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Home Publications Blogs Beat the Press Speculators Don't Eat Grain

Speculators Don't Eat Grain

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Wednesday, 11 August 2010 05:08

The NYT featured a bizarre column today by a family farmer who expressed concern that financial reform will drive speculators from the grain market. The column tells readers:

"According to the trading commission, about one-third of the long positions in hard red spring wheat futures, which is what I trade on the Minneapolis Grain Exchange, are owned by speculators. If speculators were driven out of the market, it would be as if I’d lost a third of my customers."

No, that is not quite right. Speculators may buy one-third of the wheat sold on the market, but unlike other customers, they don't keep it. Instead, they resell it. So, if speculators are driven from the market, it would be comparable to eliminating one-third of the buyers and one-third of the sellers, leaving prices on average unchanged.

The profit of speculators come at the expense of sellers and consumers. This may be an acceptable price, if they lend stability to the market. In effect, speculators can absorb the risk of price swings. However, there are reasons to believe that they can also contribute to price swings, making the market less stable. If this is the case, then their profits are a pure loss to the economy. It is also possible that the volume of speculation in the market far exceeds what would be necessary to stabilize prices. In this case the excess speculation would be a drain on the economy.

Comments (14)Add Comment
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written by David Strickler, August 11, 2010 7:10
I too was amazed that the New York Times printed this column.

However, my surprise was based on the disingenuous way in which the author misused the concepts of derivatives, futures and swaps. All swaps and futures are derivatives, but futures are not swaps, and swaps of course are not futures.

The CFTC already does a proper job in regulating agricultural and other commodity futures markets. There is no provision in the new legislation to impede the activities of speculators in such markets, who indeed are needed to provide liquidity. The CFTC has the existing authority to ensure that speculators do not take excess positions or engage in any improper trading to manipulate or corner such markets.

The regulation of swaps is intended to make those markets MORE like the properly functioning futures markets which the author of the column rightly defnds. Credit default swaps will be traded on organized exchanges, and the risk of counterparty default will be eliminated by the intermediation of a clearing organization -- again, just as in the futures markets.

Does the Times even run these pieces by their business editors who might know something about these issues?
The pain of a wound that just will not heal.
written by Scott ffolliott, August 11, 2010 8:22

The Neo-liberal Times is in lock step with those who will have us make the same mistakes that exacerbated the First Great Depression

Is it a sign of sanity to make the same mistakes we made in the Hoover Years and later The Conservative Coalition in the late thirties and expect different results?

Perhaps, they do not expect different results. They are not the ones that are out of work. They do not talk to the same people that I talk to that are out of work. Many of them tell me for three years. When I look into their eyes and hear their voices there is pain, the pain of a wound that just will not heal.

Our Great Depression may turn out to be greater than their Great Depression
Medical Travel - U talked all the time
written by James, August 11, 2010 2:07
This story talks about more companies are giving their staff the option of having major surgery oversea -

no need to pay co-pay, deductible, free airfare, hotel, per diem, car, interpreter, and airfare is even given to spouse.

http://money.cnn.com/2010/08/11/news/companies/health_care_medical_travel/index.htm
Don't the speculators provide something like insurance to growers?
written by floccina, August 11, 2010 2:20
Don't the speculators provide something like insurance to growers? Don't they tend to keeping the growers income more level which is an added function to keeping prices more stable. I think that they also help growers decide what to grow.
Kaufman
written by Robert, August 11, 2010 4:11
Apparently they don't even bother to glance at the COVER of Harper's over at the NYT, either - read Frederick Kaufman's cover piece for the July 2010 issue for some perspective on grain speculation.
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written by Tim Dufault, August 11, 2010 6:14
I couldn't agree more with the column. I am also a family farmer from Minnesota. I am one of about 2 million american farmers. American farmers sell their crops to less then a dozen multi-national corporations, who buy from every region of the world. And food buyers have to go through them to get the worlds grain.
Who has the power here?
Speculators help keep the buyers honest. Without speculators bidding up the price of grain, who else will do it? It won't be the handful of grain buyers.
Grain is a perishable commodity. We have to sell it to someone. We can't holdout for years and hope demand increases.
So the buyers sit back and buy it all up at bargin prices knowing they are the only buyers we can sell to.
And if we don't want to sell our grain, they can source it from South America or Canada or the Ukraine to fill their customers orders.
One does not need a license to buy grain. If somebody out ther wants to buy wheat because they think it might go higher, it's there right. And it's their obligation to send money to their broker when the price falls and they lose money.
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written by TR, August 11, 2010 7:32
Yeah, let's have Cargill and ADM set the prices. They'll be more than fair to farmers while also passing on discount prices to consumers as well. These guys are almost as honest as, say, Wall Street bankers.
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written by Joshua Bates, August 11, 2010 8:28
If speculators absorb the risk of price swings then they are doing more than stabilizing the market. By being net buyers at lows, and sellers of highs, speculators can inadvertently communicate to farmers and other producers through price. This can affect farmers' choices of the types and quantities of crops to plant. The speculator then takes a slice of the profits, but at the same time farmers are likely planting a set of crops that better mirrors future consumption patterns. Price setting is not a zero sum game.
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written by tinbox, August 11, 2010 9:47
I don't know the source for Mr Baker's assumption that speculators derive any profits at all from grain markets.

