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The Food Bubble (2010)

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Re: The Food Bubble (2010)

#61

Post by Cushman »

thaumaturgy wrote: post #23
ramanujan wrote: post #12

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)…

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 inves…

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?

Re: The Food Bubble (2010)

#62

Post by nandemo »

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?

Rolling over is a routine operation. Say you hold a long position on 1 contract of X with expiry in December. At the expiry date, you simultaneously sell a offsetting contract of X (canceling out your long one), and simultaneously buy a new contract with expiry in March.

Re: The Food Bubble (2010)

#63

Post by Cushman »

mike_esspe wrote: post #59
ramanujan wrote: post #12

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)…

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

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.

Re: The Food Bubble (2010)

#64

Post by sammathews »

forensic wrote: post #31
BrainScraps wrote: post #22

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 i…

This community is exactly the type of testosterone-driven money-obsessed community that would create a Goldman Sachs Commodity Index that will cause starvation, and then absolve themselves of responsibility due to some free market arms-length ideology. It's not a coincidence that you're disturbed by the comments. Wall Street entrepreneurs and Silicon Valley entrepreneurs are fundamentally very similar in mindset and…

I could not disagree with you more.

SV Entrepreneur types, as a generalisation, are more like the farmers in this article selling there wares than the WS Bankers. Sure people are money obsessed but they do it either by being profitable or by selling equity in value creating businesses.

I think the Google slogan of "Don't be evil" is the best summation of the average tech entrepreneur these days, generally because they are smart respectable human beings. They are looking to solve a problem that exists, for people willing to pay.

Of course there are always bad apples.

There is nothing broken about demand and supply, only the steps in between are broken, which the financial institution's such as Goldman saps on.

Re: The Food Bubble (2010)

#65

Post by justincormack »

ArchD wrote: post #58
justincormack wrote: post #50

Earlier quoted context omitted.

That would make the problem worse though, by adding more demand for futures. They should sell futures to take advantage of raised prices now for future production, taking profits and driving prices down...

Maybe what I was suggesting wasn't clear enough. If you need food in 100 days, you can pay for the futures for that day, or in 100 days the actual spot price, whatever it turns out to be in 100 days. You generate demand for the futures or the actual commodity, not both. By acting early, well in advance, you could get a better price if the price is going to go up. Even if you have zero idea where the price is heading,…

That is clearer. But right now that would increase demand for futures even more, over the current situation, and if the futures prices are higher purely for speculative reasons, you would reduce volatility but pay a lot for that.

Whereas if you sell future production into the market now, you realise gains from historically high prices, and hopefully make a profit.

Re: The Food Bubble (2010)

#66

Post by Tloewald »

Cushman wrote: post #61
thaumaturgy wrote: post #23

Earlier quoted context omitted.

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 inves…

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?

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.

Re: The Food Bubble (2010)

#67

Post by eftpotrm »

wanorris wrote: post #20
rcthompson wrote: post #6

Earlier quoted context omitted.

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 com…

Given Ponzi schemes tend to end in prosecution,(this is probably a forlorn hope) could we eventually see prosecutions for this sort of behaviour? Or maybe as a next best investors slowly beginning to realise that these odd price spikes keep ending with a few investment banks winning and all else losing?

Re: The Food Bubble (2010)

#68

Post by Cushman »

Tloewald wrote: post #66
Cushman wrote: post #61

Earlier quoted context omitted.

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?

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.

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.

Re: The Food Bubble (2010)

#69

Post by Symmetry »

Andrew_Quentin wrote: post #56
tpatke wrote: post #39

Earlier quoted context omitted.

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…

Maybe it should be illegal.

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

Re: The Food Bubble (2010)

#70

Post by 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.

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