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I keep hearing the phrase "worldwide food costs are at an all-time high" on NPR and in other news outlets; although I would expect natural disasters and politic

I keep hearing the phrase "worldwide food costs are at an all-time high" on NPR and in other news outlets; although I would expect natural disasters and political conflict and other changes in supply and demand to affect specific regional markets, I find it difficult to ascribe a worldwide across-the-board rise in commodities to just those explanations. (I would expect a higher demand in China for American milk to actually decrease domestic milk prices, for example, assuming that production could be scaled upward to meet demand; given what I've seen of the dismal conditions of several dairy farms in California, healthy pastureland doesn't seem to be a requirement for operating a dairy.) There's a solid alternative theory -- as yet unproven, though -- that makes a lot more sense to me. Relatively recent changes in the handling of speculation in commodities is causing across-the-board price increases where prices should be decreasing instead. For more info: http://english.aljazeera.net/indepth/opinion/2011/04/2011415143212280315.html http://english.aljazeera.net/indepth/opinion/2011/04/2011415...

serichsen 15y ago
I was immediately reminded of the same story. As far as I remember, speculators (who are important for a market, but should not dominate it) have been relatively recently allowed to dominate the market they speculate in. This led to them simply buying and buying, speculating on the rising prices the buying itself causes.
- thaumaturgy 15y ago
  Yes. IIRC, the critical change was that a major investment firm successfully lobbied regulators to allow them to give investors the option of indefinitely rolling over their commodities investments for a small fee. Investment firms are making a ton of money on the rollovers, and investors are simply purchasing commodities orders at whatever price they're available for and sitting on them until the market prices raise enough for them to feel like selling the orders. So, I could buy a pile of grain or a truckload of oil or what-have-you, not on the expectation that I'll be able to sell it for more money 6 months from now, but on the expectation that I can sit on it until I can sell it for more money. Basically, it gives me a place to stash money, that's guaranteed to pay me back at whatever rate I feel like demanding. The downside for everyone else is that this is creating artificial scarcities in markets across the board. There's a glut of oil in storage right now that isn't being refined into gasoline or other products just because investors somewhere are waiting for the price to go up before they let go of it. When you look at the peculiar way that so many commodities prices have risen so quickly in recent years, and at the way that other more traditional markets have been recovering more sluggishly than people are expecting, and at the way that the real estate market has been staying in gutter, this theory starts to make a lot of sense. There seems to be a lot of investment capital missing somewhere, and commodities seems to be inflated.
baltcode 15y ago
Yes, but when speculators push the prices higher, won't supplies increase as it becomes more profitable to grow food? I can understand a transient phenomenon, but that would eventually hurt the speculators if they try to lift pricing out of the demand-supply curve.

serichsen 15y ago

I was immediately reminded of the same story. As far as I remember, speculators (who are important for a market, but should not dominate it) have been relatively recently allowed to dominate the market they speculate in. This led to them simply buying and buying, speculating on the rising prices the buying itself causes.

thaumaturgy 15y ago
Yes. IIRC, the critical change was that a major investment firm successfully lobbied regulators to allow them to give investors the option of indefinitely rolling over their commodities investments for a small fee. Investment firms are making a ton of money on the rollovers, and investors are simply purchasing commodities orders at whatever price they're available for and sitting on them until the market prices raise enough for them to feel like selling the orders. So, I could buy a pile of grain or a truckload of oil or what-have-you, not on the expectation that I'll be able to sell it for more money 6 months from now, but on the expectation that I can sit on it until I can sell it for more money. Basically, it gives me a place to stash money, that's guaranteed to pay me back at whatever rate I feel like demanding. The downside for everyone else is that this is creating artificial scarcities in markets across the board. There's a glut of oil in storage right now that isn't being refined into gasoline or other products just because investors somewhere are waiting for the price to go up before they let go of it. When you look at the peculiar way that so many commodities prices have risen so quickly in recent years, and at the way that other more traditional markets have been recovering more sluggishly than people are expecting, and at the way that the real estate market has been staying in gutter, this theory starts to make a lot of sense. There seems to be a lot of investment capital missing somewhere, and commodities seems to be inflated.

baltcode 15y ago

Yes, but when speculators push the prices higher, won't supplies increase as it becomes more profitable to grow food? I can understand a transient phenomenon, but that would eventually hurt the speculators if they try to lift pricing out of the demand-supply curve.