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The Food Bubble (2010)

theglobalrealm.com

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Re: The Food Bubble (2010)

#11

Post by te_platt »

capnrefsmmat wrote: post #7
te_platt wrote: post #4

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 downtur…

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.

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.

Re: The Food Bubble (2010)

#12

Post by 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.

Re: The Food Bubble (2010)

#13

Post by 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

Re: The Food Bubble (2010)

#14

Post by 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

Re: The Food Bubble (2010)

#15

Post by [deleted] »

tpatke wrote: post #8
pg wrote: post #2

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

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]

Re: The Food Bubble (2010)

#16

Post by lzell »

latch wrote: post #13

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]…

Covered in the article. Begin at "While Japan had relied on..."

Re: The Food Bubble (2010)

#17

Post by wanorris »

latch wrote: post #13

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]…

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.

Re: The Food Bubble (2010)

#18

Post by jallmann »

rcthompson wrote: post #5

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?

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.

Re: The Food Bubble (2010)

#19

Post by 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.

Re: The Food Bubble (2010)

#20

Post by wanorris »

rcthompson wrote: post #6
te_platt wrote: post #4

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 downtur…

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.

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.

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