9 ms·

The Food Bubble (2010)

204 points by smilliken 15y ago

pg 15y ago
Wow. I had no idea this happened. I'm surprised this story has not had more attention.
- ramanujan 15y ago
  At the time some said that the upstream cause of the Arab Spring was increased food prices. http://www.pbs.org/newshour/updates/world/july-dec11/food_09-07.html http://www.pbs.org/newshour/updates/world/july-dec11/food_09... More controversially, some blamed this on the Fed's inflationary QE2 policy (printing money), as food prices went up across the world in real terms. In the US this was an inconvenience, but abroad it was something else. http://www.telegraph.co.uk/finance/economics/8492078/How-the-Fed-triggered-the-Arab-Spring-uprisings-in-two-easy-graphs.html http://www.telegraph.co.uk/finance/economics/8492078/How-the...
- tpatke 15y ago
  I used to work at Goldman's. This story doesn't surprise me at all. This is what all good bankers do. I think the story hasn't gotten attention because it is not a story. It is just how things work.
  - deleted 15y ago
    [deleted]
  - lawnchair_larry 15y ago
    This comment is...amazing. Much like Paul, most actual people are genuinely shocked about this. It is one hell of a story. The general population does not understand how markets work. Billions are hungry. The streets are full of protesters worldwide. Retirement funds are gone. Markets are failing. Countries are failing. These are humans, who just want to eat. And for what? To turn $100 million into $200 million? This is not "how things work". This is not "what good bankers do". This is what greedy sociopaths do. It is reprehensible and disgusting. These people are malicious and should be in prison.
    - tpatke 15y ago
      First of all - I wasn't making a value judgement. Personally, I agree with you - it is reprehensible and disgusting. That is part of the reason I don't work at Goldman's anymore. I always found it a bit embarrassing to be associated with them. By "good" bankers - I ment the one's making all the money. Not those who are morally good. Second - it is how things work. Not just in commodities, but in everything Goldman's does. There is always an angle which greatly reduces risk. That angle might be insider trading, advanced statistics, or just a rigged market. Goldman's is doing nothing illegal that I am aware of or anyone can prove. ...it is just how things work.
      - Andrew_Quentin 15y ago
        Maybe it should be illegal.
        Symmetry 15y ago
        Well, it is illegal with Onions, but the prices of those tend to be even more volatile than the ones that people speculate in.
      - Cushman 15y ago
        Does it surprise you how many of us are surprised? Even pg? We don't know how bad it's gotten. If you really think it's reprehensible, it's well past time you (and other insiders, not to single you out) spoke up.
    - bubbleRefuge 15y ago
      You don't know the half of it! Huge pension funds such as CALPERs, the california public pension fund, invest large sums (go long) passive commodity instruments such as oil and agriculture. These pension funds are insured by the federal government. So the federal government is indirectly subsidizing this activity.
  - MrMan 15y ago
    I am not entirely sure but no one has ever called it "Goldman's" in my limited experience.
- lawnchair_larry 15y ago
  I thought the same thing when I first came across this info about a year ago. You might be interested in Matt Taibbi's "The Great American Bubble Machine" article. The title refers to Goldman Sachs, and the various bubbles that they have caused and how they did it: The great depression, tech stocks and the dot com bust, the housing bubble, $4/gal gasoline (and other commodities), the bailout, and their next target - the up-and-coming cap and trade/carbon credits market. http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405 http://www.rollingstone.com/politics/news/the-great-american... Then there is his other article, on why no one went to jail: Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer. "Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that." http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216 http://www.rollingstone.com/politics/news/why-isnt-wall-stre...
- jcampbell1 15y ago
  > Wow. I had no idea this happened. I worked in commodities and read the article. What happened? Are you talking about the forced long money? Yeah, we and every hedge fund on the planet skimmed that pool. The dumb money doesn't move the market these days.
  - Cushman 15y ago
    We had no idea that bankers literally, directly made people starve to death, which is what happens in the real world when you double the price of bread for a month to make a buck. The fact that the bankers among us can't see anything odd about this, let alone shocking and disturbing, is still more food for thought for those of us who care to live through the winter.
te_platt 15y ago
Something seems wrong with this story. I understand how speculation can push the price up but if the price goes too far above the true value for too long there has to be a drop - the bubble needs to burst at some point. Has there been a drop in price since this article came out? Have farmers adjusted to grow unusual amounts of wheat? Are there parties to the events who have been shielded (bailed out) from any downturns?
- rcthompson 15y ago
  The key seems to be the way in which the accumulated long positions were periodically rolled over, but the article doesn't seem to explain how this was done.
  - wanorris 15y ago
    capnrefsmmat covered the bursting of the bubble, but the positions were rolled over simply by converting the futures to their equivalent holdings in actual wheat, selling the rights to that wheat for the actual spot price, and using the proceeds to buy more futures for the next term. This doesn't actually protect the buyer. Rather, the buyer was protected (for a while) by the continuing influx of new capital into commodity indices which led to a continuing rise in prices -- in other words, it was effectively a distributed Ponzi scheme.
    - rcthompson 15y ago
      I think I understand. The profit is determined by how much the spot price has increased during the term, since the futures are bought for the spot price at the beginning of the term and sold for the spot price at the end. Put that way, this looks much more like all the other bubbles we've read about. I get the feeling that there's really only one bubble, but it moves from one sector of the economy to the next, leaving destruction in its wake, kind of like Bugs Bunny used to tear up the ground as he burrowed through it.
