Steadfast FinancesThink Speculators Don't Influence Markets, Think Again

Think Speculators Don’t Influence Markets, Think Again

Filed in Budgeting , Commodities 4 comments

I get a laugh out of folks who say… speculators have little or no effect in the everyday lives of consumers.

Really?

Wheat futures

Ostensibly, it’s never a good thing when a vast supply of any commodity, in this case, wheat, is taken out of the supply and demand equation by a devastating round of wildfires. Russia has experienced a severe drought and record high temperatures, which has turned the biomass into kindling, and when lit, went up in smoke even faster than wheat futures contracts.

Bottom line: it’s a no brainer that bread prices are heading upwards short term. It’s also possible the cost of animal protein could rise since feed costs could rise in tandem.

In part, the spike higher is due to traders buying large quantities of futures contracts so they can take delivery for their customers to keep prices low. That’s no big deal, and it happens everyday. However, you’re fooling yourself if you don’t believe a substantial quantity of this price spike isn’t due, in part, to speculators.

Alas, looks like deflation at the grocery store won’t be happening anytime soon.

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Posted by CJ   @   5 August 2010 4 comments
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4 Comments

Comments
Aug 5, 2010
2:52 pm

Speculators have a play wherever volatility is found. Krugman spent a fair amount of time dealing with speculators in his book The Return to Depression Economics (highlights here: http://bit.ly/cCQ0wv). They’re ability to leverage and pile on bad situations is nothing short of astounding.

Aug 5, 2010
2:53 pm

Their, that is.

Aug 6, 2010
5:12 am
#3 Ed :

I just read an article in Harper’s, “The Food Bubble: How Wall Street Starved Millions and Got Away With It” that discussed speculation in the wheat market. You have to be a subscriber to read the article online, but in a nutshell, speculators essentially cornered the market in wheat futures a couple of years back. This created a bubble that resulted in wheat shortages across the world, which led to food riots in some countries, and widespread starvation and malnutrition in others.

So having just read this article, I mostly agree with your post, with one minor quibble (not even really a disagreement). You mentioned animal protein, and the possibility it would get more expensive. The thing is, livestock owners will be able to afford more costly feed, but poor people, whether in the U.S. or the rest of the world, won’t. So while some of us will be paying more for bread and burgers, there are other people who aren’t going to be eating at all.

While I’m commenting, let me add that I enjoy reading your blog–keep up the good writing!

Aug 6, 2010
10:39 am
#4 Money Obedience :

Traders do contribute to short-term volatility in markets. Academic literature calls short-term trading “noise” because that is what it really is. Noise by itself cannot create a new, long-term equilibrium. You need some real underlying changes in supply and demand to create sustained long-term prices. On the way to these equilibrium prices you will encounter some volatile swings due to noise. Let’s be grateful to the noisy guys – yes, they are mostly guys – whose noise also helps us find these equilibrium prices.

Fortunately short-term price movements do not have that much affect on every day life, since producers use these very same and sometimes noisy markets to hedge, i.e. to lock in prices for the products they need to make for us consumers. And these actors – producers(supply) and consumers(demand) – are the only ones that matter in the long run.

By the way, my 3- and 4-year old are very noisy consumers of cereal.

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