Crops, speculation and starvation

Farmers are having a hard time in Europe. Production (“yield”) is falling due to drought:

  1. In this video [in Dutch], an organic farmer near Amsterdam discusses the low yields of crops in drought-hardened clay soil. (We are in his CSA.)
  2. Meanwhile, English farmers complain that householders are not being told to use less water. The farmers think that hosepipe (outdoor-watering) bans would “free” water for suffering crops. Sadly, I think the water companies oppose the hosepipe ban because they earn far more from selling water to households. Farmers would pay them little or nothing in the current system (raise prices! water markets!) so food security is getting short shrift.

I could easily find many more examples from around the world, since various chaoses (droughts, floods) are disrupting agriculture everywhere.

The traditional hedge against food insecurity is storage (“after 7 years of fat, come 7 years of lean”), but markets are more efficient for storage if they can replace local losses at a reasonable price.

The criterion of “local losses” vs “market supply” is usually easy to meet, as global agricultural production is, by definition, far greater than any local production, but it weakens if/when many crops are failing in many places and/or politicians “protect” their citizens by banning exports that could help other citizens. As of June 2022, 34 countries were doing this.

The criterion of “reasonable price” brings me to the title of this post, i.e., to the role of speculators in markets.

In general, market traders and speculators help markets by smoothing spikes in supply and demand. They buy when prices are low and sell when prices are high; they arbitrage between markets where prices are not well matched (usually due to legal or logistical barriers); they bet on future scarcity… and thereby reduce it.

But some speculators go farther, pursuing profits in ways that can destabilize markets:

We spoke to experts, whistleblowers and industry veterans, who expressed concerns that current levels of speculation may be driving and exacerbating price increases. Experts also helped to identify how structural weaknesses have remained unaddressed since the 2007-2008 food crisis, and how attempts by regulators to curb excessive speculation since then have withered in the face of determined industry lobbying.

In the past, I have dismissed these types of claims, since speculators — who often trade “paper” commodities without any intention of taking physical possession of the underlying good — do not represent “final” (in-the-mouth) demand. I assumed that a speculator buying @ $50 per unit would have to sell @ $30 per unit if that price represented physical demand, but my “equilibrium” thinking was wrong. Here’s why.

If the speculator buys at $50, then there’s less supply for other buyers. If that supply is greater than remaining demand, then prices will fall in equilibrium (when everything is lined up and matched); if supply is lower, then prices will rise in equilibrium.

But what about “before equilibrium”? At that point, buyers are not sure of where prices will end up. They are not sure of supply (more drought? more trade restrictions?), and demand can rise if others are buying due to panic, new crop failures and/or greater risk aversion (i.e., buying to store), so it’s easily possible that prices can keep rising.

Few buyers will be able to hold out for lower (hoped for) equilibrium prices when there’s a risk of (a) higher prices and/or (b) falling short in meeting known future needs.* So those buyers will jump in “early” and “high” to avoid the chance of a future disaster.

In these cases, the speculators can make a killing.

tl;dr: If speculators “mop up” supply by purchasing at low prices at the start of a crisis, then they can resell for profit before they are forced to take delivery (the “chicken game” in game theory). If buyers are afraid of losing out to faster buyers (a “prisoners dilemma” in game theory), then some will  buy quickly, at “spectator prices,” to avoid the risks of even higher prices  — or no food at all.

Market note: Unlike the case with a non-perishable commodity like silver whose supply and demand is not time sensitive (remember the Hunt Brothers), food is perishable (hence the haste and angst over Ukrainian crops) and overall demand (“hunger”) is easier to predict, so the speculators can forecast demand, supply and shortfalls.

None of these “squeeze the hungry” trades are ethical, but they are legal. Although it might be tempting to regulate them, such actions can easily backfire (law of unintended consequences) or fail (food is traded in global markets without a single regulator).

What if some traders denounce speculation, as a means of helping the poor? That won’t help as long as others don’t care — or care more about their poor  (another prisoners dilemma) — so that’s no solution.

My one-handed conclusion is that fragile food markets and volatile prices** mean that many people will spend more on food while others go hungry or starve.

H/T to PB

* Governor Gray Davis signed long-term contracts in the middle of California’s 2000 energy crisis, locking the state into  high prices for a decade or more.

** Don’t mix up cause and effect here! Far too much food is used as biofuel and animal feed. Excess emphasis on industrial agriculture increases crop-risk-failure. Climate chaos is disrupting all farms. This “speculators-will-fuck-you” post wouldn’t exist without those three causes increasing risk!

Addendum (6 Sep): An interesting (but over-hostile-to-markets) article on this topic

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Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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