Speculation blamed for global food price increases

The link between commodity speculation and global food price weirdness just got stronger, and researchers warn that a new and potentially calamitous price bubble is imminent.


Previous research had blamed a combination of food-to-fuel crop conversion and financial speculation for driving food prices up in sudden, unpredictable spikes, independent of changes in supply or demand. But the market model used in those findings only explained trends retroactively. It didn’t test a prediction.


“People could say, ‘You must have fit the model to the data.’ Now we have this additional evidence, and people can see that we didn’t,” said Yaneer Bar-Yam, president of the New England Complex Systems Institute and co-author of the new study, which was released March 6 on arXiv. “This confirms that the model is very solid in its underpinnings. It says our understanding of what’s going on is right.”


Since 2007, global food prices have surged twice, each time rising by more than 50 percent in less than a year, putting people in poor countries at risk and sparking social unrest around the world. Economists have argued over what drove the surges: Maybe it was bad weather, or changing dietary habits, or changing farming practices, or even a change in how global food markets now work.





Global food prices (blue dotted line) track with the original model (green dotted line) and a slightly tweaked version of that model (red dotted line) after March 2011 (blue vertical line). Image: Bar Yam et al./arXiv




In earlier work Bar-Yam’s group used mathematical models to test links between food prices and proposed explanations for market behavior. They identified two culprits: replacing food crops with biofuel crops seemed to be driving food prices slowly upward, while commodity speculation — investors betting on food prices — appeared to cause the spikes.
The link to speculation was especially significant. For most of the 20th century, only farmers and food industry companies speculated on food. It helped them offset risks posed by fluctuating prices and production levels, and generally had a stabilizing effect on markets. But in the late 1990s, financial industry-led deregulation efforts opened food speculation to hedge funds, investment banks and other people with only betting interests.


Some economists said the massive rise in speculation had no effect on food markets, but others argued that speculation — especially over the past several years, when stock market volatility sent investors into commodity markets — now made food prices volatile and prone to surges. That’s precisely what Bar-Yam’s group originally found, but with an important methodological caveat.


Their model was tested by matching its output against the market’s recent history, but data from the market’s recent history also guided the model’s design. As a result, it was possible that the model didn’t really explain food price trends, but merely imitated them with the benefit of hindsight. Whether it predicted the future was an open question.


In the new study, predictions made by the researchers’ original model are compared to actual food prices between March 2011 and January 2012. Placed on a graph, the lines match closely, and do so despite spanning a major change in price trends at the last bubble’s peak.


“If you have a straight line, extend it and say, ‘Aren’t we predictive,’ it doesn’t give that much confidence,” said Bar-Yam. “If it changes direction, that’s a much more severe test of what’s happening.”


Both the European Union and United States are now considering whether and how to limit commodity speculation. In the U.S., such limits are required by the Dodd-Frank Act, but have been fiercely resisted by the financial industry.



It’s expected that the U.S. Commodity Futures Trading Commission will enact speculation limits by the end of 2012, though they might still be blocked in court. But even if the rules pass, they’re arguably weak, focusing on “position limits,” or caps on the maximum number of contracts a single speculator can hold. The rules won’t won’t prevent markets from being overwhelmed by speculation.



In their ideal form, commodity markets should contain “70 percent commercial hedgers and 30 percent speculators. The speculators are there to provide liquidity. In the summer of 2008, it was discovered that it’s now 70 percent speculation and 30 percent commercial,” said Michael Greenberger, former director of the CFTC’s Division of Trading and Markets. “Now reports are coming out that it’s 85 percent speculation and 15 percent commercial. You have markets dominated by people with no real interest in the economics of supply and demand, but who are taking advantage of bets authored by Wall Street that prices will go up.”
Greenberger said the CFTC’s current position limit rules would likely bring speculators’ share of food markets down to 60 percent, which is “still a volatile market that wouldn’t truly reflect supply and demand.”
In the absence of stronger rules, direct Congressional action is an option. A speculator-driven rise in gas prices has made crude oil speculation a potential target of regulation, and agricultural commodities would likely be covered by the same rules.



According to Bar-Yam, the model predicts another speculative surge by 2012′s end, with food prices rising above their 2011 peaks. “Unless they get speculators under control, eventually there’s going to be a big bubble,” he said. “It’s a countdown to a real problem.”


Citation: “The Food Crises: Predictive validation of a quantitative model of food prices including speculators and ethanol conversion.” By Marco Lagi, Yavni Bar-Yam, Karla Z. Bertrand and Yaneer Bar-Yam. arXiv, March 6, 2012.

