

The Food Bubble (2010) - smilliken
http://theglobalrealm.com/2011/02/04/the-food-bubble-how-wall-street-starved-millions-and-got-away-with-it/

======
ramanujan
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.

~~~
OstiaAntica
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.

~~~
bubbleRefuge
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
Increasing the money supply devalues the currency even if that's not the
intended goal; that is basic economics.

------
jeffem
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&...](http://www.economist.com/node/16432870?subjectid=2512631&story_id=16432870)).
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>). 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?

------
BrainScraps
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"_

~~~
hooande
I thought the human angle of the piece was far overblown. The underlying story
being presented is "Goldman Sachs raises prices and people starve as a
result". I think that was mostly to add a dramatic point to the article. In
reality it's a "look at how all of these pieces fit together, and here's how
Goldman Sachs hacked the system" story. While hackers love that kind of thing,
we're a relatively small market and a story with a spin about the evil of
corporations is so _in_ right now.

The reason people aren't reacting to human suffering is because we can see
that it isn't a real factor in this story. We're talking about a small change
in the world's supply of food here. It would be very difficult to image (or
prove) that anyone actually died of starvation as a result of this. It's more
like a loaf of bread that used to cost $4.50 now costs $6.00. That extra $1.50
can be enough to make an unpleasant life significantly less pleasant (believe
me, I know), but I don't think it equates to the starving human beings.

tl;dr - Capitalism is a dick move. Don't blame the flaws in the system on the
people who benefit from them.

~~~
rdl
Unfortunately, people at the margin DO starve. All economic activity happens
at the margin.

What usually happens is a country at a large scale imports less subsidized
food commodity, and this limits government distribution of that commodity --
they usually stop some feeding centers, which makes the marginal trip more
difficult or impossible for some people.

It might also lead to scaled back or eliminated aid programs.

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

~~~
tpatke
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.

~~~
lawnchair_larry
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
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
Maybe it should be illegal.

~~~
Symmetry
Well, it is illegal with Onions, but the prices of those tend to be even more
volatile than the ones that people speculate in.

------
te_platt
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?

~~~
capnrefsmmat
According to the article, the bubble did indeed burst:

> Then, like all speculative bubbles, the food bubble popped. By late 2008,
> the price of Minneapolis hard red spring had toppled back to normal levels,
> and trading volume quickly followed. Of course, the prices world consumers
> pay for food have not come down so fast, as manufacturers and retailers
> continue to make up for their own heavy losses.

~~~
te_platt
Thanks, I must have skipped over that part. Also I was able to find a good
chart at <http://www.wikinvest.com/futures/Kansas_City_Wheat_Futures>

The article still isn't clear (at least to me) on who took the losses for the
speculators.

~~~
tsotha
The same people who always take the losses - speculators. Some of them are the
same people who bid the market up; some of them are people who foolishly
bought at the top.

------
rcthompson
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?

~~~
thaumaturgy
Frustratingly, the post you are probably thinking of _was_ here:
[http://www.cpeterson.org/2011/03/10/why-gas-is-so-
expensive-...](http://www.cpeterson.org/2011/03/10/why-gas-is-so-expensive-
today-hint-its-not-libya-2/)

(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
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
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.

------
rcthompson
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
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
_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.

------
zacharyvoase
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>

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>

------
daniel-cussen
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.

------
robfig
Obligatory <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).

------
thebmax
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.

------
viandante
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
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
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)?

------
ArchD
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.

~~~
mhb
The governments don't need to do it. This is exactly why futures contracts
exist. So that bakers who know they need wheat in six months can know today
what the wheat will cost them and can price the bread with that assurance.

But maybe your point is that by doing this they would avoid the transient
price spike due to the indexes rolling over in the near months. Which might
make sense, but that phenomenon was noticed by traders anyway and you would
expect it to be smoothed out because of that.

~~~
ArchD
Sure, bakers who know they need wheat in six months can buy some futures for
six months from now. Then, what is the problem that TFA is talking about? I
thought it was about poor countries being impacted by the price spike
resulting from the long speculation. If the people in these countries had
bought the futures they needed well in advance, why were they getting
impacted? I inferred that the problem was because people there were not
sophisticated enough to buy the necessary futures.

------
Hitchhiker
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..

------
rayiner
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.

------
latch
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>

~~~
wanorris
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
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.

------
JonnieCache
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.

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

------
ricardobeat
Most kinds of trading are just fucked up.

~~~
MrMan
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
My fault for not being a native english speaker. I meant trading as in
_speculative/electronic/realtime/valueless_ trading.

------
rajpaul
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.