      - JonnieCache 15y ago
rcthompson 15y ago
The article totally glossed over how the long orders were "rolled over" from one trading period to the next. This seems like a critical detail. What happens when all the orders come due and you're holding a bunch of long orders? Also, wasn't this on HN a while ago? Or did I see it somewhere else?
- jallmann 15y ago
  Strangely enough, this is a recurring nightmare of mine. I'm holding commodity futures that I forget to close out, and then one day farmers show up at my door with the delivery.
- thaumaturgy 15y ago
  Frustratingly, the post you are probably thinking of was here: http://www.cpeterson.org/2011/03/10/why-gas-is-so-expensive-today-hint-its-not-libya-2/ http://www.cpeterson.org/2011/03/10/why-gas-is-so-expensive-... (Aside: this is one reason why I have so little trust in the web as a long-term historical medium.) Although that article focused primarily on oil futures, it also discussed commodities futures, and specifically addressed the rollovers. Unfortunately, I neither understood it well enough at the time, nor remember it well enough now, to regurgitate it. Maybe someone else will come along with a cached copy.
  - rcthompson 15y ago
    I think that's the one I was thinking of. I guess I followed the link from that one to this one, and therefore I remembered reading this article.
    - thaumaturgy 15y ago
      Nah; the previous version of the article I linked was completely different. For some reason, the author felt the need to take it down and replace it with links to these other articles.
- nandemo 15y ago
  Rolling over is a routine operation. Say you hold a long position on 1 contract of X with expiry in December. At the expiry date, you simultaneously sell a offsetting contract of X (canceling out your long one), and simultaneously buy a new contract with expiry in March.
rayiner 15y ago
We need to get rid of our highly distortionary tax policy. We incentivize "saving" over 'spending" by taxing capital gains at a lower rate, but we've got too much saving now and all that money is looking for places to go.
ramanujan 15y ago
I usually don't do this, but this article is long. The summary (tl; dr) is as follows: 1) Large institutional long investments in a certain type of wheat future (Chicago soft red winter) started crowding out the real customers of physical wheat, such as bakers. 2) Because wheat varieties are moderately fungible/exchangeable, the downstream bakers started to use a different brand of wheat (Minneapolis hard red spring) and changed their recipes accordingly. 3) This second class of wheat is very widely consumed, and bidding up its price caused riots and food shortages around the world (or so the reporter states. He didn't provide specific examples, as this predates the Arab Spring). The overall effect is if a particular food staple suddenly became a fashion item, with wealthy people buying it off the market for non-dietary purposes at such a rate that poor people could not afford it. However, the key bit I don't understand, and which the reporter doesn't explain, is how commodity fund investors didn't lose their shirts by betting on wheat to keep going up. If they did lose their shirts then this bubble is unlikely to repeat in the near future.
- thaumaturgy 15y ago
  He did mention it somewhat. Since the funds were only required to store 5% of their clients' money in the actual commodity, they could stash the rest of the money somewhere else safe, and then on top of that make money on transactional costs. From another article I'd read before (which I linked to down below, and which is gone now), the funds made quite a bit of money in the rollovers by charging a fee to every investor who wanted to roll it over. Since none of their investors actually wanted a dump truck of grain showing up in their driveway, and since the price kept going up and up and up, they paid the fee to roll it over each time. Somebody probably did lose their shirts, but it sure wasn't the funds, and the funds won't have any trouble doing this again, because there will always be more customers eager to park money somewhere to make more money.
  - justincormack 15y ago
    People lost some money after 2008, although prices are now approaching the peak levels again. However, the key point is that your pension fund may not care, they are buying because of the negative correlation with other assets, and positive correlation with inflation, as the 2005 paper mentioned demonstrated. Pension funds are where this money is coming from now, and where the trillions of dollar figures talked about would come from, as they get persuaded that this is a real investible asset.
latch 15y ago
At the risk of being the ugly capitalist in the room, it's worth mentioning that farmers have long used financial instruments to help them hedge against very severe volatility in their industry. Volatility caused by Acts Of God[1], like droughts and diseases. So while I'm all for more regulations, I think we shouldn't demonize an entire sector without considering that some of what it does can and has be helpful. [1] http://en.wikipedia.org/wiki/Act_of_God http://en.wikipedia.org/wiki/Act_of_God
- lzell 15y ago
  Covered in the article. Begin at "While Japan had relied on..."
- wanorris 15y ago
  Did you read the article? It talks extensively about how the markets were set up for exactly this purpose, and that the balance of long and short positions for the futures kept the market relatively stable in exactly this way, until the relatively recent (1990s) influx of commodity indices pushed a whole bunch of money purely into long positions and destabilized the market by, effectively, buying far more futures contracts than there was actual wheat. Edit: and buy not buying any short futures to counterbalance them.
  - nandemo 15y ago
    It's not true that long-only funds destabilize the market. Those funds invest only in long positions, but in the futures market a long position always has a short counterpart. It's like stock options: in order to buy a call option you need someone to sell it to you. That seller will be short on the stock. The author of the article doesn't seem to understand that. He says: > The managers of this new product would acquire and hold long positions, and nothing but long positions, on a range of commodities futures. They would not hedge their futures with the actual sale or purchase of real wheat (like a bona-fide hedger), nor would they cover their positions by buying low and selling high But that is irrelevant since there were other market participants selling the futures. The author also fails to understand that rolling a contract implies covering your position at contract expiration and then buying another contract.