Link to article

Quote from Greedy Bastards:

This is the cost of the government’s attempts to hide the costs of the bailout by printing extra money. As hedge fund manager Bill Fleckenstein explained on my show, doing this has its own ripple effect. The lucky banks that received this free money had to put it somewhere, and now that the real estate market no longer seemed safe, they bought commodities, driving up the price of gold and oil and food. Few of us need gold, but everyone needs energy and food, and so the pain of the bankers’ bailout spread. In 2010 alone, according to the Oliver Wyman management consulting firm, the price of coffee rose 77 percent; wheat, 47 percent; and cotton for clothes, 84 percent. Instead of a real estate bubble, the bailout created a global food and clothing bubble. For the middle class, that’s a nuisance. For the poorest billion people in the world— and that includes the poorest Americans— who were already spending 70 percent of their disposable income on food, it’s a disaster. They can no longer afford staples such as tortillas, rice, pasta, and couscous. The bank bailout and the government’s attempt to cover up the massive banking theft create global misery. In the long term, there is an even higher price to pay. All of the money diverted into insurance fraud and reckless speculation is not going into productive investments that could solve our problems. Many investors find that it’s not worth the time, work, and patience to develop real products such as clean energy, improved health care, and so on when they can make money so much more easily by cheating. And small investors follow in the wake of big ones: how many people do you know who are putting their own extra money into the most promising green energy technologies? And how many do you know who are buying oil and gold? This is the most disastrous long-term consequence of Trade a Cup: not only do prices inflate but also productive work suffers because it doesn’t pay as well as extraction. The smartest, most talented people discover that the big rewards go to special bankers. The damage to our economy and our shared future is far greater than the $ 12,000 of debt it imposed on each of us for the bailout. The true cost is incalculable and ongoing.

The book by Dylan Ratigan talks about this very thing and how the banks are still practicing the same toxic policies that lead to the financial disaster of 2008.

You know how to fix it?

Grow or catch your own damned food

The Fed needs to stop printing money and giving it to these damn bankers who think they are too big to fail.. that would be the first step to taking on this problem. They are still to this day giving fucking stealth bail outs to the big banks.. and nothing has changed since 2008.

The Fed needs to stop printing money and giving it to themselves.. that would be the first step to taking on this problem. They are still to this day giving fucking stealth bail outs to the big banks.. and nothing has changed since 2008. Originally Posted by Sexyeccentric1

fixed that for you

in all fairness to the banks, they did pay back the bailout $.

they didnt need it in the first place

fixed that for you Originally Posted by dearhunter

Thank you..lol

Always good to have someone watching my back with regard to my spelling errors and grammar!

in all fairness to the banks, they did pay back the bailout $.

they didnt need it in the first place Originally Posted by CJ7

Actually no, because if you look at the entire amount of damage they did and the ongoing damage still continuing from it.. they haven't even come close to paying back.

"The damage to our economy and our shared future is far greater than the $ 12,000 of debt it imposed on each of us for the bailout. The true cost is incalculable and ongoing. Imagine that we went out together and ate an overpriced meal that turned out to be poisonous. By the end of the night, the price we paid for the meal would be the least of our concerns. That’s the Very Bad Deal.

Dylan goes on to say with regard to this subject:

You might assume that as costly as the bank bailout was, it preserved something of value. But as Naked Capitalism blogger Yves Smith (in the nonvirtual world, management consultant Susan Webber) told me, if we were to tax the largest banks for the cost of the global financial crisis over twenty years it would cost over $ 1.5 trillion a year. That’s more than the market capitalization of the biggest banks of the world. So banks are, in her words, “net value destroyers”: it’s not just that bank bailouts have been incredibly expensive but also that banks actually cost taxpayers more than they are worth. Their only benefit is to the economy as a whole— but that is the benefit that has been destroyed since the 1990s. This is the mathematical definition of extraction. Some people will tell you that the government had no choice but to stabilize the financial system. They’ll tell you that some bailout money has been paid back, that the lessons have been learned, and that we will be safer in the future. That might be one-third true. Many banks and other companies that received money are paying it back— though none of them is repaying the greater losses we all suffered from the money printing that degrades our currency and costs us so much in jobs, houses, savings, and commodities. It’s true that lessons have been learned. Testifying before Congress on October 23, 2008, Alan Greenspan was asked by Representative Henry Waxman of California, “You have been a staunch advocate for letting markets regulate themselves. And my question for you is simple: Were you wrong?” Greenspan answered, “Yes.” Larry Summers now says that he supports strong regulation of derivatives. President Clinton told ABC News that when it came to deregulating financial markets in 1999 and 2000, “I think [Treasury secretaries Robert Rubin and Larry Summers] were wrong, and I think I was wrong to take” their advice. After the financial crisis, a bipartisan commission of US senators issued the Levin-Coburn Report, which found that “the crisis was not a natural disaster, but the result of high-risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street.” The financial markets need regulation the way a nuclear power plant needs a cooling agent for its radioactive fuel rods. In a nuclear plant, if safety rules are enforced and the heat of the rods is properly controlled by a cooling agent, the result can be clean, abundant electricity. But if that cooling process is neglected, the fuel rods overheat and may cause a nuclear meltdown. Similarly, capital requirements are the cooling agent of risk taking in the economy, whether the risks are being taken by banks, consumers, or industry. Just as nuclear fuel will always be reactive, people will always be greedy. We need to enforce rules to balance natural greed with capital requirements so that greed can create productive risk taking and competition and not short-term extraction, otherwise known as theft.

