The following headline appeared in The Times (of London) this morning:
Greggs chief attacks speculators for driving up the price of wheat
The managing director of Greggs, the high street baker, has attacked speculators for driving up the price of wheat and fuelling famine in Africa.
Sir Michael Darrington, who yesterday announced that he would be stepping down after 24 years in charge, said commodity traders were more to blame for spiralling food price inflation than poor harvests or farmland given over to biofuels.
Ah, bash the speculators. Where would we be without those terrible people? It may be that some of the high price of wheat – now over $13 a bushell and up 118% in the past 12 months – is down to hordes of greedy, Gordon Gekkos bidding up prices for the stuff, but these people make a living by trying to correctly guess future prices and act on imperfect information. They cannot, however, defy the laws of economic gravity. If supplies increase, as is likely if prices are so high and there are big profits to be made growing the stuff, or if demand slackens, as people use wheat substitutes, then all that speculative mania will fall away. In any event, unless this business executive or other folk have looked at what happens when wheat is no longer traded as a commodity but handled by government regulations, they will realise the nonsensical nature of bashing speculators. In the 1980s, years of agricultural subsidies led to the infamous “wheat mountains” that were subsequently dumped onto the world market, hitting producers in the Third World.
Now consider this headline:
Bread basket that is left to grow weeds
The item goes on to explain that large tracts of good, agricultural land in Eastern Europe are lying fallow, ie, un-planted, because of tariff barriers and other restrictions. The Times rightly hammers the EU’s wretched Common Agricultural Policy, the USA’s farm support system, and other regulatory controls on farm production, for contributing to this farce.
It is a joke to attack speculators, who after all bet their own or their banks’ money on trying for forecast supply/demand trends, when it is politicians, who rarely, if ever suffer the consequences of bad investment decisions, who get to bugger up global agricultural markets in this way. At least if a bank or hedge fund gets a bet wrong, the principals in the fund get bankrupted, or executives are sacked. This does not always happen, of course, but generally the market is much tougher on mistaken bets than the political system is. As prices soar in the shops and hit poor consumers, the petty meddling of Chancellor Alistair Darling in today’s budget statement is small beer indeed. Great former UK politicians like Robert Peel have put free trade front and centre of their economic philosophy. It would be a welcome step if western governments today did the same.
So the MD of Greggs doesn’t see the real problem, where has he been? It is a compounding of the EU with its CAP, bad harvests and of course the demand for bio-fuels, again led by the EU. I find it odd that he never mentions these things. But then the media are also chary of taking a crack at the EU and bio-fuels.
Do Greggs protect their interests by forward buying their raw materials on the futures markets?
If not, shouldn’t the owners of the business be demanding to know why?
If yes, shouldn’t he be thanking the speculators for providing liquidity to the market?
That is on the assumption he is right. In fact, for someone high up in the food business, he shows a remarkable ignorance of what is actually driving(Link) the price increases.
CountingCats hits the target!
Main consumers do “hedge,” which I was trained to observe at age 14 (70 years ago) in a totally unrelated field.
Full disclosure: Based on stats of “Stockpiles” vs “Use Rates,” I hold JJG & JJA [speculation?].
Since I still pay increasing prices for baked goods, is that not one way of hedging for inflation.
Free markets for free people! “Speculators” included!
I found one slightly misleading sentence in the linked article “While cereal farmers get fat in America and Europe,” that, from the thread so far, I think will be understood by Johnathan and the other commenters.
It’s been many years since I was a cereal farmer (and then, only for a few years), but my recollection is that farmers (and co-ops, RRS?) generally hedge their next crop cycle. So if the price shoots up during a crop cycle, they will have generally hedged very approximately 1/2 their estimated yield. So profits from short term swings are substantially absorbed by speculators* in exchange for them also absorbing the risk of losses in a down swing.
I know when I was farming, locking in what I would be paid before I bought seed, fertilizer, pesticides, fuel and maintenance was worth being paid less than the maximum possible price. But not knowing how to do that, I gambled.