rcthompson 15y ago
An understated but key idea from relatively early on in the article is that investment firms like Goldman Sachs have a strong incentive to destabilize markets, since a commodity that never changes price cannot ever yield an investment return. Seems like a bit of a perverse incentive, pitting investors against the common good
littlegiantcap 15y ago
While I'm sure that this may be a component, I don't know if it has as deep as an impact as it's implied. With rising worldwide demand due to an exponentially increasing global population, as well as things like Ethanol in the US driving up the price of corn, protectionist policies on things like rice in Thailand, and things like possible inflation from QE2 this may be just a component of a veritable plethora of issues that are effecting the global prices of food. Still though it's fairly interesting to hear about this side of it.
- randomdata 15y ago
  things like Ethanol in the US driving up the price of corn You can't really drive up the price of an individual crop. If the price of one crop goes up, they all go up. There is only so much land, so if one crop looks to be more profitable, farmers will shift their growing plan to include more of that crop, leading to shortages of the other crops. Given this article, if true, means that ethanol may have play little to no role in the commodity price increases. I remember at the time it was really only the mainstream media that jumped on ethanol. In the farming communities, investors were thought to be the source of the price increases even then.
BrainScraps 15y ago
It is a bit disconcerting to me that commenters here are fascinated by the technical analysis of this system and appear quite oblivious to the problem of starving human beings. Perhaps I am not intellectual enough to appreciate the empathy hiding behind this analytical ruminating about the problem - but I wish that I got the impression that there was more reaction happening than "Wow, what an interesting phenomenon in the commodities market- how do all of these moving pieces fit together?" To quote the sometimes poignant Jack Johnson: "Why don't the newscasters cry when they read about people who die? At least they could be decent enough to put just a tear in their eyes"
- thaumaturgy 15y ago
  For what little it's worth, a lot of my commentary on HN for quite a while has been centered around the effects of things on real people -- whether it's UI, buggy software, or poverty. And those conversations have generally not gone very well. So I've recently started giving up. HN is just not the place for that sort of thing. It's a place where the audience-participants want analysis, they want technical details, they prize expertise, and they can't discuss value unless there's a hard real-world number involved. That's not altogether bad, but I do hope that somewhere there is a group of smart people who actually think about the real-life problems that other people have, and try to do something about it. If there is, I don't know of it yet.
  - BrainScraps 15y ago
    Thanks for your insight and for your past championing of a more "ground level" approach to improving some crucial systems. The sort of community of which you speak does certainly sound like an exciting and powerful one. I hope that it exists, and I hope that it finds you - and maybe me.
  - sammathews 15y ago
    I can't speak for others on HN but I come here seeking knowledge, to understand. Not as forum for activation. This knowledge is then to be used to take action in the real world. That may not be through pushing a cause or donating to a charity, but by getting myself into a position of greater power and authority to make a real impact when I can make an impact. I see articles like this as cards at my disposal, that I will refer back to when the time is right and the chance is there, to make a dent.
Hitchhiker 15y ago
It is truly sad to see that some of the smartest minds in the room are using their brains in this fashion. Interesting times ahead.. as a man sows.. and the love of money..
ArchD 15y ago
I'm wondering if there's something preventing the government of vulnerable countries from buying futures themselves to shield their own people from violent price fluctuations like these, i.e. hedge against price increase for food commodities that need to be imported. Trading commodity futures may be inaccessible to ordinary people, but I don't see why the government of a country, even a developing one, cannot do it, other than because of some idiosyncratic rules of the game.
- justincormack 15y ago
  That would make the problem worse though, by adding more demand for futures. They should sell futures to take advantage of raised prices now for future production, taking profits and driving prices down...
  - ArchD 15y ago
    Maybe what I was suggesting wasn't clear enough. If you need food in 100 days, you can pay for the futures for that day, or in 100 days the actual spot price, whatever it turns out to be in 100 days. You generate demand for the futures or the actual commodity, not both. By acting early, well in advance, you could get a better price if the price is going to go up. Even if you have zero idea where the price is heading, by buying futures continually well in advance, you could smoothen out the volatility for yourself. So, why would it make the problem worse?
    - justincormack 15y ago
      That is clearer. But right now that would increase demand for futures even more, over the current situation, and if the futures prices are higher purely for speculative reasons, you would reduce volatility but pay a lot for that. Whereas if you sell future production into the market now, you realise gains from historically high prices, and hopefully make a profit.
      - ArchD 15y ago
        Well, I'm not necessarily suggesting it for right now, but as a general strategy. But, if the governments were to short the futures right now, who's to say the price will not increase? It's a risk. If they can be sure, other entities can also be sure and make money doing the same.
viandante 15y ago
