More evidence that financial speculators drive crazy food-price swings

A new study on the link between financial speculation in commodity markets and food-price spikes shows that the model can be used to predict future food-price spikes, strengthening the case that financial speculators (fleeing the collapse of the housing market) art the root cause of the violent food-price swings that have been blamed for global starvation, riots and political instability.

The new paper -- M. Lagi, Yavni Bar-Yam, K.Z. Bertrand, Yaneer Bar-Yam, UPDATE February 2012 — The Food Crises: Predictive validation of a quantitative model of food prices including speculators and ethanol conversion -- was produced under the auspices of the New England Complex Systems Institute.

In the new study, predictions made by the researchers’ original model are compared to actual food prices between March 2011 and January 2012. Placed on a graph, the lines match closely, and do so despite spanning a major change in price trends at the last bubble’s peak.

“If you have a straight line, extend it and say, ‘Aren’t we predictive,’ it doesn’t give that much confidence,” said Bar-Yam. “If it changes direction, that’s a much more severe test of what’s happening.”

Both the European Union and United States are now considering whether and how to limit commodity speculation. In the U.S., such limits are required by the Dodd-Frank Act, but have been fiercely resisted by the financial industry.

It’s expected that the U.S. Commodity Futures Trading Commission will enact speculation limits by the end of 2012, though they might still be blocked in court. But even if the rules pass, they’re arguably weak, focusing on “position limits,” or caps on the maximum number of contracts a single speculator can hold. The rules won’t won’t prevent markets from being overwhelmed by speculation.

(But what's a little starvation and global upheaval when compared against the miracle of "enhanced liquidity"?)

Speculation Blamed for Global Food Price Weirdness


  1. The food insecurity in Tunisia and all down the line is what started the Arab spring movement.

  2. The reason there is speculation in housing, followed by speculation in oil, followed by speculation in food ad infinitum is that the world’s central banks have enabled borrowing at interest rates which are effectively zero.

    Which means that there are no investments which provide a steady, safe return any more, either for the big investor or the small.

    It’s part of the general policy of hating savers and loving punters, which began under Clinton and has continued unabated under Bush and Obama. (Although I suspect all the cool kids would be outraged if seniors were earning 0.4% on their savings under a Republican president).

    1. There are no good financial services fees to be extracted from those tedious “savers” with their long-term strategies.

      The street demands customers who have to churn their way through ever more byzantine synthetic assets with incredible speed!

    2. There was speculation before interest rates dropped to zero. The Chicago Mercantile Exchange is 114 years old.

      1.  But not everybody who participates is a speculator. Some have skin in the game, and use contracts to hedge and stabilize their supply of whatever commodity is involved. Even down to a small feed store or small oil dealer.

        Some speculation can be helpful as it can keep going a market trading sluggishly. However, there are a substantial number of trades that have nothing to do with supplying or delivering a product, merely trading positions to be liquidated and churned. These need to be limited as a small percentage of all trades.

    3. “Which means that there are no investments which provide a steady, safe return any more, either for the big investor or the small.”

      Except education, that always pays dividends.

    4. That’s right. If capital can’t find a good home through the banking system, it will go where it can earn a return. 

    5. Central banks have enabled nothing, as the tail wags the dog. As long as the fractional reserve requirement adds up at end of period, the private banks can lend as they please. And as long as speculators think they can outrun compound interest by market trades, they will attempt to do so if the banks are willing to lend. All this stacked upon the impossibility of knowing risks, meaning that banks, after a period of little to no defaults, will ramp up the chance they are willing to take and inevitably end up lending to Ponzi schemes.

  3. The Invisible Hand of the Market will take care of the poor and hungry, but gently leading them out of their miserable hovels into the sunlight of free enterprise . . .  and then pushing the unfit leeches into Soylent Corporation intake hoppers.

    1. Stefan, the real reason that the cost of food and energy has gone up is because the currencies that they are priced in have been devalued by the actions of the Central Banks and by successive government policies. 

      It has been the distortion caused by this intervention that is causing the real misery here.  If people bothered to look at the commodity fuel, oil, agricultural raw materials and food price indices they will see a steady rise over the past 20 years, with a significant upswing over the past 6 years. This correlates perfectly with the elastic money policies of the central banks. Period.

      Still, I’m sure the trillions stolen from our childrens labour by the ECB and the Fed and packaged as GDP will all end well.

      Stop being scared of the boogeymen speculators and start focusing on the rigged market.

  4. And we’re not greasing the wheels on the tumbrils and sharpening the guillotines because…why??

    1. Because corporate media keeps us just under the required critical mass of seething anger, and makes it difficult to connect personal problems to systemic problems.

    2. And we’re not greasing the wheels on the tumbrils and sharpening the guillotines because…why??

      Some of us don’t need a special reason to keep the guillotine sharp.

