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Panic Buying from Speculators: Casino Capitalism

by Asinus Asinum Fricat Sun May 11th, 2008 at 08:57:05 AM EST

Panic over commodity shortages continues to emerge as the dominant factor in the global markets, with both end user and speculative buyers of corn, soybean, cotton, rice and a host of other commodities taking note of what's happening with the wheat shortcomings. Commodity markets are now seen as the main factor behind price rises. But rising fuel prices, Chinese demands and a lack of infrastructure to deal with extreme weather in countries such as Bangladesh and Australia have also played their part.

Farmers and food executives have appealed fruitlessly to federal officials for regulatory steps to limit speculative buying that is helping to drive food prices higher.  "Casino capitalism has taken a seat at the table of the poor" said EU Socialist Group leader Martin Schulz yesterday, "this is immorality carried to the extreme. This is why we need international controls on financial markets."

Meanwhile, some Americans are stocking up on staples such as rice, flour and oil in anticipation of high prices and shortages spreading from overseas.

Diary rescue by Migeru


Even Wonkette reports: "the New York Times to, uh, the New York Sun, newspapers are reporting the hot new American trend: survivalism.

"Something is wrong," said National Farmers Union President Tom Buis, adding that the CFTC's refusal to rein in speculators will force farmers and consumers to take their case to Congress. Their pleas did not find a sympathetic audience at the Commodity Futures Trading Commission (CFTC), where regulators passed the buck and said high prices are mostly the result of soaring world demand for grains combined with high fuel prices and drought-induced shortages in many countries.

This may warrant congressional intervention. The public is all too aware of the credit crisis on Wall Street. No one needs another lack of oversight and regulation that could lead to a similar crisis in rural America and beyond.

While farmers here and abroad generally are benefiting from the high prices, even they have been burned by a tidal wave of investors and speculators pouring into the futures markets for corn, wheat, rice and other commodities and who are driving up prices in a way that makes it difficult for farmers to run their businesses. While US has made improvements to increase crop production efficiency in recent years, the world hasn't really put sufficient investment into production agriculture for several decades. The net result has been declining stocks at the same time that expanding global wealth has demanded more raw commodities. The net result is a new all-time record high prices for corn, soybeans and wheat. Solid demand for soyoil and soybeans, especially from China, continues to fuel buying interest in the oilseed complex. China is also said to be buying both to fight food inflation and to build inventories ahead of this year's Olympics.

Vietnam moved to quell panic over rice supplies yesterday, banning speculation in the market after a "chaotic" buying binge at the weekend highlighted growing global fears about food security. The Vietnamese government, facing the challenge of double-digit inflation as it makes the transition to a market economy, blamed hoarding and speculation for the weekend buying spree, and reacted by ordering local authorities to regulate markets and ban non-food traders from trading rice. The consumer rush for rice took place even as Vietnam's output for the winter-spring crop was estimated at 9.9mn tonnes, 400,000 tonnes higher than last year.

Although Asia consumes over 80% of the world's rice, the impact has been limited as countries like China, India and Japan are self-sufficient. The frantic pace of price increases in Thailand, the world's largest rice exporter, looks set to cool in the weeks ahead, a Thai rice exporter said, with improved supplies.

"The market is likely to correct up to 20% even if the bans by India and Vietnam remain,"
Korbsook Iamsuri, the secretary general of the Thai Rice Exporters' Association said yesterday.
"Crop arrivals are much better than what it was three weeks ago,"
she said, as Thai prices remained above the historic $1,000 per tonne level reached a week ago.

Elsewhere, in a world of increasing affluence, the hoarding of rice and wheat has begun. The President of the Philippines made an unprecedented call last month to the Vietnamese Prime Minister, requesting that he promise to supply a quantity of rice. The personal appeal by Gloria Arroyo to Nguyen Tan Dung for a guarantee was a highly unusual intervention and highlighted the Philippines' dependence on food imports, rice in particular. Mounting concern about rice has prompted the Indian Government to restrict exports of certain varieties. The measure triggered another surge in global rice prices, which have risen 50 per cent in a year, according to the FAO. The rice shortage is even felt in Britain where the price of basmati, the biggest-selling variety, is rising rapidly despite the fact that there are ample stockpiles. The specter of hoarding is everywhere.

The issue of food prices will be discussed on June 3-5 when world leaders meet in Rome at FAO's invitation to attend a High Level Conference on World Food Security: the Challenges of Climate Change and Bioenergy. Guests whose presence at the summit has already been confirmed include Presidents Sarkozy of France and Lula of Brazil, and UN Secretary-General Ban Ki-moon. It will be interesting to see if they will address the evils of speculation.

 

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The underlying fundamentals of food production and distribution are that "high prices are mostly the result of soaring world demand for grains combined with high fuel prices and drought-induced shortages in many countries," as the CFTC stated.  