I just don't get the point. You buy something if you expect its price it is going up. If the price is going up, it means there is higher demand. If there is higher demand, it means somebody does actually need more food (think of China and India). I think the whole point of this article sounds a bit ideologic. Also, again, no really good data to prove his point.
- megablast 15y ago
  You buy something if you think the price will go up, but this also makes the price go up. If a whole bunch of people think a commodity will go up, and start buying up, this will drive the price up a lot. A commodity does not have to change it value, or for there to be an increase in demand for the price to go up, all it needs is some speculation that it will go up, and a whole bunch of people looking to profit.
  - viandante 15y ago
    I still don't get it. If people are buying and the value is not there, they will loose money, right? Speculators can also bid on a lower price (derivatives), right? So, who are all those crazy people bidding only in 1 direction (higher prices)?
JonnieCache 15y ago
Here in the UK I've seen price of bread double, and the price of pasta triple over the last couple of years. It has never dropped. It is like this everywhere. Perhaps it isn't in america, where you guys have even more ridiculous agricultural subsidies than we do in the EU. The people responsible for this shit don't ever look at the prices of things at retail anyway.
jeffem 15y ago
I thought this was a pretty poor article. For one, there's debate over what actually drove up the price of wheat (http://www.economist.com/node/16432870?subjectid=2512631&story_id=16432870 http://www.economist.com/node/16432870?subjectid=2512631&#38...). The author glosses over or fails to acknowledge some of the major counterpoints. He also seems to have a pretty superficial understanding of futures markets. For example, there's nothing inherently "hysterical" about contango (future prices higher than current prices). It's a perfectly natural state for many commodities (browse some prices on http://www.cmegroup.com http://www.cmegroup.com). He also paints a pretty rosy picture of the history of futures markets, but people have complained about speculators causing wild price swings since the beginning, long before index funds came on the scene. And there's nothing new about the way index funds maintain their long positions. Speculators have always had the option of rolling their contracts forward. Index funds have opened up investment opportunities for a lot of people. Imagine if you had to buy and maintain a server for every app you wanted to put on the web (this is like buying a futures contract directly). Now compare that to a VPS/shared server (this is like buying an index fund). Not a perfect analogy but pretty fitting. Speaking generally, if people are investing foolishly (i.e. mispricing something) well then they're investing foolishly. This can happen in any market. They'll either adapt or get weeded out. What's the alternative? Does Big Brother or anyone else know what the "correct" price of something is at any point in time?
thebmax 15y ago
This article omits important details and is factually wrong. In its attempt to 'blame the bankers' it glosses over the role of ethanol policy and the federal reserve on food price rises and wrongly presents the link between futures markets and actual prices. At the end of a futures contract term, an actual delivery of physical product has to take place. "Rolling over" long futures contracts does not mean the holder can get out of physical delivery. Exchanges do not raise prices of physical products by themselves. They also provide valuable price signals for producers about expected future events. Blaming speculators is easy, but a factually incorrect way to see the situation. A world bank report written in July 2008 stated that "large increases in biofuels production in the United States and Europe are the main reason behind the steep rise in global food prices responsible for 70-75% of the price rise...with higher oil prices and a weak dollar explain 25–30% of total price rise." It is a common theme these days to blame bankers and market participants for problems created by government policies. Market actors are agnostic. Governments set the rules of the game and should be the ones held accountable.
daniel-cussen 15y ago
Current suspected, unpopped bubbles: Food bubble; Commodity bubble, esp. the Gold bubble; Higher Education bubble, esp. the Student loan bubble; Health care bubble; Tech bubble; China bubble; Developing world real estate bubble; and the Luxury bubble.
zacharyvoase 15y ago
Food prices have swelled many times in history, but Goldman Sachs wasn't to blame for those bubbles and I doubt they're at fault for these. See a short list of previous food riots which catalysed political upheavals here: http://en.wikipedia.org/wiki/Food_riot http://en.wikipedia.org/wiki/Food_riot Derivatives are actually incredibly useful tools in agriculture because they allow a farmer to embark on the long-term commitment of growing crops with the peace of mind that (s)he'll have guaranteed customers for the final product. This is why the MGEX has been running since 1883: http://en.wikipedia.org/wiki/Minneapolis_Grain_Exchange http://en.wikipedia.org/wiki/Minneapolis_Grain_Exchange
rajpaul 15y ago
The root cause of speculation is cheap and easy money. The cheap and easy money comes directly from the Federal Reserve. They provide it in the misguided hope that it will be put to work in the real economy.
ricardobeat 15y ago
Most kinds of trading are just fucked up.
- MrMan 15y ago
  Agriculture and trading are inextricably linked. How f-ed up is that? Care you tell us your opinion of foraging? Also know as ...trespassing... now that almost every acre of land on earth is owned by someone.
  - ricardobeat 15y ago
    My fault for not being a native english speaker. I meant trading as in speculative/electronic/realtime/valueless trading.
robfig 15y ago
Obligatory http://xkcd.com/552/ http://xkcd.com/552/ I read an article in The Economist some time ago about speculative trading in oil markets. People were raising a ruckus about how it raised the costs of heating for the poor. Turned out that the evidence showing causation was extremely flimsy, and many other global trends were much better explanations. I think burden of proof is on the article to make the case for causation, and I didn't see it (although I skimmed the second half).
dhgisme 15y ago
Thank you for this insightful and informative article. Had no idea!

