Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

The Food Bubble (2010)

theglobalrealm.com

Post reply on HN
Print view View original

71–80 of 125 posts

Re: The Food Bubble (2010)

#71

Post by nandemo »

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…

I don't have data for the wheat alone, but the index did tumble:

http://www.google.com/finance?q=AMEX%3AGSG

There's a lot wrong with this story. I'm amazed that most people here are just eating it up. Compare to the reaction to science news: if an article claims that X causes Y but the data only shows a correlation but not causation, people will always point it out. Why not be a little more critical here too?

For instance, how do we know the commodity index prices caused an increase in the price of the actual commodities, or if something else caused the price increase and the commodity index price was merely reflecting it?

Other things the article gets wrong or doesn't explain:

* the Goldman Sachs Commodity Index is just an index (and it's not even owned by GS anymore, it's owned by S&P). It's not a fund. There are funds that track it, but just creating an index doesn't do much to the market.

* he says that bankers started making financial products out of food products in the early 1990s, only to contradict (and correct) himself later but without explaining that contradiction.

* "the bankers had figured out how to extract profit from the commodities market without taking on any of the risks they themselves had introduced by flooding that same market with long orders". This is exactly what every mutual fund manager does, whether it's stocks or commodities. There's nothing new here. The fund manager will only flood the market with orders to the extent that his clients are putting money into the fund.

* "By the time the normal buying season began, drought had hit Australia, floods had inundated northern Europe, and a vogue for biofuels had enticed U.S. farmers to grow less wheat and more corn". How in the world does that support the claim in the title? Droughts and floods decrease the supply, prices go up.

I'll stop here, but there's more data about this in the Economist:

http://www.economist.com/node/16432870?subjectid=2512631&#38...

Re: The Food Bubble (2010)

#72

Post by Cushman »

tpatke wrote: post #39
lawnchair_larry wrote: post #37

Earlier quoted context omitted.

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? Th…

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 it surprise you how many of us are surprised? Even pg?

We don't know how bad it's gotten. If you really think it's reprehensible, it's well past time you (and other insiders, not to single you out) spoke up.

Re: The Food Bubble (2010)

#73

Post by 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&#38...). 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?

Re: The Food Bubble (2010)

#74

Post by tatsuke95 »

davidw wrote: post #40
ramchip wrote: post #28

Earlier quoted context omitted.

I think we all realize it's a terrible thing, but repeating how sad it is will get us nowhere. Understanding what caused it and how it works, on the other hand, can help us prevent further people from starving. I'm personally happy that HN often takes an analytical, rationalist point of view, rather than an emotional one like eg. Reddit tends to do.

Exactly - if you don't understand a system, how can you fix it? You risk making it worse, rather than better, or shunting the problem elsewhere, but not really fixing it.

...exactly.

The sentiment seems to be that "we" need to somehow control these prices and markets, which has worked horribly in the past (and present).

The creation of the index isn't the problem. Wild speculation is. When you speculate the wrong way, you need to lose. But the precedent has been set --not only on the top level with the huge banks, but with main street citizens speculating on second homes and mortgages-- that the bet should be upside only.

Re: The Food Bubble (2010)

#75

Post by z0r »

Cushman wrote: post #68
Tloewald wrote: post #66

Earlier quoted context omitted.

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.

> When one [...] organization with [...] capital makes its goal [...] to extract value from the rest of the market for itself and its shareholders

Nope, just a regular capitalist enterprise

Re: The Food Bubble (2010)

#76

Post by Cushman »

z0r wrote: post #75
Cushman wrote: post #68

Earlier quoted context omitted.

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.

> When one [...] organization with [...] capital makes its goal [...] to extract value from the rest of the market for itself and its shareholders Nope, just a regular capitalist enterprise

And fascism is just a regular government, and secret police are just regular police, and martial law is just regular law... You know -- since I've got you here anyway -- I've always wanted to tell you how much I loved your novels, Mr. Orwell.

Re: The Food Bubble (2010)

#77

Post by mchusma »

OstiaAntica wrote: post #43
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)…

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.

Agreed. Price growth is natural when you increase the money supply. It's one of the reasons that the CPI index is flawed, as it does not include food costs directly.

Re: The Food Bubble (2010)

#78

Post by randomdata »

justincormack wrote: post #47
capnrefsmmat wrote: post #7

Earlier quoted context omitted.

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.

Prices are back up. Not quite up to the peaks of 2008 but not far off. http://www.indexmundi.com/commodities/?commodity=wheat&m...

Speaking as a farmer, these are the prices required to remain profitable. I'm sure it wasn't covered here, but prior to 2008 we were seeing numerous farmer protests against the destabilization of our food sector. And then, all of a sudden, the prices rose. Maybe it was purely coincidence with investor actions, but I have always felt it was something else.

Though it raises some interesting ethical questions. Is it better to have the farmer subsidize the poor by not turning a profit, or is it better to have the farmer turn a profit (the goal of the business) at the cost of starvation of others?

Re: The Food Bubble (2010)

#79

Post by mhb »

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.

Before the contract is due for delivery, it is sold and the next contract further out is bought. It is trivial.

Re: The Food Bubble (2010)

#80

Post by randomdata »

littlegiantcap wrote: post #19

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 issu…

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.

Post reply on HN