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Speculation, Futures, and the impending food crisis


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This is essentially a difficult and complex question and I would appreciate if someone could give me an elementary answer.

I was watching Stephen Colbert last night and he had on someone who was talking about how speclators were driving up the price of food. Also, disasters in Russia (specifically related to wiping out lots of corn fields), Pakistan, and floods in Australia have had an impact on the global food crisis which is going to get a lot worse.

What I don't really understand is when the lady was talking to Stephen saying how speculators were driving up the prices. This made me think back to when speculators were also "driving up the pirce" of gas a few years back.

1. Speculators are just investors who buy futures stock right? If so, how do they control so much and have an impact on something like food. If guy A buys futures in corn. How exactly does he do that and what does he do? Does he buys shares in Dekalb (for example) to get a ROI in the future because he is essentially predicting a rise in cost? I really don't get how futures work. And, from what I understand futures are speculation right?

2. Do these speculators get rich off of mass suffering? That is what it seems like. I mean when about 90% of the world goes to bed hungry. These people get blamed for the price hike.

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Monthly futures contracts, actually. They exist for most months over the next several years. They allow you to speculate on the future price of wheat for that month (like July 2012). They are also used by farmers to hedge their crops, i.e. they sell their wheat in the future and lock in a profit.

Commodities futures isn't investing, since futures contracts expire and require you to take or make delivery on the commodity involved, i.e. you have to buy or sell the actual physical stuff.

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Speculators are only part of the story. Our agricultural policies are absurd. Isn't the debate about ethanol pretty much settled at this point? It's not green and it's not cheap. (I've also read that it does more damage to engines over time than gasoline.) Then there's the fact that we pay farmers to not grow food.

On top of that, there's the fact that most of the world's central banks are pursuing extremely inflationary policies. This goes double for the Fed, because we export so much of our inflation. I suppose I'm one of those evil, evil speculators because I've been betting on surging commodities ever since the financial crisis began. How dare I pay attention to what Bernanke told everyone he would do in this situation.

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You have to split up speculators into two groups. The big commercial banks (Goldman Sachs, JP Morgan, etc...) and the rest. It's these banks that drive up commodity prices that are irrespective of supply and demand (in the short run). In the long run fundamentals, supply and demand, rule. All these paper contracts dealt by these banks, etfs, futures, derivatives, etc are sold so many more times than the actual commodity existing in it's physical form. These banks have successfully lobbied for extensive deregulation, especially in the last 15 years. What rules and laws that still remain, are overlooked (read as paid-off) by the CFTC.

Here's a recent article on the subject.


It's not the small time investors (you or me) or traders (Marc Faber or Jim Rogers) that are the problem.

EDIT: Google goldman sachs jp morgan commodities manipulation. and you'll see a butt load of articles on the very subject. And Hubbs is right. With the amount of QE thats pumped money into the global system it's devaluing the dollar. So far we've managed to export most of the inflation to other countries which has acted as a catalyst for a lot of the uprising around the world.

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