Monday, June 30, 2008

It's not speculators...

Driving the market up. It's demand, voluntary and mandated. In fact, the speculators could be helping the market through this incredible and wrenching transition.
The results suggest that after an initial surge from early 2004 through mid-2005, index fund positions have stabilized as a percent of total open interest. Traditional speculative measures do not show any material changes or shifts over the sample period. In most markets, the increase in long speculative positions was equaled or surpassed by an increase in short hedging. So, even after adjusting speculative indices for index fund positions, values are within the historical ranges reported in prior research. One implication is that long-only index funds may be beneficial in markets traditionally dominated by short hedging. Attempts to curb speculation through regulatory means shoclass of speculators. [More]
Economists all all kinds are lining up behind the same conclusion. But the problem is the old hammer-nail syndrome. Congress only has a hammer and speculators are the only thing faintly resembling a nail. We can't do much about Chinese demand for steel, for example. But it would make good political theater to regulate spec money, many reason.
Some of the best minds in academia, to say nothing of blogging, have been probing the question of the extent to which financial speculation has influenced oil prices. The conversation has been long and detailed, so I'll just suggest that if you're interested, you should read this post, by Mark Thoma, and this one, by Tyler Cowen, and follow every link. I'll also give Mr Cowen the last word, for now:

The bottom line is that when it comes to the key substantive questions about the oil market - why are prices so high -- the correct answer is the Lachmannian one: "expectations." If you push one step further on that, and try to evaluate or "source" those expectations, the correct answer is "we don't know."

The ravaging effects of a soaring prices are starting to be felt keenly on hog farms and in grain-consuming developing countries. So, the blame machine is getting wound up as well.

The target is too easy to find, unfortunately. Index funds certainly fit the stereotype but an even easier-to-attack scapegoat worked too hard to hog the spotlight to hide now.
The human cost of the global biofuel switch was put in stark terms today by international advocacy group Oxfam, which released a report saying biofuels are responsible for pushing 30 million people into poverty (International Herald Tribune, Reuters and BBC coverage). The widely noted report asserts that the increasing use of grains as biofuel feedstocks is responsible for 30 percent of the increase in food prices, and that’s hitting the world’s poorest hard.

The report, written by Oxfam biofuel policy adviser Rob Bailey, urges developed nations to abandon their biofuel mandates and get rid of the subsidies and tariffs on biofuels that are destroying the ability of the market to appropriately adjust biofuel and food supply and demand. These economic hurdles have lead to an all-time low in grain reserves, the report says, and pushed food prices to record highs. [More]
The floods in Iowa have created a perfect visual aid for biofuel opponents. Along with a meat industry meltdown, grain farmer windfall profits, and mediocre E-85 experiences, it would seem like ethanol especially might be in for a rough time.

I don't think so. As long as oil prices hold or advance, it will be livestock and people who cut back, regardless of government action.

This runaway train has too much momentum.


Ol James said...

Mr. John. You and your AgWeb associates should have one of them webinar broadcasts, or live Internet feeds, covering Food-Fuel-Feed, Market,Oil Ethanol things. Last week on the Round Table discussions by Mr. Al, (US Farm Report- June 21-22), was one of the most interesting I have heard in awhile!! I think the panel was just getting warmed up in their discussions!! I would like to see even a whole show dedicated to these as well as the issues you have posted on this. Whadda Ya think??

someguy said...

I think it's a little misleading to say "congress" can only find the speculators to play the role of nail. I think it's more accurate to say it's the Democrat party that is looking for scapegoats to distract from their refusal to upset environmentalists who are a solid block in their party. While a few republicans have also caved, this is clearly a fault-line between the parties with Republicans focused on increasing production and Democrats opposing increasing domestic oil production and trying to blame 'big oil' and speculators, regardless of how little sense it makes to anyone who understands commodity markets.

jjbluecw said...

Is it really a 'round table' discussion if you only have one side of the table present?!?

John Phipps said...


Given my doubts about ethanol, maybe an ethanol love-fest was not out of line overall.

Besides, this wheel is grinding slowly and expensive corn may be just beginning to push up meat prices.

John Phipps said...


I agree there is a clear political difference, but my read on the speculation issue is most of both parties are ready to do something ineffective and showy. It's really hard to stand up for wealthy investors when most of your constituents are livid about gas prices.