Immoral and amoral speculators

Apparently those wicked speculators have been at it again. Not content with bringing the banking system down by sellling shares in banks that were just going through a slightly dificult time, they are now driving the price of wheat up so the poor starve. Cue Frau Merkel – time for the EU to regulate the grain dealers.

Most speculators are not immoral. They are amoral. They are making a living, providing a service. Farmers need wheat futures so they can speculate on when to sell their crop. They like rising prices as it helps them invest and develop their businesses and grow more grain in the future, as well as giving them a better income. Many of you will have shares in your pension funds and unit trusts that include shares in commodity companies that use wheat futures and other commodity derivatives to help them manage their businesses. You may even have investments that include commodity funds, savings schemes that are seeking to make money out of rising prices of food, energy, and metals. These are not immoral.

The grain price has been going up recently because Russia is having a poor harvest. It has gone up because Mr Putin has banned Russian exports. It has gone up because there are many more mouths to feed and the system allows little for harvest failure in the main grain baskets of the world.

These same amoral speculators who are currently being attacked for buying wheat have not yet had the praise surely they deserve for driving the price of oil down in recent months. As a result so the world’s poor can afford more energy. If they are to blame for things critics don’t like, shouldn’t they get credit for things that help?

A market is a mass of buyers and sellers. Each tries to make the right judgement for themselves or their organisation. Individual speculators do not seek to make the poor starve or go without heating. They seek to make money, and they may be working for you. Grain prices can only be carried upwards by speculators if the underlying market position between users and producers warrants it. If it doesn’t the market will soon adjust and the speculators will lose money. If there is a shortage of wheat then prices will rise. If they rise enough that will induce more supply, the ultimate answer to a food shortage anywhere in the world.

The reasons why some are facing dire conditons over food supply are many. That requires better government in their country, and more assistance in the meantime from outside sources. We should nto stand by and watch people starve, but we should not think we can solve their problem by regulating the speculators.

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  1. APL
    Posted September 5, 2010 at 8:02 am | Permalink

    JR: "they are now driving the price of wheat up so the poor starve. Cue Frau Merkel – time for the EU to regulate the grain dealers."

    I am not exactly sure if the policy impacts wheat prices directly, but isn't it our old friend the European Union that has decreed we should turn feedstock grain into so called 'biofuels' that must be taking a few million tonnes of grain off the food market putting already constrained supply under greater stress, leading to higher prices.

    A policy – grain foodstock to bioduel – is of course supported by our coalition government, and such people as our friends; Zak G, David Cameron and Chris Huhne.

    When your readers, find themselves paying out more for everything they shouldn't only blame the speculators, it's the Green politicians and the European Union that is assisting in the price rises.

    By the way, not only is production of biofuels from a food crop insane, it is also inefficient since ethanol produced from the fermentation has a lower calorific value than say octane, that is petrol. So you have to produce more of it, which is energy expensive, to get the same amount of work as the gallon of octane would provide.

  2. Morlock
    Posted September 5, 2010 at 9:12 am | Permalink

    "Farmers need wheat futures…"

    No. Farmers may _benefit_ from wheat futures. They may _like_ having a futures market. But they most assuredly don't "need" one. Nor does the producer of any other commodity.

    Commodities were being produced and sold long before such markets existed. They may be beneficial, or they may not be — that's a valid argument to have. But none of us genuinely _needs_ them.

    • Matt
      Posted September 5, 2010 at 8:50 pm | Permalink

      But that's a bit like saying we don't need the internet or the internal combustion engine or the printed word. I think in the current world economy we do need a futures market – doesn't it act as a very effective shock absorber for major changes in commodity supply – thereby reducing risk for suppliers?

    • libertarian
      Posted September 5, 2010 at 11:15 pm | Permalink

      Sorry you're wrong there was a futures market in farming long before the advent of money systems. You can't DO farming unless you have a future market

    • james
      Posted September 6, 2010 at 1:06 am | Permalink

      Curious, then, that futures markets are so old. Jacob's advice to the Pharaoh comes to mind. In any case, futures markets are MUCH older than any mathematical model of them. (Modigliani/Miller, those guys from LTCM, etc.)

