Yes, I'm increasingly inclined to agree.

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I get rather irritated when people blame "speculators" for rising commodity prices. It mostly happens with oil, when OPEC oil ministers try to suggest that high oil prices have nothing to do with them. Somebody pointed out that when oil prices rose to $50 a barrel, OPEC blamed speculators, and then continued to blame speculators as it rose to $100 a barrel: they might at least have the grace to admit that the original speculators had a point.

Speculation doesn't take anything out of the commodity market. Oil speculators don't burn the oil, food speculators don't eat the food. The nature of modern speculation is that no goods ever change hands and positions are closed before delivery is required.

If speculation is a major factor in food pricing (which I rather doubt), then either (i) the speculators are wrong and are going to end up out of pocket or (ii) future demand for food will exceed present demand. If the latter is true then the problem is worse than we thought but blaming the speculators for noticing is no better than blaming George Monbiot.

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future demand for food will exceed present demand

Isn't this inevitable so long as the total world population keeps rising? What am I missing?

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You're right basically. It's a bit more complicated than that, since not all food is used for human consumption, so it depends on things like levels of meat eating and biofuel consumption as well, but those factors are also increasing. So you are right that we can expect demand for food to increase steadily.

I've expressed myself rather badly (partly because I was still thinking of the oil analogy). What I really mean is that the speculation moderates between future and present demand (because the speculator buys stuff in the expectation of selling it later and therefore represents a future demand). If the spectulators' expectations are correct then they'll make money, but presumably we should be grateful to them for storing up grain for the lean years ahead.

(In fact I don't believe that any of this is happening, but it seems to be what Sam believes.)

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I must admit that I don't pretend to know the details of how commodity trading works, because I know that it is incredibly complicated and that you have all sorts of complex 'derivatives' for which the maths (which I've taken a bit of a look at) is enough to make one shudder.

However. While it is true that speculators don't burn oil or eat the wheat, they do own it, or have some sort of ownership claim on it, at least temporarily. (When they buy wheat that is). Or, if it's for example a wheat future, they enter into a contract to buy X amount of wheat at a price of Y at some specified future time.

Now of course no wheat actually changes hands when this happens. But when wheat is traded on the global market, there will be various different types of buyers and sellers: some buyers will be those intending to deliver it to some end user, others will be buying it as a tradeable commodity to hold on to and sell at a future point. Now the wheat producers, or whatever bulk wheat broker buys from the original producers, don't care what sort of buyer they're selling to. Likewise, traders and final users don't care who they're buying to or selling from. There will be a single global market price. (A rare example of an essentially perfect market).

So, if a lot of commodity traders are wanting to buy wheat, and not many wanting to sell, then the price will go up. And if in particular a lot of traders are holding on to large quantities of wheat for a long period of time, then that will keep the price high for a long period of time. Of course, this is virtual wheat, the trader might not be able to point to a particular warehouse and say "That's my wheat there". Presumably the wheat has to get used at some point or go off (or is it freeze-dried or something I don't know), so the physical wheat attached to a trader's claim would change, if there is any physical connection at all. But that doesn't change the fact that, if traders are holding onto their wheat claims, then buyers wishing to use the wheat for producing food will have to pay a higher price, as the available supply will be reduced.

here is one other article, the Times this time, suggesting that speculation may be a factor in high wheat prices. The BBC Learning page on it lists speculation as a reason too.

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To what extent does no wheat actually change hands? I mean, if traders buy a large amount of wheat and just sit on their purchase, expecting the value to go up, doesn't that mean that a corresponding amount of wheat is taken out of circulation - even if the the wheat in question isn't a specific warehouse-full? I mean, suppose the following year all wheat harvests failed and everyone else sold all their wheat - wouldn't the speculators be able to say "ah but we have this wheat we've been sitting on, we will now sell it at a vast profit, muahahahahaaaa"?

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Well - I'm to some extent guessing here. But I'd imagine is that all that is necessary is that at any given time there exists an amount of wheat in warehouses (or in transit!) worldwide equal to the amount of wheat that is owned, but not yet used, by traders/importers/exporters etc. You don't need to be able to connect particular wheat to particular owners. Brokers presumably have a certificate (or a number in a computer) saying they own X tonnes of wheat. If a broker has a client saying they want to actually import wheat (for use), then the broker must acquire sufficient certificates, then take them to someone who actually physically has wheat (or deals with shipping it). Meanwhile the physical holders of wheat only need to know that they have X tonnes of wheat and have sold Y tonnes, and then wait till someone tells them they need to send Z tonnes to the harbour. (Not sure how storage payments are handled, but not too hard to deal with).

Now if traders are collectively buying reserves of wheat, and not selling it (yet) to end users, then there will be a net stockpile of wheat building up, but there will still be a continual flow, although the average amount of time a given consignment of wheat will wait in storage must go up. But the changing hands of wheat would happen when an end-user buys it - until then, only certificates need change hands.

