From today’s Financial Times:
BNP Paribas made a loud contribution to the debate on how comfortable fund managers, and financial institutions generally, should be about speculating on food prices last week.
On the back of criticism from Oxfam, the international aid agency, which accused the French house of “speculating on hunger”, BNP suspended subscriptions on two of its funds.
BNP’s Parvest World Agriculture fund, which manages €159m of assets, has been shut to new investors as a “precautionary” measure, while its EasyETF Ultra Light Energy fund has also been closed.
BNP Paribas has funds in which its clients invest; those funds hold investments in agricultural-related businesses and properties of one kind or another, such as companies that make farm machinery, etc. If commodity prices for things such as wheat and soy are rising and that encourages the share prices of various industries to rise, and this encourages more investment in those industries so that the production of said commodities rises, this is not a bug of capitalism, but a feature. And if those speculators, who bet that prices will rise, and they do, and therefore make money, their price-creation role – conveying information that triggers responses – is to be applauded, not condemned.
Oxfam, and other organisations that throw rocks at the financial intermediary role of speculators and the like, is merely playing to a long-established trope. It is demonstrating economic illiteracy on an epic scale. I can, of course, understand why a large bank that makes a big point of its image not wishing to offend organisations such as Oxfam. But bear in mind that what Oxfam objects to is the very process of the free market in action. When a bank caves into such pressure, then that surely is a sign that anyone serious about making money from the agricultural sector would be better advised to do so elsewhere.
In the meantime, if anyone can explain to me how a hungry person in a country benefits from such actions, do let me know.
Update: I suppose it is possible to argue that central bank inflation of the money supply via quantitative easing is encouraging investors to put this money into commodities and other “hard assets” in ways that have unforseen and negative effects, but I haven’t seen that point made by Oxfam.
The failure (often a deliberate failure) to understand what a “speculator” is and how they perform a POSITIVE role is a failure to understand basic economics.
There are many things wrong with banking (lending out “money” that does not exist, depending on the government Central Bank credit-money expansion, dependence on the government national debt and…..), but trading in commodity (incuding farm) futures prices is NOT one of them. Indeed such “speculation” is a vital and positive fuction – which does NOT create risk, it takes already existing risk away from farmers (allowing them to plan the operation of their farms without fear that they will be wiped out by an expected fluctuation in prices).
Further to P M’s comment:
One is reminded of Hayek’s anecdote to the effect that during the dark ages in Europe the forges, Smith’s and metallurgy were often banned from within the village limits to its outskirts because the inhabitants discerned “mystery, magic and work of the devil” to the processes which they could not understand though they partook of the results.
Still, in the financial world, there do appear to be numerous participants inside and outside the villages who do not understand the processes but yearn to partake of the results.
I remain invested in RJI.
Thanks to being in the process right now of reading Man, Economy, and State, I am reminded that speculation makes it faster to find the market price for a good, and does nothing else other than allow arbitrage on the way to the market price.
(What Mr. Marks said, in other words.
One almost wonders what Oxfam thinks farmers are growing food for… on the other hand, one can’t help but speculate that they think the answer is “to feed the world’s poor”, not “to gain by their labor”, and I almost suspect they’d prefer agriculture be state-run for not just non-, but anti-profit.)
The argument is that speculators bid up the prices. It’s a pretty dumb argument – what, is the speculator going to eat all that overpriced food themselves? – but it’s a very common reaction from people who feel powerless and assume that all the power to make their lives better is in the hands of people whoa re just too evil to use that power for good. (This is, not coincidentally, the same mindset that leads to all the attempts to put a Great Man in charge of the country in hopes that he’ll make everything perfect)
Isn’t the danger that because capital market theory has been discredited in the past few years the likes of BNP will continue to cave in? Until BNP have greater confidence in allocative efficiencies, possibly by adopting a more behavioural approach to explain erratic performance, the likes of Oxfam will be able to heckle from the sidelines.