    • Lola
      Posted September 6, 2010 at 1:03 pm | Permalink

      A futures market is a sort iof insurance. It ensures that the farmer can get a know price for his product.

  3. Jim
    Posted September 5, 2010 at 9:16 am | Permalink

    Tim Worstall has the best piece on why futures markets are in fact highly moral, not amoral here:

    He comprehensively shows speculators actually improve matters, by driving the price up now, because of a perceived future shortage, thereby increasing supply next year, and encouraging consumers to conserve food now. Thus reducing the likelihood of an actually physical shortage and famine.

    Here is a link to another post that explains what used to happen in the Middle Ages when speculation in food was banned by the Church:

    • Dave
      Posted September 5, 2010 at 11:11 pm | Permalink

      And that could not be more true. If commodities are heading for short supply what else makes us aware and rations supply but price. Dave

  4. oldrightie
    Posted September 5, 2010 at 9:26 am | Permalink

    "A market is a mass of buyers and sellers." Not aided and abetted by useless regulators and an EU bureaucracy of fools whose failure to control crime and corruption is more damaging than any market forces.

  5. nonny mouse
    Posted September 5, 2010 at 11:01 am | Permalink

    I believe in free markets, but the current system allows speculators to amplify problems with supply and demand to generate excess profits. This has been seen in oil futures as well as food. This is not the invisible hand at work but people abusing the system for financial gain at the expense of consumers.

    I think that the problem is that there is too much money flowing around for the market to operate effectively. The excess of free capital causes a rush into the futures markets when a commodity looks like it will rise, causing an overshoot in prices. High prices just cause more capital to come in rather than changing demand. This has probably always happened, but has got a lot worse over the last few years as capital flows have grown unchecked.

    I don't know what the answer is, but lets not pretend that the current system always does the job of efficiently matching supply and demand via the pricing mechanism.

    • DBC Reed
      Posted September 6, 2010 at 12:13 am | Permalink

      One of the lesser known Keynesian proposals was for national or international "Buffer stocks" whereby commodities were stored in years of plenty and sold at reasonable prices in times of shortage. But anything that Keynes put his name to does not get much of a hearing nowadays, so general
      is the disapproval of demand stimulus.

      • Lola
        Posted September 6, 2010 at 1:04 pm | Permalink

        Why bother with buffer stocks? Why not just let the price signal work?

    • StevenL
      Posted September 6, 2010 at 1:31 am | Permalink

      The answer? It's simple, destroy some money through central bank market operations – like they did to fight the inflation of the 70's in the early 80's.

      Wouldn't win you many votes though!

  6. GJWyatt
    Posted September 5, 2010 at 11:09 am | Permalink

    In the case of grain there may be inadequate storage from previous harvests. Storage too is speculation, in the physical product. So the poor can suffer from too little speculation.

    • StevenL
      Posted September 5, 2010 at 6:20 pm | Permalink

      A good point, but like buying and selling wheat futures, storage can be a hedge as well as speculation. Russia in effect is cashing in it's hedge by banning exports of stored grain, making sure it's citizens do not go hungry.

      • GJWyatt
        Posted September 5, 2010 at 9:24 pm | Permalink

        It's stored against the prospect of future scarcity. You wouldn't store the stuff if you thought the price would fall in the future. When the future arrives and the price has gone up you release it from storage, which alleviates the scarcity and moderates the price rise. So storage activity smooths the price changes. Even so the individuals who stored the stuff to begin with might correctly be called speculators. But they make life better for consumers of grain, not worse.

        • Mark
          Posted September 6, 2010 at 10:33 am | Permalink

          Those who store are often arbitrageurs, locking in a guaranteed profit by buying supply today and selling it for later delivery immediately in the futures market at a higher price than their storage and financing cost. Low interest rates make storage more attractive.