If there's a failed harvest, then yes that would be exactly the sort of time that traders who'e accumulated speculative stocks of wheat might choose to sell it. (Though perhaps without the muahahahahaaa. Actually possibly with the muahahaha, or an equivalent like "OMG!YES! I've just sold 1000 tonnes of wheat at 13.5 that I bought at 12.6! Aren't I brilliant!")

Stocking up wheat in good years and selling it in bad is of course a very, very old strategy - see the end of the book of Genesis!

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I think, though I may be wrong, that commodity speculation is now (and has been for some time) nearly all futures trading, and derivatives thereon. So the speculator enters into a contract to buy X amount of wheat at a price Y at some time T as you say, but before T occurs he closes the position (either by cancelling it with the counterparty or (more commonly) by entering into an equal and opposite transaction with another counterparty). It's important that they do close the positions in this way because quite often total amount of futures in a commodity exceed by some margin the total amount of that commodity.

If they don't close the position, then, contrary to what you suggest, some wheat does actually have to change hands. Certainly under the terms of a plain vanilla future the purchaser is obliged to take delivery of the product at time T. This is important because there are costs associated with owning a commodity, particularly a bulk commodity like wheat.

Of course it would be possible to securitise wheat. You would have to incorporate some mechanism for paying the storage and insurance costs, but it could be done. I'm not aware, however, that it is done. The Chicago Board of Trade wheat index, for example, which is often cited is a futures index.

Although I agree that wheat is a pretty good market, there is not in fact a single global market price. It's comparable with oil in that respect in that the price varies both by quality of product and by location. For example, it appears that hard red winter wheat for delivery on 8th May would currently cost me some 896 cents/bushel in Chicago but 906 cents/bushel in Minneapolis.

I am afraid that much though I admire Greggs custard doughnuts, they would not be my first choice for analysis of the global wheat market.

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I posted a Greggs link? i wasn't looking too carefully, though others of them were rather sounder, e.g. BBC.

Trying to work out if it is the case that the futures market has no effect on the price of the underlying instrument... I'm trying to wrap my head round it and not coming to a firm conclusion.

However I'm coming across plenty of links that suggest it is the case, and none that say "No, don't be silly, it doesn't work like that, futures markets don't affect the price of the underlying commodity". here's one for example, which is defending speculators, and arguing that speculation isn't the driving force behind price rises, but at no point does it say that speculation intrinsically can't affect the actual commodity price. And here is an article in which various people who are very deeply involved in the whole business - a banker, someone in agribusiness, and a financial economist explicitly say that it is having an effect.

If speculators are putting large sums of money into buying long positions, pushing the futures price up, then buyers of the actual grain are going to either have to pay those high futures prices if they want a certain forward price, or take a risk on buying on the spot market. Meanwhile sellers will want a higher spot price to tempt them away from selling their grain on the futures market. While the clearer link is from the underlying commodity to the futures market, it seems to make sense that it will work the other way too - if there's a big injection of new money into those markets.

Yeah, as with oil I suspected there would be different varieties of wheat. And there are always anomalies. Why aren't all the traders buying loads of 8th May wheat futures in Chicago and selling them in Minneapolis? In theory such variations cannot exist, or at least not for more than a few seconds given the speed of today's trading. Never quite works exactly like that in practice. But I don't think it changes the basic point.

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Oh goodness, yes, futures speculation does affect the price of the underlying commodity. I mean, if the spot price is £100 a tonne and the one month future price is £200 a tonne, then if I'm a farmer I'm going to hang on to my wheat for the extra month, am I not? So a spot buyer would have to raise his bid or go anyway empty handed. It would be theoretically possible for there to be a wheat bubble, driven by speculation. However, we're not there, and I doubt we ever will be there.

For the arbitrage you suggest to work, one would need to take delivery of a load of wheat in Chicago on 8th May and deliver it on the same day in Minneapolis, which is scarcely possible. It's pretty obvious that the value of a tonne of wheat at the farmyard gate is different from its value CIF the Port of London. (However, it is also possible that I was misreading the quotes: I don't do a lot of wheat trading.)

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On the other point:

I'm not particularly blaming the individual speculators for noticing. They're doing their jobs, they're not jobs I consider particularly valuable for society, but I'm not suggesting these people as individuals are the root of the problem. The problem is the system, that allows Capital to dictate the organisation of production and trade, instead of putting human needs at the forefront. Keynes, a much more moderate fellow, likewise wasn't blaming individual speculators when he talked of the absurdity of economic activity taking place as the by-product of a casino, he was likewise criticising the system, created and/or permitted by governments, that made it so.

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This is fascinating. A bit terrifying, but fascinating. Can't wait to be properly studying this stuff to see whether I agree with you or robert_jones.

I had a cunning plan the other day - to put a tariff on grains, which is not payable if the grains are going straight to food (for humans). Kind of like no VAT on food here. Then competing demands for grain - biofuels, fodder for cattle, speculation - would have a bit more of a hurdle to jump. You would set the level of the tariff such that the demand for biofuels and fodder is sufficiently decreased, that the world's poor can afford their local grain. Is that a load of nonsense?

