The drought that is affecting much of the Midwest is scary enough but what makes me even more nervous is the way speculators in the grain futures market are sending grain prices gyrating all over the place as they bet on what will happen next. Betting on the future supply of food is risky business. There’s too much chance for mischievous manipulation. It is risky enough to gamble with banknotes of one kind or another but they aren’t edible no matter how much good steak gravy you sop on them. Food, however, is everyone’s essential necessity and I wonder greatly about the wisdom of gambling with it especially when many of the gamblers can barely tell a stalk of corn from a hoe handle.
Like most everyone else, I’ve had orthodox economics drummed into my head. I know how economists argue that the speculators, by pooling the information upon which they place their bets, arrive at what is called “price discovery” that helps establish some kind of market equilibrium overall, and helps farmers and processors and society in general adjust to the situation. The gamblers also benefit all of us, I’ve been taught, by “risk shifting” or hedging which provides producers and others with a way to shift the risk involved in ownership of a commodity to others (called, in plain language, “covering your ass”). This kind of speculation seems to work (I wonder) when markets are fairly normal and stable. When times are not normal (are they ever?) the stated beneficial effects of price discovery and hedging are mostly wishful thinking. It reminds me of the bishop who quotes the commandment, “Thou shalt not kill,” in the face of an advancing army and assumes that by doing so he has reduced the number of people about to be slaughtered. Merely saying that an economic theory (like price discovery) helps the market adjust to changes does not mean that it actually works out in a beneficial way in the real world. The grain futures market is just as easily corrupted by human greed as its first cousin, the derivatives market, and we all know about that.
Right now the highs in corn prices are over $8 a bushel, wheat over $9, soybeans over $17 and all three expected to keep on climbing. These are unprecedented, historic highs, as speculators react (and likely overreact) to coming shortages. The day traders sit at their computers and try to guess when to sell when the price is rising and when to buy when the price if falling. That is as far as their commitment goes. Computers can buy and sell with split second speed and often are programmed to buy and sell on their own when a certain price level is reached. All this means irresponsible volatility it seems to me.
When grain prices rise as precipitously as they are doing now, I doubt that anyone benefits in the long run, including the traders themselves, phooey on price discovery. It is not even certain that the current soaring prices really reflect the true supply and demand situation. It started raining a little again in the middle of July and things don’t look as bad as they did even ten days ago. Furthermore this year more acres have been put into corn than at time since the 1930s, and lots of that increase went on land too poor to grow profitable corn in any year. It was planted solely with the idea of taking advantage of the high prices. The risk is covered by subsidized crop insurance, another example of money being used to encourage bad farming. Higher prices mean little when crops are average anyway. Agri-Solutions, an Illinois based financial consulting firm quoted online at DTN/ Progressive Farmer, points out that where corn yields fall just to 100 bushels per acre, (not a bad crop on poorer land) a price of $8 to $8.50 this year will just allow a farmer to break even. Livestock producers are taking a big hit too. Not being able to afford to feed such high priced grain, they have to sell out or cut back. Less milk, meat, and eggs means higher retail prices. But retailers don’t really make more money because consumers simply buy less. Corn ethanol plants are closing right and left because they can’t afford to buy eight dollar corn. Actually they can’t afford corn at any price because society can’t afford an industry that uses our major food product for car fuel. If we had all that corn in storage that has been turned into ethanol the last two years, we would have a comfortable buffer against the drought.
When money becomes the deciding factor in food marketing, some very bad things can happen. I keep thinking about how during the famine in Ireland, the country’s grain was sold in the higher English commodity markets to pay rents to absentee landlords while the Irish people starved. Now that’s what I call real price discovery.