And CountingCats nailed it. What kind of commercial consumer of commodities is not hedging their purchases? This guy at Gregg’s has either hedged and raised his prices anyway, in which case he is trying to pass the ‘blame’ for his higher profits. Or he has not hedged and is an irresponsible business operator. At no time do the speculations that occur between the seller hedging and the buyer hedging alter production or consumption. Sooner or later all positions close out and at that time, demand will meet supply at the market price.
* Farmers like me, did/do not hedge, are in fact speculators who are speculating on what the price they receive will be. They may make more money in an upturn, but they will lose more in a down turn. This is the entire point of selling risk in a futures market.
Johnathan, I think you misrepresent slightly how “speculation” works these days.
Normally, it’s something like:
price in asset ‘x’ rises a bit. A few retail investors read about this in the Sunday papers and ask their IFAs whether they know of any ‘x’ funds. The fund managers get wind of this and start up a string of ‘x’ funds. Now, the sales force comes out in strength ramping the funds. They tell us that we’re in an ‘x’ supercycle, that, the value of ‘x’ can only go up, that, fundamentally, ‘x’ has never decreased in price. If you want to ensure your future invest in ‘x’. they say. If you haven’t got any ‘x’ you’ll have missed the boat, you’ll be ruined. Perhaps, ‘x’ even represents a paradigm shift and the only way to make money in the future will be to own ‘x’.
‘Money’ supplements in newspapers are devoted to the wonders of ‘x’. Full page advertisements encourage punters…I mean retail investors… to invest in ‘x’ funds.
Now, we have many funds with loads of cash who need to buy lots ‘x’. All these funds buy ‘x’. The price of ‘x’ goes up. Retail investors see that ‘x’ is the place to be and they ask their IFA to recommend some ‘x’ funds…and so it goes and goes and goes…
….until it stops and the whole thing comes crashing down.
There are several reasons fpr high grain prices, and none of them has anything to do with speculators.
The reasons are well known: 1. Higher demand, 2. Lower Dollar value, 2. Ethanol and biofuel madness (mandates).
Especially the last.
And how do our governments (EU and US) adress the issue of global food security ? By issuing mandates that some 20% of food production be burned as ethanol or biofuel. 20% of corn production in the US is already used for ethanol, and mandates are in place to rise the biofuel and ethanol (“renewables”) content in fuel to some 20% (up from 5% today) over the next decade. And it has been shown that biofuels contribute nothing towards reducing the (harmless) CO2 emissions.
Our governments, prodded by the murderous greens, are totally insane.
Golbal warming (the chimera) never hurted anyone, but the hysteria is already depriving people of food today, not in a decade or two.
Final point: with grain prices high up, wouldn’t this be the right time to end the CAP and all agricultural subsidies ? That’s what a sane government would do. Fat chance!
I feel very old this afternoon; when I was but a lad at school I remember my father yelling at the TV. Harold Wilson was blaming “the gnomes of Zurich” for the latest Sterling crisis, and father was saying “the bloody gnomes would have nothing to work with if you weren’t a bloody fool or worse!” Wilson was reaping what he had sowed, it was going to hurt and he didn’t want to carry the blame so he looked for someone to pin it on.
Fast forward many years, and the MD of Greggs is blaming “speculators” as he raises his prices. He either failed to hedge, or saw a profit opportunity but doesn’t want to be blamed, so he is looking for someone to pin it on.
PaulT, you have a point, of course: the recent bubble in commercial property has been fuelled by speculative money as well as the abundance of cheap money from central banks and the flood of cash from MidEast, Russia, etc; retail investors piled into tech funds at the height of the dotom mania, only to get hammered as the market peaked. But for all that there is undeniable speculative froth in a market, it is a bit dumb for a food industry guy to try to pin the whole thing on speculators, particularly if the underlying supply-demand situation has moved as much as it has.
I think we may be ignoring Johnathan’s other point, the one about export prohibitions in potentially productive nations.
It is often reasonable for non-economic reasons (defensive ones like maintenance of production infrastructure) to restrict imports. But I am having a hard time imagining a scenario where it ever makes sense to restrict agricultural exports (or any other consumable).