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A good sort of plan. There are lots of potential ways one might come up with of tackling this - the problem is how you can get governments to implement any of them, given that it would run into overwhelming opposition from the financial markets, who would stand to lose a source of profit from it, and their interests carry an awful lot of weight with governments. We've got a 'who will bell the cat' sort of problem here.

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Here in Belize I was interested to read in the local rag that a Spanish solar-powered technology initiative by the Agengoa Co. in developing what is claimed to be "a cheap, environmentally friendly alternative way to reduce energy costs". Rising fuel prices here, especially electricity, are causing increasing hardship to the poorest. About a third of Belizeans are subsistence farmers / labourers on US$1-2 / day on average. Biofuel devt would of course mean more destruction of the rainforest to plant crops, which is already happening for the export business. Belize is also considering bio-diesel & bio-ethanol from sources other than corn starch & sugar, as well as cellulose bio fuels & renewable hydrocarbons.

It seems logical to me for countries to invest in their natural environmental resources: eg wind / sea in UK and sun here in Belize. Or is this too logical?

I'm also very aware of the many negative effects of globalca capitalism, but what is the real alternative? Cuba hasn't solved the dilemma although I freely admit it's been somewhat hindered by the US. Is Utopia really achievable?!

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Interesting. Yeah, would seem logical, but logical doesn't always transfer into what actually happens... uh, definitely a bad sign with the rainforest destruction... which would of course undo any global warming benefits from biofuels.

I've seen some discussion of how some biofuels may be a lot better both at reducing emmissions and not burning food supplies or rainforests, though also some scepticism. The problem is, even if you have a 'benign' biofuel, will growing it displace the growing of something else? There may be answers to that, if there are biofuels that can be grown on marginal land, or other possibilities. I hope it is possible. I don't take the view that driving and flying and so forth are bad things in themselves - I'm flying quite a lot at the moment unfortunately, offseting though not knowing whether offsetting is really effective... but it would be very nice to find a way of flying and driving that don't destroy the planet. My fear is that if that turns out not to be possible, we will collectively choose to keep on flying and driving anyway, while being sold various forms of snake oil to convince us that it's OK.

Utopia is not achievable, but hopefully the Kingdom of God is. :) I'm not a believer in State control of the economy as the alternative to Capitalism. I'm probably in a minority in the raving lefty end of the spectrum in believing that markets have a large part to play in a better economic system (though they do need to be subject to collective action to correct their failures). It's who owns and controls the markets. At the moment, they are controlled by Capital, whose ownership is highly concentrated, and which places the interests of very rich, powerful and impersonal entities. Whereas I would like to see them under the control of workers and communities. How exactly that would be organised, and how one could get from here to there, are details I'm working on. ;)

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Ooh, communist capitalism! I like!

I think the idea with biofuels that "sensible people" are going with, is that we have to develop "second generation" ones, where we make energy from waste materials. For example you can use the enzyme from cow's stomaches!

Whether you can get enough ethanol from farm waste to meet oil demand is another question, and I doubt it (though have seen no figures on the matter). Still, maybe one day there'll be large-scale solar, used to produce hydrogen for transport (you can fly planes on liquid hydrogen, at least you could in my model, though it's insanely expensive).

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Since we're trading links, have this one. Surely George would have taken the opportunity to stick to the speculators if he thought the idea had any legs? Or this one: the UN also fails to identify this factor.

It seems to me that people like to blame speculators, because they are an easy target. It doesn't involve admitting that policy has been wrong or that we should change anything fundamental: it's all the fault of those nasty speculators.

On a slightly different point, I've seen very few people point out that since both the production and distribution of food is heavily oil dependent, the rise in food prices is directly related to the rise in oil prices.

And on another different point, food has been very cheap for a long time. After all, even £200 a tonne for wheat is still only 20p a kilo, so only 20p of the cost of a big bag of flour comes from the actual wheat. A rise in food prices (and commodity prices generally) is not an unalloyed evil for the developing world. The underlying problem is an inadequate distribution of wealth.

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An argument from a negative is not a very strong one! Okay, I just made one too in my last comment. George can't write about everything, and the UN body producing the report is the International Assessment of Agricultural Science and Technology for Development, so financial markets are not really their remit.

It is certainly not the case that speculation is the only or even the main cause, and there seem to be varying opinions on how important it is. It is also likely to be a fairly short-term effect, but when it comes to something like food, short term effects can be rather significant!

I'm not sure why people blame speculators in so far as they do (a moment ago you were pointing out how they don't), but I would dispute the idea that they're an easy target, or that curbing them would not involve fundamental changes. It would require a willingness to go head to head against the political lobbying power of the big financial institutions.

The underlying problem is an inadequate distribution of wealth.

That I will not argue with.

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