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written by just wondering, August 12, 2010 12:17
Exactly. You should testify before congress, and send this to Paul Krugman and many other economists that seem confused about the role of speculators... many seem to think the role varies depending on whether it's oil, PIIG's CDS or food....
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written by Robert London, August 12, 2010 3:09
The point is that without speculators farmers would be unable to properly hedge their either their supplies or their crops. Hedging reduces their risk by transferring it to the speculator. Do they not teach this in Economics 101?
Ambiguous Wavers of Grain
written by JHM, August 12, 2010 6:06
Dear Dr. Bones,

Your colleague the mammonologist Dr. Baker raises an interesting point about rhetoric: since (I betcha that) as a matter of fact, ninety-nine speculators in one hundred DO eat grain. They cannot all be on crank diets, can they?

Thus DB appears to be talking figuratively in a manner that flatly contradicts his own _literaliter_.

That’s perfectly OK in principle with this critic -- "the only rule is to be very intelligent" -- but in this case my own IQ may not be up to the challenge of deciding exactly what the _allegorice_ is.

My best guess sounds decidedly childish, namely that the accused are accused of preferring to "play with their food rather than eat it," even though, like little Johnny on the high chair, Daddy Wheatbucks and the good folks at ScroogeBank will have to consume a certain percentage of their toy collection.

Speaking of cranks, I am always afraid of sounding like one if I try to talk about economics substantively. So let me just ask a couple of questions instead:

(1) Hasn’t there been an international market in grain for at least 150 years?

Can it be that nobody has ever yet thought of any plan clever enough to handle the problems described by poster T. Dufault? "Grain is a perishable commodity" cannot be a new scientific discovery. Can it? Books about pre-1860 agriculture suggest that an awful lot of it used to be turned into vodka or moonshine or _usquebaugh_. Looking ahead instead of back, perhaps

(2) If somebody could hurry up to create a petroleum replacement requiring endless amounts of fodder . . . ? Alternatively,

(3) Maybe after Obamacare makes it impossible for our TopPercenters to make an adequate buck out of health insurance -- won’t be long now! -- they could switch over to "harvest insurance"?

A couple of posters seem to be describing the present arrangement vaguely along that line, but stuff like "The speculator then takes a slice of the profits, but at the same time farmers are likely planting a set of crops that better mirrors future consumption patterns" sounds excessively vague to me. I mean, there is no definite indiovidual contract between rich ScroogeBank and poor Old MacDonald comparable to what Bob Cratchitt gets from MediScrooge(®). And finally,

(4) Unlike most discussions of this matter, the present one does not so much as mention that blessed and mysterious word ‘parity’ or, in general, the vast traditional role of The Wicked State in farming. Has Chicagonomics-for-Dummies obsoleted all that when I was not looking, sir?

_Mais que sçay-je de la économique_? Please advise.

Happy days.
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written by chris shelton, August 16, 2010 11:10
The Canadian Wheat Board exists to take the speculation out of the Canadian wheat market. The profits it make are returned to the farmers in various forms. Unfortunately the speculator in the USA and else where do not like the competition and what to break up the Canadian Wheat Board.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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