Raise margins and tighten loans to end energy & food

     inflation

By Neil Behrmann

 

May, 2008:- The reason for the food price surge is quite simple, even though the United Nations Food and Agricultural Organisation (FAO), US Department of Agriculture (USDA) and International Grains Council hardly give it a mention in their analyses.

Agricultural commodities are the latest “investment” nirvana of hedge funds pension funds, investment bank proprietary traders and other speculators. Billions of dollars have poured into agricultural derivatives, commodity indices and exchange traded funds. Growing numbers of specialist agricultural funds have opened up to take advantage of the boom. This in turn has lead to hoarding of rice and other commodities in Asia.

Farmers who hedged their crops also unwittingly contributed to the price surge.  The farmers, other producers sold futures and options to hedge against lower prices.  Instead the market soared and they were caught short and were forced to cover.  Some bearish speculators were also hit.  Their purchases boosted prices.

Such is the fashion for agricultural commodities that several hedge funds have been purchasing farms and agricultural land to take advantage of the higher prices. Win win! Boost the prices and then produce the stuff. Ospraie, a US hedge fund has bought the commodity trading and merchandising operations from ConAgra Foods, a big agricultural firm.

Solution to commodity price spiral --- raise margins & slash lending

What is being proposed here applies not only to food, but to energy and other commodities as well.

Daren Coppock, chief executive of the National Association of Wheat Growers, warned that “a huge influx of speculative money” has created a balloon. He and several veteran traders have called for a change in exchange rules. Speculators need only place a fraction of the cost of commodities as margin on the exchange. The solution of several veteran traders is a simple one. Raise the margin deposits, every day, until the speculators withdraw wounded. Simultaneously central banks should place pressure on banks who are lending money to funds that are speculating in commodities on the over the counter market (OTC). Prices would then fall sharply.

Don't panic.  As sure as day follows night, prices will eventually tumble

Chicago Futures markets are telling us that it is time to stop panicking about the extraordinary surge in rice and other food costs.

Prices on the Chicago Board of Trade have tumbled sharply in recent days. This is a hopeful sign that the agricultural commodities bubble is at last beginning to shrink.US rough rice futures and options traded on the Chicago Board of Trade (CBOT) are a very small proportion of global dealings in the important foodstuff. But from a global price and sentiment point of view, trading of the market has played an important role in causing the acceleration in world prices.

Before going into the background on how this remarkable rice price boom has occurred and has caused untold misery for the poor in Asia and elsewhere, let’s examine what prices have done. After soaring by 150 percent from US$10 per hundredweight in January 2007 to a peak of US$25 in recent days, CBOT rough rice prices have since plunged by 19 percent to US$20.5. Other grains, which soared over the past year, have also tumbled. Wheat and soybean prices in recent weeks have plunged by 41 percent and 18 percent respectively from ridiculous heights, oats has fallen by 10 percent, but corn, which fell by 10 percent from the top, has rallied.  The question is, how long? Disasters such as the awful Myanmar Cyclone will crimp supplies from time to time and cause price surges. Yet despite that cyclone, it is significant that CBOT rice futures are well down from the top.

Rice falls from peak

What is the history of the rice price surge? Similarly to other commodities, rice was extremely depressed after 9/11 and was about a fifth of present levels. The price rose sharply in the next few years and then settled back to about a third of present levels in 2005. Prices began to move ahead in 2006 and then accelerated late 2007.

Traditional agricultural economists working for the FAO, USDA and IGC, have concentrated on rising consumption in China, India and elsewhere and falling stocks. There has also been a reduction in global trade following moves by India, Vietnam and others to restrict exports. Rice prices were depressed when world inventories reached a record high of 147 million tonnes in the 2000 to 2001 season, according to the USDA. They then steadily fell to a range of 74 million to 75 million tonnes, from 2004 to the present. High prices have encouraged an increase in production, so rice inventories are expected to rise in the crop year of 2007 to 2008, failing a climatic disaster.

Now we are well aware of all the Malthusian warnings that the soaring and wealthier Third World populace will devour all and sundry. But bottom line the lower stock levels have been known for years. The growth in the world’s population isn’t exactly front page news. Yes, if demand exceeds production and stocks fall, prices rise before production increases and meets the extra consumption.

None of this, however, explains the 150 percent surge in rice prices since the beginning of 2007 and similarly ludicrous moves of wheat, soybeans and other grains. Corn has a story as it is a bio fuel, but despite the move to use agricultural land to farm corn for ethanol, there’s no shortage. There is also a surplus of oil, metals and other commodities.  Don't be fooled by the spinning nonsense that comes from the commodity and hedge fund industry.

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