  7. forthurst
    Posted September 5, 2010 at 11:13 am | Permalink

    Three cheers for speculators for having driven down the oil price, having, of course, previously driven it up; afterall, a proficient speculator can make as much money out of declining as rising prices.

    Speculators have moved into commodities because the stock market has become too difficult even for them despite the regular long term savers through their pension funds providing the potential for harvesting through short term speculation.

    The idea that speculators in a market provide a public service by providing 'liquidity' and 'price discovery' are standard alibis for predatory practices. Luckily for the Dutch, tulip bulbs were not a food staple, but whereas price manipulation of shares merely impoverishes long term servers, price manipulation of commodities can have far more immediate and drastic consequences. Frankly it is about time that short term speculators, those who are neither poducers nor consumers are either criminalised or taxed out of the markets. Laws and tax regimes should be designed to encourage investment and deprecate speculation, encourage added value creation, and deprecate harvesting of others' savings and endeavours.

  8. Iain
    Posted September 5, 2010 at 11:59 am | Permalink

    One further point, when ever a Government has sought to interfere with the market the result has been disastrous. In the past we had the ITC, the international tin council, and others. The ITC was an organisation set up by Governments to stabilise the price of tin. Of course being Governments they sought to stabilise the price of tin at a price where everybody producing tin could make a profit, including Cornish tin mines, ignoring the fact that the packaging market was moving away from tins to aluminium cans, tetra packs etc. This meant the buffer stock manager ran out of money, and the Governments bankrolling the ITC tried to run form their ITC liabilities, attempting to leave the market with billions of losses, until high court judgements forced them to pay up.

  9. Mark
    Posted September 5, 2010 at 1:21 pm | Permalink

    Things are a bit different now. Once upon a time trading in commodities was dominated by those involved in the supply chain – the farmers, miners and oil drillers; the bakers, steel mills and refineries, the aid agencies, auto manufacturers and airlines. There were specialised traders who speculated usually taking advantage of having a better overview of the market dynamics than others, but mainly who arbitraged across markets, making small profits out of price anomalies: many of the participants in supply chains also hedged and speculated. Hedging is speculating that prices will move against you, and speculating is failing to hedge. From time to time non-traditional investors might join in a speculative play – particularly when there was news of a disaster such as frosts destroying the Florida orange crop, or a political crisis in the Middle East affecting oil markets.

    Now there is a different motive altogether. Money is no longer a reliable store of value as governments seek to debase it in a form of disguised default on their debts. Investors with wealth to protect see commodities as a better store of value than dollars or pounds or euros in a bank account or government bond that pays little or no interest. This adds a demand for hoarding that pumps up commodity prices.

    If we wish to see commodity price inflation cut back, we need sound money so that it can once again be regarded as a store of wealth. Indeed, attempting to regulate speculators risks provoking currency collapse, because they will understand the intentions to deny them the opportunity to preserve the real value of their wealth, and so will seek to move wealth out of reach of the regulators and would-be defaulter governments altogether.

    • StevenL
      Posted September 6, 2010 at 1:35 am | Permalink

      Yeah, there's definately something in what you're saying. I don't have much money, but I don;t trust banks, governments, central banks, insurance companies etc with what I do have.

      I'd rather look after it myself, which creates the temptation to speculate.

  10. Richard1
    Posted September 5, 2010 at 1:50 pm | Permalink

    If European politicians want to assist developing countries with food supply they should start by abolishing the Common Agricultural Policy. No politician who defends this market-distorting cartel should be listened to on any other aspect of global food supply questions.

    • GJWyatt
      Posted September 5, 2010 at 9:29 pm | Permalink

      Agreed – it's a forty (plus) year old scam against consumers and taxpayers.

