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April 07, 2011 – Comments (14)

21 days ago I penned the post "Beware of Popcorn"

On February 4th, I wrote a post titled "Don't Cows and Chickens Have to Eat?" which basically said that the corn futures were in a speculative bubble, being pumped for profit by people who had invested 6 months earlier.

At that time farmers were being paid a Jan. spot price of $5.37 for a bushel of corn, March and July bushels were $6.48, while Oct was $5.35.

A week late July futures had been pumped to $6.85, and a week after that Feb 18th, they reached the $7.00 mark. The etf CORN rose from $41.00 to $43.00.

Today a July bushel of corn is worth $6.34 and Oct is $5.15. And farmers do make money at $5.15.

Interestingly, just after investment/trading websites were suddenly tipping all of us off on the CORN opportunity, trading volume in the etf CORN doubled as people looking to turn a quick buck jumped in on the advice. The price did not double though.

Right now the end users of corn - kellogs and coca cola and the ethanol companys for instance - are contracting to buy the corn they will use in October for $5.15/ bushel. Unless there is a weather event that wipes out acres of corn and the farmer cannot deliver $5.15 corn to Kellogs, that is about where the price will stay.

So for those of you that bought a CORN etf, that "invested" in a bushel of July corn for $7.00, You can pray for bad weather and a jump in corn prices, or take a loss, or take delivery.

Beware of Popcorn

As it turns out I wrote that post at the low of $5.15 before futures prices turned back north. So here it is 21 days later. The USDA just issued a report saying that farmers are saying they are getting paid between $5.15 and $5.65 per bushel of corn. Futures contracts out until July are at $7.20, August is $6.60 and beyond that is just under $6.00.

After averaging just around and then under 100,000 shares/day traded of the ETF CORN since a one day spike on Feb 18th, on March 31st and April 1st almost 300,000 shares traded on each day, spiking the share price from $40.00 up to $45.00.

Now once again, I am pretty sure that nobody buying shares of an etf  for $45.00 actually expects to take delivery of the seven bushels of corn that $45.00 represents.

Now as I understand a market, there is a consumer, say Kellogs corn flakes, and a seller, who is the grower. And in the case of corn there is a grain storage depot, a middleman, helping to connect buyers and sellers. The ethanol company Green Plains is one. So what role does an ETF play? It is neither a consumer or a grower. Is it merely an opportunity for investors to insert themselves into a market in which they add no value? And between CORN, and JJG and JJA and RJA and others, are their enough rent seekers to significantly affect prices to food processors and our food prices?

US farmers are planting more corn this year than last year. Mexico crops got hurt but otherwise winter corn was good. There is enough corn out there to supply ethanol and food and cattle. But there is not enough to supply the financial speculation going on, and at some point the etf CORN will have to store the corn it has contracted to buy, or sell the contracts.

I'm not cheering for a bad growing year to favor the speculators on this one. I would rather see them have to sell their contracts into a well supplied market.

Higher Food Prices Can Spur Increased Production

This is a seven-page Hightower Report that argues in favor of higher prices for food that result from speculation during times of crisis.

The report expresses the belief that:

Allowing speculation on food prices is good, as higher prices create incentives for more production. Food price increases are also related to increased demand from emerging economies, especially in China and in India. Higher prices lead to decreased consumption, which can lead to lower prices. More production will eventually lead to lower prices Imposing price controls or stifling speculation is counter-productive in terms of increasing food production.

It was written in the context of the political unrest taking place in the Middle East in early 2011, and the related increase in raw commodity prices as the markets became unsettled by the discord.

"Higher prices lead to to decreased consumption which can lead to lower prices" 

 Decreased consumption means starvation to those with the fewest dollars. So their starvation is the price paid to investors - us - as we enrich ourselves at their expense.

And I'm not good with that.  Government subsidys paid to farmers is a better way of spurring investment and increasing food production.

Subsidys paid to growers of foods other than corn would be even better. And no borrowing, just taxes.

Best wishes,


Steven

 

14 Comments – Post Your Own

#1) On April 08, 2011 at 12:45 AM, awallejr (79.68) wrote:

Decreased consumption means starvation to those with the fewest dollars. So their starvation is the price paid to investors - us - as we enrich ourselves at their expense.

