The Financial Times above-the-fold headline today screams India considers ban on trading in food futures.
It reports, “India’s finance minister said on Monday he was considering a blanket ban on trading in food futures, underlying growing concerns in Asia over the role of hedge funds and financial market traders in the recent surge in commodities prices. If India imposes a ban, it would come only five years after the country introduced such futures trading as part of a broader push to develop India as a leading financial centre.”
Last week National Public Radio ran a special report on the food crisis and many of the experts interviewed agreed on Wall Street’s role in the increased prices of food worldwide. Bidding up the prices of futures is one thing, but farmers don’t sell futures–they sell real products in the here and now. They don’t get the benefit of those price increases. Rather, they are mired in a market full of price controls. It would make sense, of course, for them to hedge their prices in case of supply issues: Sell at market prices but at the same time buy futures, and get the benefit of price upswings to re-invest in their farms. But they can’t. It’s too expensive for farmers to hedge these days. Besides, the market is so volatile that a downswing in prices on the futures markets means a wipe out of capital in the bank accounts today and no crops for tomorrow.
Elevators are the businesses getting most squeezed. They buy raw products from farmers and distribute them.
As The New York Times explains, “Since 1959, grain producers have been able to hedge the price of their wheat, corn and soybean crops on the Chicago Board of Trade through the use of futures contracts, which are agreements to buy or sell a specific amount of a commodity for a fixed price on some future date.
More recently, the exchange has offered another tool: options on those futures contracts, which allow option holders to carry out the futures trade, but do not require that they do so. Trading in options is not as effective a hedge, farmers say, but it does not require them to put up as much cash as required to trade futures. These tools have long provided a way to lock in the price of a crop as it is planted, eliminating the risk that prices will drop before it is harvested. With these hedging tools, grain elevators could afford to buy crops from farmers in advance, sometimes a year or more before the harvest. But that was yesterday. It simply is not working that way today. Futures, for example, are less reliable. They work as a hedge only if they fall due at a price that roughly matches prices in the cash market, where the grain is actually sold. Increasingly — for disputed reasons — grain futures are expiring at prices well above the cash-market price.”
The disputed reasons The New York Times is alluding to are professional investors. The rise in index funds and commodities traders and vehicles is putting the price of food—survival for many people around the world—into the hands of investors and speculators.
India is on to something, and the rest of the world should follow suit and consider tighter controls for commodities trading.
May 5th, 2008 at 5:52 pm
Nonsense article. You can fix the suppply of something, and the price of something, but not the price and supply. High prices will bring the most food on line quickly. In the mean time governments need to subsidize food costs for the poor. The Soviet Union used to ‘fix’ their commmodity markets like you suggest and the result was 10 of millions of starving russians. Farmers use both futures and options on future to hedge. Limiting long only index commodity funds would mean that ‘price’ supports were not present and only make the markets more volatile. Farmers are not mired in ‘price controls’, that is what POLITICALLY CORRECT people like this author want to do. The USA tried price controls on commodities in the 70s and there were massive shortages and when the controls were lifted prices exploded even more. This is a poorly written, and poorly thought out of article. Farming is a low cost business to start up, and the beneficiaries of high agricultural prices are often small farmers themselves in poor countries.
May 5th, 2008 at 6:34 pm
This article is totally misinformed. For every buyer of a commodity future there is a seller. Did it ever occur to you that sometimes funds go short commodities? Therefore depressing prices. The real question is why do investors think that commodities are worth buying? Could it be because of years of loose money policies around the world that have allowed a consumption binge? When interest rates rise and investors find even ordinary savings attractive again then money will flow out of any investment in commodities. There are real supply problems in the world food and energy markets, these problems will only be cured through higher prices, which only result from free and open markets.
June 18th, 2008 at 3:53 am
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June 19th, 2008 at 4:46 am
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