31 ms·

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 futur

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.
- Cushman 15y ago
  Food didn't get harder to make, but the price of food went up around the world, and it still hasn't gone down to what it should be. Is there really any confusion as to who lost their shirts?
  - Tloewald 15y ago
    There's an old economist joke that goes like this: What happened whe the Soviet Union gained control of the Sahara desert? For five years, nothing, then a shortage of sand. It seems we can replace Soviet Union in such jokes with Investment vehicles.
    - Cushman 15y ago
      I don't see any reason to distinguish them. A free market means a free market. When one monolithic organization with access to controlling capital makes its goal not to preserve the freedom of the market, but to extract value from the rest of the market for itself and its shareholders, that's not a market. That's a centrally planned economy. The bankers have turned Communist oligarchs in all but name.
      - z0r 15y ago
        > When one [...] organization with [...] capital makes its goal [...] to extract value from the rest of the market for itself and its shareholders Nope, just a regular capitalist enterprise
        Cushman 15y ago
        And fascism is just a regular government, and secret police are just regular police, and martial law is just regular law... You know -- since I've got you here anyway -- I've always wanted to tell you how much I loved your novels, Mr. Orwell.
      - dantheman 15y ago
        Actually you are incorrect, a free market is one in which people voluntarily interact for mutual gain, i.e. it is not coercive. If their is government interference then it is not a free market, cornering a market does not make it any less free if done solely through voluntary trade.
aninteger 15y ago
Regarding point number 3. There was a food crisis story reported back in 2008 about Haitians eating dirt to suppress hunger. Before the earthquake. Truly the worst luck in the past decade to affect a single group of people. http://m.npr.org/story/18767313?storyId=18767313&from=mobile http://m.npr.org/story/18767313?storyId=18767313&from=mo...
OstiaAntica 15y ago
This article is basically shooting the messenger. The roiling agricultural commodity prices in the last decade were largely the result of dollar currency devaluation by the Federal Reserve. The same patterns occurred across other global commodities like copper and oil.
- deleted 15y ago
  [deleted]
- mchusma 15y ago
  Agreed. Price growth is natural when you increase the money supply. It's one of the reasons that the CPI index is flawed, as it does not include food costs directly.
  - Eliezer 15y ago
    Increases in the money supply don't reach everywhere at once; inflation is not evenly distributed. It's distributed, often, through hedge funds that can borrow large amounts of money from banks. You're looking at the effect and the mechanism of easily-borrowable-money actually being borrowed to bid up a particular sector of the economy; much as, earlier, it was borrowed to bid up real estate.
- bubbleRefuge 15y ago
  Disagree. The fed does not devalue currency. They set interest rate policy on reserves aka the federal funds rate. Biggest factor in supply and demand for a currency is fiscal policy. Second biggest factor is trade balance and the desirability of foreigners to save the given currency.
  - gsmaverick 15y ago
    Increasing the money supply devalues the currency even if that's not the intended goal; that is basic economics.
  - tsotha 15y ago
    "Debase" is probably a better word than "devalue" in this context.
mike_esspe 15y ago
Did the article explain why that second class of wheat wasn't replaced with another (cheaper) staple food?
- Cushman 15y ago
  The same reason it wasn't in the Soviet Union. When a centralized planning authority makes farmers grow one thing, that's what people eat. They don't have a choice.

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.
Cushman 15y ago
Food didn't get harder to make, but the price of food went up around the world, and it still hasn't gone down to what it should be. Is there really any confusion as to who lost their shirts?
- Tloewald 15y ago
  There's an old economist joke that goes like this: What happened whe the Soviet Union gained control of the Sahara desert? For five years, nothing, then a shortage of sand. It seems we can replace Soviet Union in such jokes with Investment vehicles.
  - Cushman 15y ago
    I don't see any reason to distinguish them. A free market means a free market. When one monolithic organization with access to controlling capital makes its goal not to preserve the freedom of the market, but to extract value from the rest of the market for itself and its shareholders, that's not a market. That's a centrally planned economy. The bankers have turned Communist oligarchs in all but name.
    - z0r 15y ago
      > When one [...] organization with [...] capital makes its goal [...] to extract value from the rest of the market for itself and its shareholders Nope, just a regular capitalist enterprise
      - Cushman 15y ago
        And fascism is just a regular government, and secret police are just regular police, and martial law is just regular law... You know -- since I've got you here anyway -- I've always wanted to tell you how much I loved your novels, Mr. Orwell.
    - dantheman 15y ago
      Actually you are incorrect, a free market is one in which people voluntarily interact for mutual gain, i.e. it is not coercive. If their is government interference then it is not a free market, cornering a market does not make it any less free if done solely through voluntary trade.

aninteger 15y ago

Regarding point number 3. There was a food crisis story reported back in 2008 about Haitians eating dirt to suppress hunger. Before the earthquake. Truly the worst luck in the past decade to affect a single group of people. http://m.npr.org/story/18767313?storyId=18767313&from=mobile http://m.npr.org/story/18767313?storyId=18767313&from=mo...

OstiaAntica 15y ago

This article is basically shooting the messenger. The roiling agricultural commodity prices in the last decade were largely the result of dollar currency devaluation by the Federal Reserve. The same patterns occurred across other global commodities like copper and oil.

deleted 15y ago
[deleted]
mchusma 15y ago
Agreed. Price growth is natural when you increase the money supply. It's one of the reasons that the CPI index is flawed, as it does not include food costs directly.
- Eliezer 15y ago
  Increases in the money supply don't reach everywhere at once; inflation is not evenly distributed. It's distributed, often, through hedge funds that can borrow large amounts of money from banks. You're looking at the effect and the mechanism of easily-borrowable-money actually being borrowed to bid up a particular sector of the economy; much as, earlier, it was borrowed to bid up real estate.
bubbleRefuge 15y ago
Disagree. The fed does not devalue currency. They set interest rate policy on reserves aka the federal funds rate. Biggest factor in supply and demand for a currency is fiscal policy. Second biggest factor is trade balance and the desirability of foreigners to save the given currency.
- gsmaverick 15y ago
  Increasing the money supply devalues the currency even if that's not the intended goal; that is basic economics.
- tsotha 15y ago
  "Debase" is probably a better word than "devalue" in this context.

mike_esspe 15y ago

Did the article explain why that second class of wheat wasn't replaced with another (cheaper) staple food?

Cushman 15y ago
The same reason it wasn't in the Soviet Union. When a centralized planning authority makes farmers grow one thing, that's what people eat. They don't have a choice.