Quote:

1. PUT “SWAPS” ON PUBLIC EXCHANGES In Vegas, you need to have actual money to gamble— your own money— and if you lose, you pay. But since 2000, banks, industry, and consumers have been free to take on system-threatening levels of debt (to the point of financial meltdown) without facing any requirement to risk a significant amount of their own money. And while consumer risk taking was curbed by the 2008 financial crisis, US banks continue to use America’s deposits insured by the Federal Deposit Insurance Corporation (FDIC) to fund their mad, bonus-seeking speculation. Once the banks blow through that, they borrow from the biggest money-printing house in the world, the US Federal Reserve. No one else in the world can pay themselves billions to take enormous risk with little or no money down. To end this insanity the American people must demand an end to the anachronistic “dark market” for credit insurance, or swaps, and insist that they be moved to an exchange where the risks that we all now bear can be visible to all. (You might think Treasury Secretary Tim Geithner, after his experiences during the crisis, would have led the charge to restrict or ban risky swaps, especially after the Obama administration passed a bill that began to regulate these instruments. But one of Geithner’s first decisions in using this new law was to exempt foreign currency swaps from the new regulations.) All trades on a theoretical swaps exchange must be required to meet capital requirements (or some equivalent inhibitor of risk)..

Perhaps as important as the VICI integrity of capital requirements is the visibility that an exchange would create: we could all see who was trading and insuring what. One of the greatest obstacles in resolving the financial crisis in 2008 was the need to pay all the $ 600 trillion in swaps because central bankers couldn’t see which swaps were legitimate insurance for energy and commodities— insurance that was essential to the smooth functioning of the economy— and which were idle speculation. Because the central bankers couldn’t see the difference, they were forced to pay off everybody, including the reckless speculators. The same thing happened in the European bond market in 2011. Home lending also needs additional capital requirements in the direct home lending and consumer credit markets for both private banks and government banks such as the Federal National Mortgage Association, commonly known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, known as Freddie Mac. Every loan must require a down payment. All lenders must be at risk for losses from their loans. Only by keeping a portion of the risk from the loans they make will banks’ interests remain aligned with the interests of their customers.

2. CANCEL SPECULATIVE DEBT— AND CLAW BACK BONUSES
Some of the promises that were made in the days of reckless gambling and irresponsible reliance on taxpayer money can’t be kept. But as Mohammed El-Erian, CEO of the investment firm Pimco, told me, “The question is, how do you share that burden? So far the burden has been felt mainly by the real economy and households.” Ordinary Americans have paid for bankers’ mistakes. But while US home owners are under siege by creditor predator banks, and millions of unemployed debt holders are forced into a Survivor-like fight with one another over scraps, bondholders have been paid a hundred cents on the dollar with newly printed money. Banks have been bailed out with printed money. The real sacrifices have all been made by ordinary people in the forms of increased public debt, reduced pension payments, and reduced health benefits. We must require not only that banks retain more capital but also that when they place bad bets, they pay the price for their losing bets themselves. Otherwise we are stuck with the worst of two economic systems: like a capitalist country, we have private banks that keep their profits. But like a communist country, we have a system where banking losses are charged to the government. Only when we end this corporate communism will we realign the interests of the banks with the investors they serve. The way to do this is debt reduction or cancellation. If the system is so out of control that we can use a computer to fabricate trillions in new money by simply adding some zeros, then surely we can find a way to delete some zeros as well. By definition, if you can print it, you can cancel it. As we have already seen, a swap can either be an insurance policy that helps to lower long-term costs for a business or a bet by an outsider on whether a given company or country will succeed or fail. Putting swaps on a public exchange would create the visibility for all to see the difference between commodity insurance that is critical to the economy and speculative bets that are not much different from gambling. In fact, Richard Grasso, former chairman of the New York Stock Exchange, suggested to me in a personal interview that the speculative bets that fueled the financial crisis could be reclassified legally as online gaming— and then cancelled. His technical explanation: “I believe regulators should require the product to be registered with a central clearing agent (like an exchange) and thus able to be monitored globally to prevent contracts being written in excess of the debt obligations they are designed to insure (corporate or sovereign). This is easily accomplished by [regulators] and Treasury issuing a cross-markets rule adopted by non-US counterparts. Any contracts written outside these requirements would be deemed null and void by regulators as simply online gaming.” Similarly, bonuses collected by CEOs and board members of AAA-rated financial institutions on the basis of profits from reckless speculation should be “clawed back” and repaid. These leaders were the custodians for their institutions, with the responsibility to determine how much risk was safe to take. They should not keep bonus pay for losses caused by their own bad decisions just because those losses were covered by the government— that is, by ordinary taxpayers. The threat of future clawbacks will keep their personal interests aligned with the financial interests of their institutions and their country.

