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Speculation Blamed for Global Food Price Weirdness
by Brandon Keim (Wired Science) The link between commodity speculation and global food price weirdness just got stronger, and researchers warn that a new and potentially calamitous price bubble is imminent.
Previous research had blamed a combination of food-to-fuel crop conversion and financial speculationfor driving food prices up in sudden, unpredictable spikes, independent of changes in supply or demand. But the market model used in those findings only explained trends retroactively. It didn’t test a prediction.
“People could say, ‘You must have fit the model to the data.’ Now we have this additional evidence, and people can see that we didn’t,” said Yaneer Bar-Yam, president of the New England Complex Systems Institute and co-author of the new study, which was released March 6 on arXiv. “This confirms that the model is very solid in its underpinnings. It says our understanding of what’s going on is right.”
...In earlier work Bar-Yam’s group used mathematical models to test links between food prices and proposed explanations for market behavior. They identified two culprits: replacing food crops with biofuel crops seemed to be driving food prices slowly upward, while commodity speculation — investors betting on food prices — appeared to cause the spikes.
The link to speculation was especially significant. For most of the 20th century, only farmers and food industry companies speculated on food. It helped them offset risks posed by fluctuating prices and production levels, and generally had a stabilizing effect on markets. But in the late 1990s, financial industry-led deregulation efforts opened food speculation to hedge funds, investment banks and other people with only betting interests.
...In their ideal form, commodity markets should contain “70 percent commercial hedgers and 30 percent speculators. The speculators are there to provide liquidity. In the summer of 2008, it was discovered that it’s now 70 percent speculation and 30 percent commercial,” said Michael Greenberger, former director of the CFTC’s Division of Trading and Markets. “Now reports are coming out that it’s 85 percent speculation and 15 percent commercial. You have markets dominated by people with no real interest in the economics of supply and demand, but who are taking advantage of bets authored by Wall Street that prices will go up.” READ MORE