Speculative money flooding into the Commodities Future Markets are also causing food prices to rise.  Straightforward Supply/Demand: a larger demand for a fixed Supply increases its cost.  Given the theoretical, arithmetical, relationship of a commodities selling price and its futures contract price bidding-up the futures prices has an 'ever-higher' input into the immediate selling price of the commodity.  

In the InfoProc-Biz that's what we call "Completing the Analysis."  You see - and hold on to your hats now! - two things can be true AT THE SAME TIME!  

(Whoa Nellie!)

There's this recently invented logical/analytical operator called: AND.  A truly amazing intellectual tool it allows the user to give equal weight to two (or MORE!) affective factors of what, or to, is being analyzed.  

I strongly urge the decision makers to acquaint themselves with this marvelous, albeit obscure, tool and use it frequently.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Wed Apr 30th, 2008 at 11:33:49 AM EST
ATinNM:
Speculative money flooding into the Commodities Future Markets are also causing food prices to rise.  Straightforward Supply/Demand: a larger demand for a fixed Supply increases its cost.  

I think you are conflating the physical and futures markets.

Futures markets are about price expectations and risk management: they are not about making and taking delievery. They have no influence on what the price will actually be upon expiry. That depends on the supply and demand in the "physical" or "spot" market.

The physical market is the dog - the derivatives market is the tail.

If speculative money is hoovering up physical stocks and buying forward contracts from physical suppliers, then that's a different matter. It's called "cornering the market".

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Wed Apr 30th, 2008 at 01:33:43 PM EST
[ Parent ]
Part of the relationship between a futures market and the 'Real Thing' market is the use of the futures price (nearest delivery month) to set the current selling price.  The purchasers do this to smooth the Cost of Capital allocated to resource purchase(s).

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre
by ATinNM on Thu May 1st, 2008 at 10:56:29 AM EST
[ Parent ]
As far as I am aware futures prices - not even the front month - are never used as a basis for spot pricing.

The tail does not wag the dog. The function of futures contracts is as a basis for forward not spot pricing.

And yes, part of the function of futures is to smooth revenue streams.

There is a convergence between the futures price and the spot price upon expiry, but even here the delivery process, and the fact that the futures contract is standardised, while the physical market is not, leads to all sorts of games between buyers and sellers.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu May 1st, 2008 at 08:51:34 PM EST
[ Parent ]
Here in the States I'm noticing a trend for retail sales points of oil products, gasoline (petrol) primarily, to change their pricing based on future prices.  

The reasoning behind this is to use the future prices as a predictor of future wholesale prices.  They charge more in the present to garner the funds needed to cover the cost of purchasing the gasoline in the Future.  This  maintains their profit margin.

The background is the sales points (gasoline stations) purchase intermittently while the spot/Future prices change constantly and fluctuate around the Supply-from-the-refinery/Demand-at-the-Pump equilibrium point.  This Price-Time difference, plus the Boom-Bust nature of the future markets, exposes the sales point to Product Price Supply risk -- buying at a high point in the price fluctuation cycle and selling into a downward fluctuation.

This same process occurs at the refineries when they purchase crude oil to turn into petro-chemical wholesale products.

Without research the affect of this is unclear.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun May 11th, 2008 at 12:50:18 PM EST
[ Parent ]
Govts. doing ANYTHING which doesn't favor the ultrawealthy, and screw/kill everyone else ... when in recent history can you give me examples of this? The current game will continue until the ultrawealthy feel genuinely threatened but what will that take? They're the cattle barons and the rest of us are cattle.  Our death/starvation is meaningless to them.  In fact, if some of them are staunch greenies/tree-huggers, a huge die-off in humans would look like a good thing for the planet's health.

Time to embrace starvation people, OURS!

"Starvation, NOT just for Africans anymore".

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Sun May 11th, 2008 at 10:31:39 AM EST
Food prices soaring.  Oil prices soaring.  I don't suppose those would have anything to do with each other.  And I don't suppose either of them would have anything to do with the Federal Reserve frantically printing money they don't have.

The blurker formerly known as ignorant bystander.
by b--- (budr at hughes net) on Sun May 11th, 2008 at 12:45:36 PM EST
Oil prices soaring in Euros has nothing to do with the Fed printing Dollars.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Sun May 11th, 2008 at 12:46:56 PM EST
[ Parent ]
Don't forget the dollar/euro exchange rate does have an affect.

How much of an affect is open to question.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun May 11th, 2008 at 12:53:48 PM EST
[ Parent ]
I don't find that intuitively obvious.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Sun May 11th, 2008 at 01:26:18 PM EST
[ Parent ]
Future markets are good things. One of those financial services which actually happens to be useful. They let people hedge, and they also make it easier for new suppliers to start a business, raising start up capital by selling their future produce.

Alas, if there was a trade in iron futures...

Anyway, speculative bubbels pop. Witness the collapse in the price of wheat.

The solution to high food prices is high food prices. Trade restrictions are just making things so much worse. If nations have a legitimate worry that their poor might starve or fall on very hard times, they should raise taxes or borrow and hand the money out to the poorest.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Sun May 11th, 2008 at 05:16:19 PM EST


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