204 points by smilliken 15y ago

pg 15y ago

Wow. I had no idea this happened. I'm surprised this story has not had more attention.

ramanujan 15y ago
At the time some said that the upstream cause of the Arab Spring was increased food prices. http://www.pbs.org/newshour/updates/world/july-dec11/food_09-07.html http://www.pbs.org/newshour/updates/world/july-dec11/food_09... More controversially, some blamed this on the Fed's inflationary QE2 policy (printing money), as food prices went up across the world in real terms. In the US this was an inconvenience, but abroad it was something else. http://www.telegraph.co.uk/finance/economics/8492078/How-the-Fed-triggered-the-Arab-Spring-uprisings-in-two-easy-graphs.html http://www.telegraph.co.uk/finance/economics/8492078/How-the...
tpatke 15y ago
I used to work at Goldman's. This story doesn't surprise me at all. This is what all good bankers do. I think the story hasn't gotten attention because it is not a story. It is just how things work.
- deleted 15y ago
  [deleted]
- lawnchair_larry 15y ago
  This comment is...amazing. Much like Paul, most actual people are genuinely shocked about this. It is one hell of a story. The general population does not understand how markets work. Billions are hungry. The streets are full of protesters worldwide. Retirement funds are gone. Markets are failing. Countries are failing. These are humans, who just want to eat. And for what? To turn $100 million into $200 million? This is not "how things work". This is not "what good bankers do". This is what greedy sociopaths do. It is reprehensible and disgusting. These people are malicious and should be in prison.
  - tpatke 15y ago
    First of all - I wasn't making a value judgement. Personally, I agree with you - it is reprehensible and disgusting. That is part of the reason I don't work at Goldman's anymore. I always found it a bit embarrassing to be associated with them. By "good" bankers - I ment the one's making all the money. Not those who are morally good. Second - it is how things work. Not just in commodities, but in everything Goldman's does. There is always an angle which greatly reduces risk. That angle might be insider trading, advanced statistics, or just a rigged market. Goldman's is doing nothing illegal that I am aware of or anyone can prove. ...it is just how things work.
    - Andrew_Quentin 15y ago
      Maybe it should be illegal.
      - Symmetry 15y ago
        Well, it is illegal with Onions, but the prices of those tend to be even more volatile than the ones that people speculate in.
    - Cushman 15y ago
      Does it surprise you how many of us are surprised? Even pg? We don't know how bad it's gotten. If you really think it's reprehensible, it's well past time you (and other insiders, not to single you out) spoke up.
  - bubbleRefuge 15y ago
    You don't know the half of it! Huge pension funds such as CALPERs, the california public pension fund, invest large sums (go long) passive commodity instruments such as oil and agriculture. These pension funds are insured by the federal government. So the federal government is indirectly subsidizing this activity.
- MrMan 15y ago
  I am not entirely sure but no one has ever called it "Goldman's" in my limited experience.
lawnchair_larry 15y ago
I thought the same thing when I first came across this info about a year ago. You might be interested in Matt Taibbi's "The Great American Bubble Machine" article. The title refers to Goldman Sachs, and the various bubbles that they have caused and how they did it: The great depression, tech stocks and the dot com bust, the housing bubble, $4/gal gasoline (and other commodities), the bailout, and their next target - the up-and-coming cap and trade/carbon credits market. http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405 http://www.rollingstone.com/politics/news/the-great-american... Then there is his other article, on why no one went to jail: Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer. "Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that." http://www.rollingstone.com/politics/news/why-isnt-wall-street-in-jail-20110216 http://www.rollingstone.com/politics/news/why-isnt-wall-stre...
jcampbell1 15y ago
> Wow. I had no idea this happened. I worked in commodities and read the article. What happened? Are you talking about the forced long money? Yeah, we and every hedge fund on the planet skimmed that pool. The dumb money doesn't move the market these days.
- Cushman 15y ago
  We had no idea that bankers literally, directly made people starve to death, which is what happens in the real world when you double the price of bread for a month to make a buck. The fact that the bankers among us can't see anything odd about this, let alone shocking and disturbing, is still more food for thought for those of us who care to live through the winter.

te_platt 15y ago

Something seems wrong with this story. I understand how speculation can push the price up but if the price goes too far above the true value for too long there has to be a drop - the bubble needs to burst at some point. Has there been a drop in price since this article came out? Have farmers adjusted to grow unusual amounts of wheat? Are there parties to the events who have been shielded (bailed out) from any downturns?

rcthompson 15y ago
The key seems to be the way in which the accumulated long positions were periodically rolled over, but the article doesn't seem to explain how this was done.
- wanorris 15y ago
  capnrefsmmat covered the bursting of the bubble, but the positions were rolled over simply by converting the futures to their equivalent holdings in actual wheat, selling the rights to that wheat for the actual spot price, and using the proceeds to buy more futures for the next term. This doesn't actually protect the buyer. Rather, the buyer was protected (for a while) by the continuing influx of new capital into commodity indices which led to a continuing rise in prices -- in other words, it was effectively a distributed Ponzi scheme.
  - rcthompson 15y ago
    I think I understand. The profit is determined by how much the spot price has increased during the term, since the futures are bought for the spot price at the beginning of the term and sold for the spot price at the end. Put that way, this looks much more like all the other bubbles we've read about. I get the feeling that there's really only one bubble, but it moves from one sector of the economy to the next, leaving destruction in its wake, kind of like Bugs Bunny used to tear up the ground as he burrowed through it.
    - JonnieCache 15y ago

rcthompson 15y ago

The article totally glossed over how the long orders were "rolled over" from one trading period to the next. This seems like a critical detail. What happens when all the orders come due and you're holding a bunch of long orders? Also, wasn't this on HN a while ago? Or did I see it somewhere else?