    • APL
      Posted September 6, 2010 at 12:03 pm | Permalink

      Richard1: "If European politicians want to assist developing countries with food supply they should start by abolishing the Common Agricultural Policy."

      The CAP like the CFP is a bondoogle for French agriculture. Our fishing industry has actually been decimated and the British politicians have stood by and twiddled their thumbs.

      The CAP, set aside and all the associated parafinalia is a state subsidy directly to the largest land holders in the country.

      The small fishing business, a man owning his trawler and employing half a dozen friends and family practically no longer exists.

      As neither European nor British politicians care one jot for the small holder nor small fishing buisness in this country, the farmers, fishermen and small businessmen of devoloping countrys don't have a cats chance in hell.

  11. Stephen MacLean
    Posted September 5, 2010 at 5:56 pm | Permalink

    Austrian economist Walter Block wrote this very good defence of the speculator.

  12. Lindsay McDougall
    Posted September 5, 2010 at 8:08 pm | Permalink

    If the world's population keeps on growing, will adequate food and water supplies be available? Are markets that responsive?

    • Mark
      Posted September 6, 2010 at 10:37 am | Permalink

      Doesn't that depend on how many of them work?

  13. bloke
    Posted September 6, 2010 at 1:19 am | Permalink

    So rather than doing something useful like abolishing the Common Agricultural Policy, Frau Merkel is going to dictate the weather.

  14. grahams
    Posted September 6, 2010 at 3:16 am | Permalink

    In economic theory, speculators smoothe markets and that still happens. But in most commodity markets today, speculators outweigh actual traders (such as farmers and bread companies) many times over and in reality trend speculation makes prices much more unstable and volatile, increasing the general level of risk and uncertainty and therefore shrinking real business. There is a theological thing about defending all kinds of speculation. Free markets are right therefore there must be some value in mass speculation that artificially boosts demand and then, when the game is done, artifically boosts supply. No-one has yet come up with a way to get the benefit of benign speculation and defeat the market manipulators and bully-boys, most of whom are now investment banks. Market manipulation was not right when Thornton created his tallow corner and it is not right now.

    • Lola
      Posted September 6, 2010 at 1:07 pm | Permalink

      I'd agree that 'modern' speculation is not as useful as 'traditional's epculation. I have the vague, but unchecked, notion that this is more due to the appalling State sanctioned banking cartel depserately looking for profits, than speculators per se. That is if we had sound money, sound banking, a repsonsible central bank (or better yet NO central bank), responsible government fiscal and monetary policy it couldn't happen.

  15. FaustiesBlog
    Posted September 6, 2010 at 11:00 am | Permalink

    I'm not at all convinced that speculators are not responsible.

    Recall the fuel price hike? Peak oil was much hyped in the media as being responsible when, at the same time, it was found that there was no shortage of oil reserves at all. Once the public cottoned on to this, the price of fuel duly went down.

    As one of your respondents commented, the price hike of wheat might be caused by the EU's biofuels directive.

    I'm astonished that the media (no doubt, sponsored by governments) puts out that we have a food shortage looming. What utter tosh!

    Hydroponics, a 'farming' method which produces almost 60% of our supermarket produce, is a hugely effective means of producing food.

    I germinated a load of seeds and potted some in composted soil, some in nutrient-rich perlit and some in my hydroponics system. The results?

    * The soil-bred plants were largely eaten by caterpillars;
    * The perlite plants were spared being eaten by caterpillars/predators and are 3 times the height of their soil-bred brethren;
    * The hydroponic plants are easily 10 times the height of their perlite brethren and have not been feasted upon by pests.

    So, given these results, it seems clear that we can produce more than 10 times the amount of food that we currently produce, if farmers adopt hydroponic methods.

  16. APL
    Posted September 6, 2010 at 11:10 pm | Permalink

    Then nearly anyone who bought or sold a house during the last ten years or so might be labeled a 'speculator'. Buy now and extend yourself financially because 'the price of houses always goes up', bing, bing, bing, SPECULATION!

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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