Comment by ramanujan | Hacker News Reader

Comment by ramanujan | Hacker News Reader

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I usually don't do this, but this article is long. The summary (tl; dr) is as follows:

1) Large institutional long investments in a certain type of wheat future (Chicago soft red winter) started crowding out the real customers of physical wheat, such as bakers.

2) Because wheat varieties are moderately fungible/exchangeable, the downstream bakers started to use a different brand of wheat (Minneapolis hard red spring) and changed their recipes accordingly.

3) This second class of wheat is very widely consumed, and bidding up its price caused riots and food shortages around the world (or so the reporter states. He didn't provide specific examples, as this predates the Arab Spring).

The overall effect is if a particular food staple suddenly became a fashion item, with wealthy people buying it off the market for non-dietary purposes at such a rate that poor people could not afford it.

However, the key bit I don't understand, and which the reporter doesn't explain, is how commodity fund investors didn't lose their shirts by betting on wheat to keep going up. If they did lose their shirts then this bubble is unlikely to repeat in the near future.

He did mention it somewhat. Since the funds were only required to store 5% of their clients' money in the actual commodity, they could stash the rest of the money somewhere else safe, and then on top of that make money on transactional costs.

From another article I'd read before (which I linked to down below, and which is gone now), the funds made quite a bit of money in the rollovers by charging a fee to every investor who wanted to roll it over. Since none of their investors actually wanted a dump truck of grain showing up in their driveway, and since the price kept going up and up and up, they paid the fee to roll it over each time.

Somebody probably did lose their shirts, but it sure wasn't the funds, and the funds won't have any trouble doing this again, because there will always be more customers eager to park money somewhere to make more money.

People lost some money after 2008, although prices are now approaching the peak levels again. However, the key point is that your pension fund may not care, they are buying because of the negative correlation with other assets, and positive correlation with inflation, as the 2005 paper mentioned demonstrated. Pension funds are where this money is coming from now, and where the trillions of dollar figures talked about would come from, as they get persuaded that this is a real investible asset.

Food didn't get harder to make, but the price of food went up around the world, and it still hasn't gone down to what it should be.

Is there really any confusion as to who lost their shirts?

There's an old economist joke that goes like this:

What happened whe the Soviet Union gained control of the Sahara desert? For five years, nothing, then a shortage of sand.

It seems we can replace Soviet Union in such jokes with Investment vehicles.

I don't see any reason to distinguish them.

A free market means a free market. When one monolithic organization with access to controlling capital makes its goal not to preserve the freedom of the market, but to extract value from the rest of the market for itself and its shareholders, that's not a market. That's a centrally planned economy.

The bankers have turned Communist oligarchs in all but name.

> When one [...] organization with [...] capital makes its goal [...] to extract value from the rest of the market for itself and its shareholders

Nope, just a regular capitalist enterprise

And fascism is just a regular government, and secret police are just regular police, and martial law is just regular law... You know -- since I've got you here anyway -- I've always wanted to tell you how much I loved your novels, Mr. Orwell.

Actually you are incorrect, a free market is one in which people voluntarily interact for mutual gain, i.e. it is not coercive. If their is government interference then it is not a free market, cornering a market does not make it any less free if done solely through voluntary trade.

So if I'm born into a world where someone has cornered the market on, let's say, food, and their perfectly rational strategy is to choose not to sell food to anyone who competes with them, I'm not any less free to compete than if one person didn't get to make that decision?

Get outta here with that.

> So if I'm born into a world where someone has cornered the market on, let's say, food

Then you can ride away on your unicorn.

The western world doesn't have food monopolies. The 2nd world occasionally does, but they're created by their govts.

Of course, it doesn't help that the US govt decided to raise corn prices by subsidizing corn ethanol.

Why is it that a subsidy (which pays farmers to grow one thing, then collects money from taxes progressively) is bad, but an investment (which pays farmers to grow one thing, then sells it at a high price once someone gets hungry enough to buy it, and pocketing the cash) is good?

Huh? If you're going to claim two things are the same, it's good form to refer to them by their proper names before arguing similarity. And, if you're going to attribute a position to someone, you might want to have some evidence that they actually hold that position. (The fact that Hitler was bad does not imply that he killed puppies.)

I'm against payments to farmers other than by folks voluntarily buying said farmer's output. That's a special case of a more general rule that applies to every work product.

So I'm against "pays farmers to grow one thing" if it isn't money paid by folks who want and get said thing in exchange for said payment.

And yet I note you haven't actually challenged my point: A subsidy is when the government pays for food, then gives it out for free (it costs less to the consumer than it would otherwise.) An investor pays for food, then sells it at a higher price, extracting the value for himself (it costs more to the consumer than it would otherwise.)

That's the only difference; in neither case do the people who wind up actually eating the food, i.e. everyone else, have a choice what to pay.