jallmann 15y ago
Strangely enough, this is a recurring nightmare of mine. I'm holding commodity futures that I forget to close out, and then one day farmers show up at my door with the delivery.
thaumaturgy 15y ago
Frustratingly, the post you are probably thinking of was here: http://www.cpeterson.org/2011/03/10/why-gas-is-so-expensive-today-hint-its-not-libya-2/ http://www.cpeterson.org/2011/03/10/why-gas-is-so-expensive-... (Aside: this is one reason why I have so little trust in the web as a long-term historical medium.) Although that article focused primarily on oil futures, it also discussed commodities futures, and specifically addressed the rollovers. Unfortunately, I neither understood it well enough at the time, nor remember it well enough now, to regurgitate it. Maybe someone else will come along with a cached copy.
- rcthompson 15y ago
  I think that's the one I was thinking of. I guess I followed the link from that one to this one, and therefore I remembered reading this article.
  - thaumaturgy 15y ago
    Nah; the previous version of the article I linked was completely different. For some reason, the author felt the need to take it down and replace it with links to these other articles.
nandemo 15y ago
Rolling over is a routine operation. Say you hold a long position on 1 contract of X with expiry in December. At the expiry date, you simultaneously sell a offsetting contract of X (canceling out your long one), and simultaneously buy a new contract with expiry in March.

rayiner 15y ago

We need to get rid of our highly distortionary tax policy. We incentivize "saving" over 'spending" by taxing capital gains at a lower rate, but we've got too much saving now and all that money is looking for places to go.

ramanujan 15y ago

I usually don't do this, but this article is long. The summary (tl; dr) is as follows: 1) Large institutional long investments in a certain type of wheat future (Chicago soft red winter) started crowding out the real customers of physical wheat, such as bakers. 2) Because wheat varieties are moderately fungible/exchangeable, the downstream bakers started to use a different brand of wheat (Minneapolis hard red spring) and changed their recipes accordingly. 3) This second class of wheat is very widely consumed, and bidding up its price caused riots and food shortages around the world (or so the reporter states. He didn't provide specific examples, as this predates the Arab Spring). The overall effect is if a particular food staple suddenly became a fashion item, with wealthy people buying it off the market for non-dietary purposes at such a rate that poor people could not afford it. However, the key bit I don't understand, and which the reporter doesn't explain, is how commodity fund investors didn't lose their shirts by betting on wheat to keep going up. If they did lose their shirts then this bubble is unlikely to repeat in the near future.

thaumaturgy 15y ago
He did mention it somewhat. Since the funds were only required to store 5% of their clients' money in the actual commodity, they could stash the rest of the money somewhere else safe, and then on top of that make money on transactional costs. From another article I'd read before (which I linked to down below, and which is gone now), the funds made quite a bit of money in the rollovers by charging a fee to every investor who wanted to roll it over. Since none of their investors actually wanted a dump truck of grain showing up in their driveway, and since the price kept going up and up and up, they paid the fee to roll it over each time. Somebody probably did lose their shirts, but it sure wasn't the funds, and the funds won't have any trouble doing this again, because there will always be more customers eager to park money somewhere to make more money.
- justincormack 15y ago
  People lost some money after 2008, although prices are now approaching the peak levels again. However, the key point is that your pension fund may not care, they are buying because of the negative correlation with other assets, and positive correlation with inflation, as the 2005 paper mentioned demonstrated. Pension funds are where this money is coming from now, and where the trillions of dollar figures talked about would come from, as they get persuaded that this is a real investible asset.

latch 15y ago

At the risk of being the ugly capitalist in the room, it's worth mentioning that farmers have long used financial instruments to help them hedge against very severe volatility in their industry. Volatility caused by Acts Of God[1], like droughts and diseases. So while I'm all for more regulations, I think we shouldn't demonize an entire sector without considering that some of what it does can and has be helpful. [1] http://en.wikipedia.org/wiki/Act_of_God http://en.wikipedia.org/wiki/Act_of_God

lzell 15y ago
Covered in the article. Begin at "While Japan had relied on..."
wanorris 15y ago
Did you read the article? It talks extensively about how the markets were set up for exactly this purpose, and that the balance of long and short positions for the futures kept the market relatively stable in exactly this way, until the relatively recent (1990s) influx of commodity indices pushed a whole bunch of money purely into long positions and destabilized the market by, effectively, buying far more futures contracts than there was actual wheat. Edit: and buy not buying any short futures to counterbalance them.
- nandemo 15y ago
  It's not true that long-only funds destabilize the market. Those funds invest only in long positions, but in the futures market a long position always has a short counterpart. It's like stock options: in order to buy a call option you need someone to sell it to you. That seller will be short on the stock. The author of the article doesn't seem to understand that. He says: > The managers of this new product would acquire and hold long positions, and nothing but long positions, on a range of commodities futures. They would not hedge their futures with the actual sale or purchase of real wheat (like a bona-fide hedger), nor would they cover their positions by buying low and selling high But that is irrelevant since there were other market participants selling the futures. The author also fails to understand that rolling a contract implies covering your position at contract expiration and then buying another contract.