I am not going to put the weight of the world on my shoulders because some nations prefer to over propagate beyond their means to support.  While there is certainly seasonal speculation in the markets (as is always the case every year), don't start throwing the guilt dart about evil profit mongers making money because they try to make a buck. 

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#2) On April 08, 2011 at 7:34 AM, devoish (96.47) wrote:

OK,

If you can think of what else that means let me know. I do not want to feel responsible either. Maybe I'll recognise the harm done, put aside my love of money and pass on buying a food ETF in real life.

Best wishes,

Steven

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#3) On April 08, 2011 at 8:45 AM, ChrisGraley (29.69) wrote:

China is still experiencing a 9% growth rate. That means a lot more Chinese people upgrading their lifestyle. There a 5 expected Major Hurricanes this year. Every country in the world is printing money like there's no tomorrow. I don't have to mention global population growth. There are reasons why corn futures are priced the way that they are. If at any time I feel that corn futures are irrational, I won't just not buy them, I'll short them. I suggest that you do the same.

My hope is that you'll recognize the harm done by this post, pick up a book on economics, and put your money where your mouth is, rather than try to coax people into poor economic decisions.

I doubt that will happen.

Instead, you'll do nothing but point the finger at someone else as the blame and try to do what your party likes best. Which is to control someone else's money. Subsidies will lead to shortages later and you'll be back to pointing the finger at those same speculators.

If it's irrational, then short it. Problem solved.

 

 

 

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#4) On April 08, 2011 at 3:24 PM, lucas1985 (< 20) wrote:

@devoish,
"Government subsidys paid to farmers is a better way of spurring investment and increasing food production."
That's a mistake devoish. A better policy would be subsidizing demand with in-kind payments or cash transfers [1] and let the supply-side react freely to price signals.
Also remember that the majority of poor people are subsistence farmers so higher food prices may be a blessing to them [2]

1- Conditional cash transfer.
2- Dani Rodrik on the effect of food prices on poor people.

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#5) On April 08, 2011 at 3:33 PM, ChrisGraley (29.69) wrote:

Or you could eliminate ethanol subsidies that are distorting the available supply of corn and destroying the environment at the same time.

Why would anyone consider distorting the market further to be a wise solution? 

Creating artificial supply or artificial demand with subsidies is just begging for a response from the market later that you'll have to throw even more money at. 

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#6) On April 08, 2011 at 3:39 PM, catoismymotor (< 20) wrote:

Steven.

No es bueno.

El Cato

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#7) On April 08, 2011 at 4:34 PM, lucas1985 (< 20) wrote:

@ChrisGraley,
"Or you could eliminate ethanol subsidies that are distorting the available supply of corn and destroying the environment at the same time."

Where did I advocate for ethanol subsidies, other agribusiness subsidies or corporate welfare? Corn growers have enough of an incentive with current prices.

"Why would anyone consider distorting the market further to be a wise solution?"
It's not another distortion. It's a replacement of current distortions with targeted welfare. Do you understand the difference?

"Creating artificial supply or artificial demand with subsidies is just begging for a response from the market later that you'll have to throw even more money at."
Yeah, let the filthy bastards starve. That's real wisdom:
"CELIA ORBOC, a cake-seller in the Philippines, spent her little stipend on a wooden shack, giving her five children a roof over their heads for the first time. In Kyrgyzstan Sharmant Oktomanova spent hers buying flour to feed six children. In Haiti President René Préval praises a dairy co-operative that gives mothers milk and yogurt when their children go to school (...)
The programmes have spread because they work. They cut poverty. They improve income distribution. And they do so cheaply. All this has been a pleasant surprise: when they were introduced or expanded, critics feared they would either make the poor dependent on hand-outs or cost far too much. In fact, they are cheap (Brazil’s, the biggest, costs 0.5% of GDP) (...)
CCTs work because they are rules-based and relatively uncorrupt. Though the stipends are usually a pittance, they make a difference to the poorest because they are reliable—unlike the rest of the poor’s income. CCTs also help the next generation. By requiring children to have lessons and health checks, the programmes should make children better educated and healthier than their parents. Schemes in Bangladesh, Cambodia and Pakistan have all got more girls into education. That is good in itself and good for getting jobs (...)
In rural areas poverty leads to a lack of the basics: food, water, primary schools, simple health care. CCTs are good at providing those because, however small the stipend, it gives children an incentive to go to school and encourages markets to develop in the goods and services that were lacking before."
[1]

1- Give the poor money. The Economist*

* The favourite magazine of socialists and communists.