  5. “But what’s a little starvation and global upheaval when compared against the miracle of “enhanced liquidity”? ”

    I mean, I get it, snark snark snark, but the reason that a loaf of bread doesn’t cost $1 one week and $6 the next, given the scale at which most of our food supply operates is that companies that sell it are able to hedge against swings in price by making use of these very financial instruments.

    Now, granted, most of the guys (and I think they’re probably all guys) on the NYMEX or Chicago Mercantile are actually all just there to make money and won’t ever actually take delivery on the futures contracts they trade. But they *do* provide price stability, which is absolutely a good thing for all consumers, which most of us are.

    I’m not saying the situation doesn’t need fixing, but let’s not pretend it’s an unvarnished evil whose sole reason for being is to enrich the 1%, either. You and I benefit from the ability of people to buy and sell futures contracts every day.

    1. I’m currently liking the idea of a transaction tax, to discourage the high-frequency trading types who’re most inclined to stampede.

      1. Bubbles and stampedes don’t need HFT, they have happened since time immemorial. Tulips anyone?
        A transaction tax just gets passed on to the consumer, meaning you pay your bank more, and get less in your pension.

    2. Why do you think Cory is criticizing futures in general?  Futures markets obviously predate this graph by several decades and didn’t seem to cause this sort of speculation-fueled price spike until more recently.  I infer from this that Cory must be criticizing changes in finance that have occurred more recently. 

      Plus look at the graph.  You call that price stability?

    3. This article was about evidence that speculators cause violent price swings. It might just be me, but that doesn’t sound like it provides price stability. I suspect, then, you are talking about a different set of rules for speculation than the ones in place.

  6. So, evil speculators force the price up to crazy highs, then, er, push it to crazy lows….. And errrr.. Buy high, sell low….. Errrrrr ….. And they make money how exactly? By buying high, selling low?

    1. they sell the futures on margin when the price is high and buy them back when it crashes, balancing the equation. 

  7. Is the problem so much that “speculation” exists or that plutocrats are doing stuff like, for one example:  stockpiling and mothballing commodities in massive quantities?

    1.  The speculation is in the rapid fire trading and churn of puts and options. Very little hoarding of commodities is occurring and for some commodities like milk, eggs, grains and meat, it would be difficult. The majority of speculation is in players who neither originate the commodity in question or who will not be taking delivery of some quantity of that commodity. Some traders have skin in the game and others are just trading contracts.

  8. Come on, Boing Boing.

    The summary completely ignores the other half of the research, which is the expansion of corn to ethanol conversion – which the abstract clearly indicates is one of the two indicated drivers of food prices. Why is ethanol conversion popular? Why, could it be because it’s mandated in fuel mixes and receives massive government subsidies around the world? Don’t we think that there’s a chance that has an impact?

    Also, the abstract does not seem to have any explanation of why speculation is considered a causation of food prices rather than simply being correlated – one would expect, for a group that focuses on complex systems, that such an explanation would be front and center. Correlation makes a lot more economic sense, because speculators tend to focus on commodities that are rising in price. Indeed, the chart shown appears to provide only shaky support for speculation preceding, and perhaps causing, food price increases.

    Finally, one might want to be skeptical, at the very least, of a study partially funded by the military:

    There’s nothing invisible about the hands that are driving the world economy into depression. It’s the result of the previous generations of government “experts” pushing their pet policies, just as these researchers are doing.  When are we going to learn that these policies do not, and cannot, have the best interests of the population at heart?

    1. It’s the result of the previous generations of government “experts” pushing their pet policies

      I agree about the corn subsidies.

      Having said that….

      You really think that corn subsidies are so large because of government eggheads?  You actually believe that government brainiacs are driving policy and not massive corporate interests that have pretty much corrupted our entire political system?

      1.  Yeah, Navin, just the same way that people with no money somehow acquired enough leverage to destroy the economy.

  9. CORY: Please summarize better.  The dominant effect is ethanol production, a government subsidy that has little to do with “speculation.”

    More points:

    1.  This is not peer reviewed — (almost) anyone can publish to ArXiv. So while it may be a paper by scientists, it’s not  (yet) a scientific paper. Pons and Fleischmann’s original cold fusion paper was “published” in a similar manner.
    2.  By the numbers, the claim is intensely weak.  The compare the  data series to a simplistitc theoretical model. The update says they  made a single “over/under” prediction. Big Whoop. 

    3.  Notice that foods prices track the price of crude oil closely. Since American Grain is basically converted petroleum,  the answer is probably right there. Note that the price signal from the energy markets would be transmitted to the agricultural    markets VIA THE FUTURES MARKET.

    1. How does the fact that they’re tied together diminish the point?  Oil speculation is full of manipulation, hoarding, and stockpiling as well.