3. REVISE THE TAX CODE TO ENCOURAGE LONG-TERM INVESTMENT, NOT SHORT-TERM EXTRACTION

It seems to me that if we agree that there’s nothing morally wrong with getting rich or being poor and that we want people to use their wealth in ways that increase productivity, then that’s what our tax code should encourage. Maybe we should tax spending— consumption— rather than income, and let the tax code discourage short-term investors and reward long-term investors. If you find a way to use your computer to extract money from the stock market in a few seconds, you should be taxed very high. If you commit your money for years and launch a business and build something new that others can use, you should be taxed low. A well-run country is like any well-run business: greedy, but long-term greedy. We need a tax code that will bring out the “long-term greedy” in every American.

4. DON’T LET WALL STREET BUY THE RULES

The basic secrets of the derivatives market are now known, but the crisis was not caused simply by a failure of understanding. It was caused by a failure of our political system. In 2009 alone, banks spent $ 220 million lobbying against new regulations such as capital requirements and lobbying in favor of spending cuts to get budget deficits under control. But as Simon Johnson has written, “[ The banks’] rhetoric is misleading at best. At worst it represents a blatant attempt to shake down the public purse.” When the political conversation turns to debt, it usually hides the reasons we ran up this debt and the fundamental culpability of the greedy bastards on Wall Street. When Wall Street isn’t buying access to our legislators, they are buying the very ratings agencies relied on by pension managers to evaluate how risky a given investment is. Wall Street banks pay Standard & Poor’s and Moody’s to rate their bonds. The better the rating, the more the banks can sell, and the more money ratings agencies and banks make. But considering the massive risks given to the world’s pension and insurance managers by Wall Street and the ratings agencies, shouldn’t the risk evaluation be paid for by the group buying the investment— not selling it?

5. HOLD AN INTERNATIONAL RESET MEETING

Historically, debt reset meetings have come after global conflicts such as World War II and the American Civil War. In these meetings, governments realigned the interests of countries and financial institutions using tools such as infrastructure banks (which provide temporary lending when private institutions no longer can), tax reforms, debt cancellations, and new banking regulations. Given our previous hellish experiences with large-scale war, however, I suspect that many of us would prefer to fix the problem first and skip the war. We cannot allow giant creditors to turn fights over debt into currency wars and then into real wars. Our opportunity in this generation is to resolve the global debt imbalance with a new Marshall Plan before a war begins.

Speculation does not increase food prices. Never has, never will, it is trotted out by those that like to find a scape goat for prices going higher. In fact, if not for speculators, food shortages and higher prices would be more likely. Speculators basically provide the lubricant between those that buy commodities and those that sell commodities, so they both can hedge the market and reduce risk, therefore staying in business, and producing more food.

Oh yes speculation does cause higher food prices and many economists and traders will tell you that.

Read up here

And just scroll up and re-read what I posted above.

It is totally worthless what you posted. Liars figure, and when you have a goal of proving speculation causes food inflation, the liars only present the facts that way.

I've farmed for 35 years, know all about commodity markets and speculators, and there are a plenty of honest studies that show speculation doesn't cause food price increases. The fundamental reasons of supply being shorter than demand causes the price increase every time, without fail.

I see they are all liars then.. even when Goldman Sachs admitted to this;

http://money.cnn.com/2012/03/21/mark...tors/index.htm

Sigh, the reason food and gas prices are going up is increased demand in developing countries. Because of cheap food policies in this country, ie subsidies to farmers, over production occurred in grains for most of the 80's, 90's, and through 2007. This kept food prices lower because often farmers were selling for below the cost of production. The only income came from the government subsidies.