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#8) On April 08, 2011 at 6:13 PM, ChrisGraley (29.69) wrote:

lucas1985,

While my comment wasn't directed at you, I will address a couple of issues.

First, I kind of agree with giving money to the poor (yes, evil old me does agree with some redistribution of wealth) in a specific example like conditional cash transfer provided that the money is focused on targeting the problem and not a never-ending source of funds. Don't buy a man a fish, teach him how to fish.

A terrific example of this is here. While we are at it, encouraging micro-lending ala Kiva , would be a terrific support system. (and a free market solution at that) 

As far as not caring about starving people, you don't understand. If you distort supply or demand, you're gonna make more people starve not less.

Let's say we follow devoish's advice and subsidize all the farmers here...

That means that we can dump food on poor countries at a price that is cheaper than they can grow it for themselves. That means that farmers can't exist in those countries and they not only miss a vital part of their economy, but are dependent on imports. If imports are greater than exports that poor economy declines instead of growing. Congrats, you just made the poor, poorer.

Not only that, but you have increased the chances of a major famine in that country. If a country is dependent on imports, and fuel prices go up, they pay a much higher price for their food. Yes, their economy will respond by growing food locally, but until that happens, they starve. If other companies decide to give aid, then they destroy any chance of local farmers taking hold because local farmers can't compete with free.

If you really want to help poor nations, the very first thing that you should do is to give them a level playing field and eliminate all food subsidies. Then, instead of just sending food, train and support new farmers.

I know devoish thinks that food subsidies work. Heck, guys like Bruce Springstein and Jon Bon Jovi are happy to get them, but the fact is that they hurt the little guy and support the evil rich people that devoish depises.

 

 

 

 

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#9) On April 08, 2011 at 7:11 PM, lucas1985 (< 20) wrote:

"While my comment wasn't directed at you"
OK

"First, I kind of agree with giving money to the poor (yes, evil old me does agree with some redistribution of wealth) in a specific example like conditional cash transfer provided that the money is focused on targeting the problem and not a never-ending source of funds. Don't buy a man a fish, teach him how to fish."
- I'm glad that you recognize the merits of income redistribution instead of claiming that it's the road to serfdom or some other nonsense.
- Cash transfers can (and should be) a never-ending source of funds. Smoothing consumption over time is harder when you're poor. As long as the cash transfers don't affect the incentives to work/save and responsible parenthood, they provide a nice liquidity buffer and the incentives/resources to invest in human capital.

"A terrific example of this is here. While we are at it, encouraging micro-lending ala Kiva , would be a terrific support system. (and a free market solution at that)"
There are a lot of policy interventions that are market-based or market-friendly. Naturally, libertarians will scream of statism, paternalism, social engineering and stupid technocrats but empirical evidence proves them wrong.

"As far as not caring about starving people, you don't understand. If you distort supply or demand, you're gonna make more people starve not less."
Supply should be as free as it's reasonably possible. There's no evidence that income support significantly distorts demand.

"Let's say we follow devoish's advice and subsidize all the farmers here...

That means that we can dump food on poor countries at a price that is cheaper than they can grow it for themselves. That means that farmers can't exist in those countries and they not only miss a vital part of their economy, but are dependent on imports. If imports are greater than exports that poor economy declines instead of growing. Congrats, you just made the poor, poorer.

Not only that, but you have increased the chances of a major famine in that country. If a country is dependent on imports, and fuel prices go up, they pay a much higher price for their food. Yes, their economy will respond by growing food locally, but until that happens, they starve. If other companies decide to give aid, then they destroy any chance of local farmers taking hold because local farmers can't compete with free.

If you really want to help poor nations, the very first thing that you should do is to give them a level playing field and eliminate all food subsidies. Then, instead of just sending food, train and support new farmers."

Bill Clinton acknowledged this reality the past year in the wake of the Haiti earthquake. He said that his push for free trade without the elimination of US farm subsidies has destroyed agriculture in Haiti.

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#10) On April 08, 2011 at 8:31 PM, ChrisGraley (29.69) wrote:

Supply should be as free as it's reasonably possible. There's no evidence that income support significantly distorts demand.

