Agriculture

Commodity Speculation, Rising Food Prices, and Goldman Sachs

Old habits die hard, and the motor patterns in my fingers that brought me to the Drudge Report so many times when I worked in a cubicle in Boston once again led me to page the other day.  Living up to its reputation for sensationalism, it featured a headline recently about the escalation of food prices around the world.  Unfortunately, while Drudge is usually over-the-top, rising food prices are no laughing matter.  In 2008, the rising cost of our daily bread led to food riots around the globe and massive destabilization in developing countries, most prominently in Haiti.  It alerted food-dependent developed countries to a glaring Achilles’ heel, spurring a land grab in Africa that (almost) comically culminated with the South Korean conglomerate Daewoo making a bid for half – yes, half – of the arable land in Madagascar.  So when the next food crisis hits, and hit it will, the developed countries with a foothold may think they are food-secure, until the hungry populations of the food-insecure countries serving as their respective breadbaskets see the fields of gold beyond the fence and decide to Mugabe it for themselves.  Unless, of course, the landowners (read: nations) deploy armed guards to protect these critical investments, resulting in rioting, bloodshed, and, inshallah, the toppling of governments. And now, it could be happening again.  I sound like Drudge. Theoretically, commodity prices fluctuate based on the principles of supply and demand.  When the demand for grain exceeds supply, prices go up.  In the movie Trading Places, Randolph and Mortimer Duke, the lovable racist WASPs, try to corner the market for Florida oranges.  They pay Clarence Beeks for an advance copy of the classified crop report, which will determine the price of oranges for the next trading period.  Akroyd and Murphy intercept the report and forge a new version, giving the impression that there will be a shortage of oranges due to a long winter.  On the trading floor, the Dukes’ trader buys as many orange futures as he can, under the assumption that they will become more valuable once the negative forecast for oranges is released.  The other traders see what is happening, and also buy, driving prices up and up.  Akroyd and Murphy begin selling at 120, until the crop report is released.  When the real crop report is released, which says that this year’s orange yields will be high, the price plummets, and Akroyd and Murphy buy all the futures they sold in the morning, becoming millionaires in the process.  This is how commodity trading works. In reality, this isn't always the case. (more…)