In the presence of export restrictions, domestic production will fall until it reaches profitability anyway, so the idea of restricting export to force down domestic prices fails, as is demonstrated by Russia and the Ukraine. But allowing exports optimizes production and drives local price to the world price minus the cost of shipping. If the world price is substantially higher than the cost of production intranationally (driving up intranational prices), then unrestricted exports will encourage the producers to invest in more production, driving down the cost to local consumers (along with everybody else’s). If an economic interventionist government is concerned about the domestic consumers during that interim, then a buyer’s subsidy is an intervention that is far less destructive and much easier (and more likely) to be recovered from.
PaulT,
Yes, “the whole thing comes crashing down” and the speculators (should) lose their money. It appears you may be conflating the consequences of speculation with the consequences of government manipulations. Paul Marks may know some off hand, but I can’t think of any cases where a serious bubble occurred that wasn’t a result of government intervention. Even the tulip mania was a consequence of the government decreeing (at the behest of special interest groups) that all futures contracts written after a certain date were to be reinterpreted as options contracts. I believe that government was also market tampering in other ways.
Whether by turning futures contracts into options or ‘insuring’ banks, etc, when the government interferes with the risk/return process, bad things happen. Always.
In my comment at March 12, 2008 03:35 PM, for clarity, “seller hedging” should read “producer hedging” and buyer hedging” should read consumer hedging”.
Johnathan:
From what I’ve seen the bubble in commercial property property hasn’t nearly been as extreme as the bubble in residential property. The bubble in residential property is partly because of favourable tax treatment of one’s PPR, but also because there seems to have been investor hunger for buying bundles of loans. If the securitisation market didn’t exist, ninja/non-conforming/sub-prime/liar loans wouldn’t exist.
But the core cause of this of course is Greenspasm’s put.
As for commodities, there is certainly some speculative froth there perhaps as much as $60 in a barrel of oil.
Midwesterner:
The cause of most bubbles is excessively loose money, which is what we’ve had thanks to that idiot Greenspan. Legislative interference helps too. The looser money that we’re now getting will cause the next bubble — the one designed to get us out of the trouble caused by the current implosion. The tax breaks and subsidies being given to green/alternative/fake/pretend/pie-in-the-sky energy gives us an indication of where that one will be (once the commodities’ one blows up).
Russia currently makes the case for limiting exports of directly consumable goods, one case being milled wheat flour.
Russia does export (as well as import) wheat. But a portion of Russia’s wheat is un-millable.
In controlling export, they decrease the competition of Europe (especially the Baltics) to domestic consumption, bringing the trading prices within the domestic orbit, without “price controls.”
Russia, when it included Ukraine, was once the breadbasket of Europe. Given the current world opportunities, the oligarchic entrepreneurs will no doubt reach out to create credible prodiuction again, though the vagaries of No. Russia wheat areas weather will force their activities into Ukraine.
Poland will likely turn to meat export, unrestricted, possibly with Russian capital as well, given the nearest unrestricted market.
There, that’s far enough off course!
I am confused, RRS. Are you saying that the article that Johnathan linked is wrong about Russian export restrictions? If so, I’m sure it would be the first time the MSM ever got their facts wrong. 🙂
The article (which I just now read) does not say that the export of Wheat from Russia is illegal; nor that the export of all consumables is illegal. It does conform to my understanding of the explanations given for the limitations (which really don’t matter anyway).
I did read in the services I follow that the export of milled wheat flour is forbidden. That’s not to say it does not leave Russia.
The situation of farmland ownership in Ukraine is ideal for Oligarchic Enterprise. Land can be brought into production in a way to bring large returns to the developers especially where the costs of land use can be controlled (limited) politically. It will happen, the forces are too strong.
Trust our Free Press, they are always unbiased!
Edmund Burke managed to get all the Act of Parliament against “engrossing and forestalling” repealed in the late 18th century – because he understood that “speculators” were not the cause of the various things they were accused of.
However, activist judges (yes they existed even then) carried on trying to enforce actions against the wholesale trade well into the 19th century – a special Act of Parliament had to be passed to stop certain judges making prats of themselves in this way.
Sadly the level of knowledge among members of Parliament is now so low that they would be more likely to support action against “wicked speculators” than oppose it.