rcthompson 15y ago

An understated but key idea from relatively early on in the article is that investment firms like Goldman Sachs have a strong incentive to destabilize markets, since a commodity that never changes price cannot ever yield an investment return. Seems like a bit of a perverse incentive, pitting investors against the common good

littlegiantcap 15y ago

While I'm sure that this may be a component, I don't know if it has as deep as an impact as it's implied. With rising worldwide demand due to an exponentially increasing global population, as well as things like Ethanol in the US driving up the price of corn, protectionist policies on things like rice in Thailand, and things like possible inflation from QE2 this may be just a component of a veritable plethora of issues that are effecting the global prices of food. Still though it's fairly interesting to hear about this side of it.

randomdata 15y ago
things like Ethanol in the US driving up the price of corn You can't really drive up the price of an individual crop. If the price of one crop goes up, they all go up. There is only so much land, so if one crop looks to be more profitable, farmers will shift their growing plan to include more of that crop, leading to shortages of the other crops. Given this article, if true, means that ethanol may have play little to no role in the commodity price increases. I remember at the time it was really only the mainstream media that jumped on ethanol. In the farming communities, investors were thought to be the source of the price increases even then.

BrainScraps 15y ago

It is a bit disconcerting to me that commenters here are fascinated by the technical analysis of this system and appear quite oblivious to the problem of starving human beings. Perhaps I am not intellectual enough to appreciate the empathy hiding behind this analytical ruminating about the problem - but I wish that I got the impression that there was more reaction happening than "Wow, what an interesting phenomenon in the commodities market- how do all of these moving pieces fit together?" To quote the sometimes poignant Jack Johnson: "Why don't the newscasters cry when they read about people who die? At least they could be decent enough to put just a tear in their eyes"

thaumaturgy 15y ago
For what little it's worth, a lot of my commentary on HN for quite a while has been centered around the effects of things on real people -- whether it's UI, buggy software, or poverty. And those conversations have generally not gone very well. So I've recently started giving up. HN is just not the place for that sort of thing. It's a place where the audience-participants want analysis, they want technical details, they prize expertise, and they can't discuss value unless there's a hard real-world number involved. That's not altogether bad, but I do hope that somewhere there is a group of smart people who actually think about the real-life problems that other people have, and try to do something about it. If there is, I don't know of it yet.
- BrainScraps 15y ago
  Thanks for your insight and for your past championing of a more "ground level" approach to improving some crucial systems. The sort of community of which you speak does certainly sound like an exciting and powerful one. I hope that it exists, and I hope that it finds you - and maybe me.
- sammathews 15y ago
  I can't speak for others on HN but I come here seeking knowledge, to understand. Not as forum for activation. This knowledge is then to be used to take action in the real world. That may not be through pushing a cause or donating to a charity, but by getting myself into a position of greater power and authority to make a real impact when I can make an impact. I see articles like this as cards at my disposal, that I will refer back to when the time is right and the chance is there, to make a dent.

Hitchhiker 15y ago

It is truly sad to see that some of the smartest minds in the room are using their brains in this fashion. Interesting times ahead.. as a man sows.. and the love of money..

ArchD 15y ago

I'm wondering if there's something preventing the government of vulnerable countries from buying futures themselves to shield their own people from violent price fluctuations like these, i.e. hedge against price increase for food commodities that need to be imported. Trading commodity futures may be inaccessible to ordinary people, but I don't see why the government of a country, even a developing one, cannot do it, other than because of some idiosyncratic rules of the game.

justincormack 15y ago
That would make the problem worse though, by adding more demand for futures. They should sell futures to take advantage of raised prices now for future production, taking profits and driving prices down...
- ArchD 15y ago
  Maybe what I was suggesting wasn't clear enough. If you need food in 100 days, you can pay for the futures for that day, or in 100 days the actual spot price, whatever it turns out to be in 100 days. You generate demand for the futures or the actual commodity, not both. By acting early, well in advance, you could get a better price if the price is going to go up. Even if you have zero idea where the price is heading, by buying futures continually well in advance, you could smoothen out the volatility for yourself. So, why would it make the problem worse?
  - justincormack 15y ago
    That is clearer. But right now that would increase demand for futures even more, over the current situation, and if the futures prices are higher purely for speculative reasons, you would reduce volatility but pay a lot for that. Whereas if you sell future production into the market now, you realise gains from historically high prices, and hopefully make a profit.
    - ArchD 15y ago
      Well, I'm not necessarily suggesting it for right now, but as a general strategy. But, if the governments were to short the futures right now, who's to say the price will not increase? It's a risk. If they can be sure, other entities can also be sure and make money doing the same.

viandante 15y ago

I just don't get the point. You buy something if you expect its price it is going up. If the price is going up, it means there is higher demand. If there is higher demand, it means somebody does actually need more food (think of China and India). I think the whole point of this article sounds a bit ideologic. Also, again, no really good data to prove his point.

megablast 15y ago
You buy something if you think the price will go up, but this also makes the price go up. If a whole bunch of people think a commodity will go up, and start buying up, this will drive the price up a lot. A commodity does not have to change it value, or for there to be an increase in demand for the price to go up, all it needs is some speculation that it will go up, and a whole bunch of people looking to profit.
- viandante 15y ago
  I still don't get it. If people are buying and the value is not there, they will loose money, right? Speculators can also bid on a lower price (derivatives), right? So, who are all those crazy people bidding only in 1 direction (higher prices)?