Sorry, I was reffering to subsidies, not income support. I don't really see my example as income support. I look at more like it more like opportunity support, but technically my example above does slightly distort the supply. They did give away both cattle and veternary help which distorts the supply. (albeit at a very tiny level) Giving someone 2 head of cattle to breed is better than giving them the beef from 10 cows.

Distorting demand will do the same damage, because a distortion of demand on one end will result on the market distorting supply on the other end.

I think that we actually agree on Steven's inital post lucas.

I'm not exactly Libertarian, but I'm closer to Libertarian than anything else. I don't think I was kicking or screaming about statism, paternalism, social engineering, and stupid technocrats. 

Even though I feel a few of those topics do fit in with subsidies, I don't think that they fit in with the reward based support system that we seem to agree on.  

Really, I look at a reward based system, such as that, as a free market on it's own that encourages competition and grows the economy. 

I think that the key to such a system is that you require the individual to put time and effort into it. Subsidies might temporarily make his life better, but a reward system allows him to make his own life better. 

Part of humanity is understanding what is humane. 

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#11) On April 09, 2011 at 7:05 PM, ikkyu2 (99.22) wrote:

 Is it merely an opportunity for investors to insert themselves into a market in which they add no value?

These investors/speculators contribute to efficient price discovery. 

If efficient price discovery makes poor people starve as a direct consequence of rich people choosing to fuel their SUVs and drive all over creation, the only way to address this social ill is by regulation introducing an incentive in the form of a market distortion.

Burning up the nation's food supply in order to faciliate cheaper discretionary highway travel strikes me as almost a bad idea as destroying small farmers in developing countries with aggressive US domestic subsidies.  Food policy is complicated, not suitable to complete explanation in a brief blog post.

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#12) On April 10, 2011 at 8:47 AM, devoish (96.47) wrote:

Efficient Price Discovery.

I don't know, Ikkyu2, if giving it a benign sounding name makes it ok.  I also do not think that inserting an unneccsessary rent seeker or middleman into anything can ever possibly fit the definition of efficient.

ef·fi·cient/iˈfiSHənt/Adjective

1. (esp. of a system or machine) Achieving maximum productivity with minimum wasted effort or expense.

And I definitely do not see the difference between an ETF using its collective wealth to buy guns to lay seige upon a group until they are starved into submission or exterminated, or to just do the same thing by using its collective wealth to drive up prices. Especially when that wealth comes in large part from the honest work and effort of some of those now being starved. "If you just work harder or smarter for me I'll give it back to you as higher pay because you earned it", just no longer rings true for the vast majority of the USA, much less other parts of the world.

I think vast majority of Americans beginning to remember that their grandparents had to use Democracy and organised labor to fight the financial industry to get the security they and their parents are now losing fast.

I think that college kids are watching the value of a teacher's bachelors degree or masters degree decline and are wondering why they should pay the financial industry a this high a fee for the educational opportunity to earn less than the rent seekers who add no additonal value to the work they will they do, in the guise of being an efficient middleman who calls himself "efficient price discovery" in the hope that no-one will notice that a rent seeker is what he is and that "efficient price discovery" is exactly what he is not.

to faciliate cheaper discretionary highway travel

I do not believe Americans have to surrender the freedom that cheaper discretionary travel is (highway or otherwise), in order to reward a "rent seeker" the opportunity to be an inefficient middleman. Neither do I believe that Americans have to continue rewarding great wealth in the form of lower capital gains taxes to a very few people who then have no personal benefit from rewarding investment in "cheaper discretionary travel" to someone who might use that shared and equally available tool of "cheaper discretionary highway travel" to outcompete their interests. A tool that American workers and taxpayers built for them, and that a smarter American than they are might make even more efficient use of and save us all money, rather than cost us more.

Best wishes,

Steven

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#13) On April 11, 2011 at 2:15 PM, chk999 (99.97) wrote:

Government subsidys paid to farmers is a better way of spurring investment and increasing food production.

Subsidys paid to growers of foods other than corn would be even better. And no borrowing, just taxes.

Supplier side subsides are a remarkably bad way of trying to fix problems. If we have to make transfer payments anywhere, the best place to do it is directly to the poor.

You really need to read "The Undercover Economist" to understand why.

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#14) On April 12, 2011 at 6:58 AM, devoish (96.47) wrote:

chk999,

Your comment and Lucas' represent a better solution than subsidys paid directly to farmers/growers.

Best wishes,

Steven

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