You're trying to draw this distinction between "voluntary" and "involuntary" payments which doesn't exist in the real world. I guess taxes are supposed to be involuntary, while food purchases are voluntary? Except that in the real world, if you don't buy food you die, and when one group of people who know they will never be hungry have the power to raise food prices across the board... That's a very twisted idea of "voluntary."

> And yet I note you haven't actually challenged my point

That's because, as I pointed out, you didn't actually express a point to challenge. You blathered some vague description and an accusation.

Now that I can see what you were trying to say, the error is clear.

The "food investor" spends his money, not mine. If he's wrong, he loses his money. Moreover, the food investor doesn't stop someone else providing food. Govts do that all the time.

Moreover, govts tend to go all-in on their decisions - so the amount lost when they get it wrong is much larger. Investors aren't monolithic - some get it right, some get it wrong.

Yes, you need food, but unless govt gets involved, you have considerable choice about how to aquire it.

> Except that in the real world, if you don't buy food you die

Speak for yourself. The "square foot" folks have shown that it's possible to grow an amazing amount in a very small area. And yes, poor people have the time.

> when one group of people who know they will never be hungry have the power to raise food prices across the board

Govts are the only group with that power. If I don't like the prices from ADM, I can buy elsewhere. If I don't like the food prices set by govt, there is no "elsewhere".

Oh, thank God for that then.

For some reason I thought I read this article about how between 2005 and 2008 investment into grain futures pushed the price of real grain high enough that hundreds of millions of people across the world starved, while hundreds of millions of bushels of grain sat in silos, resulting in inflated food prices everywhere which still have not returned to what they should be, meaning people at the margins who starve every single day.

But I guess I must have imagined that. It's good to know only governments have that kind of power here in Bizarro World.

> thought I read this article about how between 2005 and 2008 investment into grain futures pushed the price of real grain high enough that hundreds of millions of people across the world starved

Starved? Exaggerate much?

What, exactly, kept them from buying something else instead?

> which still have not returned to what they should be

What is this price "that should be"?

If you think that wheat should be sold at a given price, what is stopping you from providing it at that price?

You're claiming that "investors" are buying grain for less and waiting for the price to go up. What stops you from buying at the same price that they buy and selling at a lower price than they demand?

Exaggerate? Not really, no. For the first time since we started counting, food insecurity increased as a proportion of the population. 250,000,000 more people went hungry in 2008, the worst increase ever-- while the grain harvest itself was one of the most bounteous, filling up silos and going to livestock feed instead of bread. But of course this is all in the article you didn't read.

Never mind that, though. If you are seriously trying to draw some kind of moral distinction between a child "literally" starving and a child who goes to sleep every night not having had enough to eat, having a little bit less every night... I don't say this a lot, but God damn you, sir.

Free markets are where you buy unicorns, aren't they?

A free market also implies some transparency does it not? If it's crystal clear what is being bought & sold, then everyone can make informed decisions and take their gains/losses honestly. When things like derivatives are created specifically to obscure the product and mislead potential buyers, then is it truly a free market? Shouldn't the government's roll be oversight (aka interference) if deception is creating a clear advantage for one party in the transaction? Your premise of mutual gain falls short in these cases.

> When one monolithic organization with access to controlling capital makes its goal

The only organization that controls enough capital is govt.

Regarding point number 3. There was a food crisis story reported back in 2008 about Haitians eating dirt to suppress hunger. Before the earthquake. Truly the worst luck in the past decade to affect a single group of people.

http://m.npr.org/story/18767313?storyId=18767313&from=mo...

This article is basically shooting the messenger.

The roiling agricultural commodity prices in the last decade were largely the result of dollar currency devaluation by the Federal Reserve. The same patterns occurred across other global commodities like copper and oil.

Devaluation of the dollar shouldn't have been a problem for foreigners who want to buy wheat. They would have had more favorable exchange rates (their own currencies would have appreciated) that would have covered the higher USD-denominated wheat prices.

Agreed. Price growth is natural when you increase the money supply. It's one of the reasons that the CPI index is flawed, as it does not include food costs directly.

Increases in the money supply don't reach everywhere at once; inflation is not evenly distributed. It's distributed, often, through hedge funds that can borrow large amounts of money from banks. You're looking at the effect and the mechanism of easily-borrowable-money actually being borrowed to bid up a particular sector of the economy; much as, earlier, it was borrowed to bid up real estate.

Disagree. The fed does not devalue currency. They set interest rate policy on reserves aka the federal funds rate. Biggest factor in supply and demand for a currency is fiscal policy. Second biggest factor is trade balance and the desirability of foreigners to save the given currency.

Increasing the money supply devalues the currency even if that's not the intended goal; that is basic economics.

"Debase" is probably a better word than "devalue" in this context.

Did the article explain why that second class of wheat wasn't replaced with another (cheaper) staple food?

The same reason it wasn't in the Soviet Union. When a centralized planning authority makes farmers grow one thing, that's what people eat. They don't have a choice.

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