JonnieCache 15y ago

Here in the UK I've seen price of bread double, and the price of pasta triple over the last couple of years. It has never dropped. It is like this everywhere. Perhaps it isn't in america, where you guys have even more ridiculous agricultural subsidies than we do in the EU. The people responsible for this shit don't ever look at the prices of things at retail anyway.

jeffem 15y ago

I thought this was a pretty poor article. For one, there's debate over what actually drove up the price of wheat (http://www.economist.com/node/16432870?subjectid=2512631&story_id=16432870 http://www.economist.com/node/16432870?subjectid=2512631&#38...). The author glosses over or fails to acknowledge some of the major counterpoints. He also seems to have a pretty superficial understanding of futures markets. For example, there's nothing inherently "hysterical" about contango (future prices higher than current prices). It's a perfectly natural state for many commodities (browse some prices on http://www.cmegroup.com http://www.cmegroup.com). He also paints a pretty rosy picture of the history of futures markets, but people have complained about speculators causing wild price swings since the beginning, long before index funds came on the scene. And there's nothing new about the way index funds maintain their long positions. Speculators have always had the option of rolling their contracts forward. Index funds have opened up investment opportunities for a lot of people. Imagine if you had to buy and maintain a server for every app you wanted to put on the web (this is like buying a futures contract directly). Now compare that to a VPS/shared server (this is like buying an index fund). Not a perfect analogy but pretty fitting. Speaking generally, if people are investing foolishly (i.e. mispricing something) well then they're investing foolishly. This can happen in any market. They'll either adapt or get weeded out. What's the alternative? Does Big Brother or anyone else know what the "correct" price of something is at any point in time?

thebmax 15y ago

This article omits important details and is factually wrong. In its attempt to 'blame the bankers' it glosses over the role of ethanol policy and the federal reserve on food price rises and wrongly presents the link between futures markets and actual prices. At the end of a futures contract term, an actual delivery of physical product has to take place. "Rolling over" long futures contracts does not mean the holder can get out of physical delivery. Exchanges do not raise prices of physical products by themselves. They also provide valuable price signals for producers about expected future events. Blaming speculators is easy, but a factually incorrect way to see the situation. A world bank report written in July 2008 stated that "large increases in biofuels production in the United States and Europe are the main reason behind the steep rise in global food prices responsible for 70-75% of the price rise...with higher oil prices and a weak dollar explain 25–30% of total price rise." It is a common theme these days to blame bankers and market participants for problems created by government policies. Market actors are agnostic. Governments set the rules of the game and should be the ones held accountable.

daniel-cussen 15y ago

Current suspected, unpopped bubbles: Food bubble; Commodity bubble, esp. the Gold bubble; Higher Education bubble, esp. the Student loan bubble; Health care bubble; Tech bubble; China bubble; Developing world real estate bubble; and the Luxury bubble.

zacharyvoase 15y ago

Food prices have swelled many times in history, but Goldman Sachs wasn't to blame for those bubbles and I doubt they're at fault for these. See a short list of previous food riots which catalysed political upheavals here: http://en.wikipedia.org/wiki/Food_riot http://en.wikipedia.org/wiki/Food_riot Derivatives are actually incredibly useful tools in agriculture because they allow a farmer to embark on the long-term commitment of growing crops with the peace of mind that (s)he'll have guaranteed customers for the final product. This is why the MGEX has been running since 1883: http://en.wikipedia.org/wiki/Minneapolis_Grain_Exchange http://en.wikipedia.org/wiki/Minneapolis_Grain_Exchange

rajpaul 15y ago

The root cause of speculation is cheap and easy money. The cheap and easy money comes directly from the Federal Reserve. They provide it in the misguided hope that it will be put to work in the real economy.

ricardobeat 15y ago

Most kinds of trading are just fucked up.

MrMan 15y ago
Agriculture and trading are inextricably linked. How f-ed up is that? Care you tell us your opinion of foraging? Also know as ...trespassing... now that almost every acre of land on earth is owned by someone.
- ricardobeat 15y ago
  My fault for not being a native english speaker. I meant trading as in speculative/electronic/realtime/valueless trading.

robfig 15y ago

Obligatory http://xkcd.com/552/ http://xkcd.com/552/ I read an article in The Economist some time ago about speculative trading in oil markets. People were raising a ruckus about how it raised the costs of heating for the poor. Turned out that the evidence showing causation was extremely flimsy, and many other global trends were much better explanations. I think burden of proof is on the article to make the case for causation, and I didn't see it (although I skimmed the second half).

dhgisme 15y ago

Thank you for this insightful and informative article. Had no idea!