Sad, sad, piece at CiF to which I added this comment:
Oh dearie me. Having actually read the WDM report I\’m sorry but you really do fail to show what you contend you show.
Firstly, as Seth says above, you just don\’t understand that futures and derivatives are, by definition, among those who trade them, a zero sum game. If any one buyer of seller of a future (or other derivative) makes money then some other buyer or seller must make an equal and opposite loss.
If Goldmans is making a profit all that is is that they are better at it than others….some other speculators, by definition, must have lost the same amount.
The value of the whole edifice though is not zero sum. It enables the transference of risk: from the farmer and the industrial user of the commodity to the speculators in the middle. This is a good thing.
Secondly, and with resepct the food price rises of 2006/8, the prices of futures provide us both with information and with the incentives to do something.
Let us recall what actually happened back then. Various groups like Greenpeace, Friends of the Earth, WWF and so on, the alphabet soup of the environmental NGOs (whether all of them backed biofuels I cannot remember and at least one of them later decided they were a very bad idea) convinced the EU and the US government that biofuels and ethanol made from agricultural crops (corn mostly but wheat as well) were a good idea. The politicians enacted mandates which stated that a certain percentage of all petrol sold must be biofuels.
This, not unnaturally, placed a certain strain upon supplies of corn and wheat. No, I can\’t remember what percentage of the crop would now need to be turned into fuel for cars rather than food for people but we did see the effects pretty quickly. The tortilla riots in Mexico for example were the direct result of rising US corn prices as more was turned into ethanol rather than corn flour.
So, what we now want is some system of both reducing demand for corn and wheat and some incentive to increase the production of corn and wheat. A rise in prices will do nicely here.
Now here comes the futures markets. As Adam Smith pointed out (yes, his example was indeed a wheat trader, he takes a few pages to explain his ideas.) what speculation does is move these prices around in time.
Imagine we had no speculation at all? Not even physical hoarding. If such a new use for corn and wheat was mandated, then we\’d all carry on eating corn and wheat as we had done. Farmers would carry on planting as they had done. And then, some months after the mandate had come into effect we would go to get more corn or wheat from the granaries and there wouldn\’t be any. Thus starvation.
What the speculation does is looks into the future and says, hey, there\’s going to be a shortage in the future. Prices will rise in the future. So if I buy now to sell then I can make a profit. This raises prices now.
So, consumers get the message that corn and wheat are going to be in short supply and they use less now. They subsititute: instead of corn or wheat they eat rice, cassava, potatoes. Farmers also get the message. Hey, I can get higher price for my corn or wheat next year. I\’ll plant more, use that marginal land, fertilise the crop more and so on. So, consumption falls and production rises.
And as we saw, over 2006/8 (a couple of harvests don\’t forget) consumption did fall a bit, despite the new use for cars and production also increased a bit. And prices came back from their highs.
So our analysis of what happened should really be this.
Environmentalists and governments, through either idiocy or malevolence, decided to put food into cars rather than people. This will clearly create a shortage in the future.
Futures markets spotted that future shortage and through their actions (motivated only by greed recall, it was only love of filthy lucre, not any desire to do good) moved the higher prices forward from the future to the present. These higher prices reduced consumption and increased production meaning that when we got to the future there wasn\’t that shortage caused by the idiocy or malevolence of the environmentalists and governments.
The futures markets stopped people starving in 2008/9/10.
And yet you want to blame the futures markets? Seriously? The very mechanism which managed the fuck up created by biofuels, you\’re blaming the people who cleared up this fuck up rather than the people who caused the fuck up?
Finally, please do go back and read your own report again. You note that there was not a deep and liquid speculative market in rice or rice futures. There was and is in corn and wheat. If it was speculation that increased the price spike then we should have seen a greater spike in corn and wheat than in rice. But as your report also points out, the price spike was *larger* in rice than in corn and wheat.
Thus futures markets reduce price spikes, reduce price volatility, not increase it. Your own report proves you wrong.