      Google “oil+contango”

    2. Normally I would agree with your point 1. However, The underlying paper has been reviewed despite being posted to ArXiv. If you look at the link more closely you will see it’s an update to a model which was published in a previous paper and said paper has been reviewed by four people (4 economists: 2 emeritus, 1 academic, 1 at the boston fed.) (see the original paper here:

  10. I haven’t noticed much in the way of price drops.  I thought that food prices work like this:
    Fuel prices go up; food prices go up.
    Fuel prices drop; food prices stay the same.

    1.  I do wonder why the food companies don’t attempt to lower prices, in certain cases anyway (I don’t expect they’d care about increased prices for staple items because people will buy them anyway).

      The price of pistachios has increased 3x or so since maybe 2005 or 2006 – which I think is the last time I bought any – which completely prices me out of what was once my favorite snack. It would be in their interest to lower prices, if possible, for items like that which aren’t really staples but which people like to buy in great quantities – if they can afford them.

  11. Two key points about this graph:
    1.  Many economists will agree that speculation (or at least some type of dis-equilibrium)  is reflected in the two recent peaks.  It seems implausible that these two peaks reflect correct market adjustment to fluctuations in fundamental scarcity.  To me (perhaps not most economists) that suggests that governments should better regulate the role of speculation in futures markets; BUT …
    2.  We should pay attention also to the dashed line showing rising equilibrium food prices.  I am distressed that many writers — even environmentalist writers — covering an earlier version of this paper focused ONLY on speculation.  We should also pay attention to foolish ethanol policy, population growth, meat demand, food waste, and a decades-long slowdown in agricultural productivity improvements (probably caused by environmental constraints).

    Speculators may cause dysfunction and panic in commodity markets, which can cause some kinds of harm for governments in poor countries, but the speculators seldom take possession of the commodity, so they don’t really reduce the quantity of food available to the poor.  I’m not making excuses, just stating plainly the harm speculators do or don’t cause.  Speculators make terrific villains, but they are not the main source of the challenging global world food situation today.

    1.  Please give an example of: “decades-long slowdown in agricultural productivity improvements (probably caused by environmental constraints)”

      1. I was thinking of Alston, Beddow, and Pardey in Science (2009).  Yield growth much faster 1961-90 and slower 90-2007.  The easy yield improvements have been taken, and even some of those may have environmental limitations.  These are sober agricultural economists (I don’t think they’d mind if I said “sober and conservative”).

  12. It’s interesting how during the 2008 speculative food bubble there was much more awareness and discussion about what was happening, with at least some condemnation from business leaders, bankers and politicians (–how-much-are-speculators-driving-the-food-crisis ). At that point annual trading in food commodities had risen from $10bn to $140bn in a decade, and the price of rice had trebled in a year. 

    The spike at the end of 2010 / early 2011 was much less visible – indeed I wasn’t aware how bad it had been til seeing this graph.

  13. food prices for those staples like millet, cassava, and potatoes that are NOT subject to speculation do not rise.  therefore, speculation is the source of instability, even in years of bumper crops where prices for other volatile staples skyrocket in the absence of scarcity, as was the case with wheat during the 2008 bubble.

    see this Independent link re: how Goldman gambled on starvation

    1. Here’s a price graph for potatoes.

      Looks like it’s risen by about 40-50% since January despite not being a market large enough to be used by speculators. Sometimes prices just change because of fundamentals in world economics. Sometimes markets overreact without speculators being involved. Wild swings in prices of commodities are not exactly a new thing.

  14. @hnice:disqus  ,

    Speculator domination of food futures markets has really only happened in the past 5-10 years. Consumer food prices were not particularly volatile in the decades (if not centuries) before that, but have become quite a bit more volatile since then. Excess liquidity destabilises prices rather than stabilising them, by injecting money that is untied to actual consumptive demand, and which can, as a direct result, produce massive flows in and out of the market at the drop of a dime.
    There is nothing wrong with forward contracts. Indeed, most of human economic activity is built around similar concepts (e.g. you promise to deliver your employer the ‘fruits of your labour’ in return for the salary your employer promises to pay you). The economic utility of standardised futures is already more questionable, and speculator domination of markets is downright destabilising.

    Additional liquidity is good when it comes from ‘genuine’ supply and demand – i.e. parties directly responsible for the production and delivery of a good, and parties who would buy said good even if they could never re-sell it. When, on the other hand, most of the trades involve neither the ‘initial producers’ nor the ‘ultimate consumers’, one of two important questions must be answered:

    1. Why are no initial producers or ultimate consumers willing or able to participate in necessary trades?
    2. What are the motivations for and effects of the vast majority of the trading volume being unnecessary?

  15. Let’s see… it looks like these speculators are buying high and selling low…

    They’ll probably need a bailout soon.

    In Randian terms, that would make them James Taggarts.

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