because the overall composition of the agricultural commodities market has not changed; the increase in activity by index funds has been matched by an increase in trading by those who are commercial participants, that is those who have a direct interest in the physical goods.
Quite, for each and every long position there must be an equal and opposite short one. That\’s simply true, by definition, of any derivatives market.
\”That\’s an indefensible position,\” Chicago–based hedge fund manager Mark Newell of Quiddity retorted. He and another hedge fund manager, Mike Masters, prepared testimony to the US Senate when it was looking into the effect of speculation on food prices in 2008.
\”When billions of dollars of capital is put to work in small markets like agricultural commodities, it inevitably increases volatility and amplifies prices – and if financial flows amplify prices of food stuffs and energy, it\’s not like real estate and stocks. When food prices double, people starve ,\” Masters said.
I really wouldn\’t want one quite so ignorant of basic economics managing my money.
If you go off and speculate in something, and if your speculation increases price volatility, then you will be losing money. The aim is to buy low and sell high, recall? So when you buy low you\’re reducing the price volatility at the bottom of the cycle. When you sell high you\’re reducing price volatility at the top of the cycle. You\’re taking in over-supply at one point, increasing supply at the other.
The only way you can be increasing price volatility is if you\’re buying high and selling low. Which means we don\’t really have to worry about you too much as you\’re not going to be in the market all that long, you\’ll be bust.
Speculation can move high prices from the future to the present, sure, but that in itself reduces long term price volatility (Wealth of Nations, Book IV, Chapter V, start at para 40).
Can we please get this straight? Speculation can change prices, yes. Can increase them or reduce them. But it does not increase price volatility, it does the opposite, it reduces it.