More proof that speculation hasn't increased commodity prices

We're suffering a new outbreak of the Teenage Trots unfortunately. People like the World Development Movement and Oxfam, complaining bitterly that speculation in the futures and options of commodities have driven up food prices for the poor.

There are a number of good theoretical reasons why their claims are nonsense: personally I think they're entirely driven by the idea that if people are doing something with money in offices then they must be evil. But there are also good practical reasons why their theories are nonsense. Take the rise in food prices in 2006/8:

If speculation was driving up the price of commodities, how would it work? Presumably the mechanism would be that agents in the market are expecting prices to rise, and so they would build up stocks of the commodities to sell in the future. But as they build up these stocks, the quantity supplied in the market is decreased, and so prices could spike. Low interest rates could contribute to such build-ups in stocks, because they decrease the opportunity cost of holding such inventories. But a difficulty with this explanation is that: "Broad declines in aggregate commodity inventories, however, cast doubt on the current importance of this effect."

That is, it's theoretically possible that hoarding of physical stocks can drive up food prices: but if stocks are falling then no one's hoarding and that can't be the reason for food price rises.

"According to
Barclay’s, index fund investment in commodities increased from $90 billion in early 2006 to just under $200 billion by the end of 2007. ... [H]owever, the true impact of speculative inflows on underlying commodity prices remains debatable. ... Factual inconsistencies are numerous. For example, inventories should have risen between 2006 and 2008 according to the bubble theory, but they actually fell. Other reasons for discounting this theory include: • arbitraging index-fund buying is fairly easy due to its predictable nature, • commodity prices rose in markets with and without index funds, • speculation was not excessive after accounting for hedging demand, and • price impacts across markets were not consistent for the same level of index fund activity."

In fact, the WDM's own report on the matter pointed out that rice rose more in price than wheat or corn, despite the speculative market in rice being much smaller than that in wheat or corn.

All of which means that it's the original contention that's wrong: speculation hasn't been starving the poor.

Source: http://feedproxy.google.com/~r/TheAdamSmithInstituteBlog/~3/4UNCTbz_qkM/

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