Speculation Drove Wheat Prices up While Supply Expanded
Jayati Ghosh: Speculation, concentration of ownership and hoarding creates food price bubbles, with more to come
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. And in Washington a battle continues. No, it’s not just the debt ceiling battle. There is another battle taking place that’s not getting so much attention but in the long run may be actually more significant, and that’s the battle over whether there’ll be any real regulation about speculation in commodities trading. That’s things like oil and, perhaps even more importantly, food. The Dodd-Frank bill allowed for some kind of regulation, but there’s a behind-the-scenes fight taking place whether that regulation is going to be meaningful or just some nice words on paper. Now joining us to talk about the regulatory battle, but also the whole issue of the price of food, is Jayati Ghosh. Jayati teaches at JNU in New Delhi, at the university there, and she’s a renowned global expert on commodities trading and speculation. Thanks for joining us, Jayati.
JAYATI GHOSH, JNU, NEW DELHI: It’s a pleasure to talk to you.
JAY: So why don’t we start now from where we were last time we talked, which is just a little less than a year ago? We talked about the beginnings of a new food bubble in prices. So did the bubble take place? And where are we now?
GHOSH: Well, very much so. In fact, from about the beginning of 2010 to February 2011 we had a very significant increase in food prices, something like 40 percent overall, and in some commodities, like wheat, a doubling between just June and December. The prices peaked in February this year, but they’ve been very volatile since then, they’ve been up and down. And it’s really not clear at the moment which direction they’ll go in.
JAY: So if we look back and analyze why that bubble took place, how much did that have to do with real issues of supply and demand, drought, and/or flooding and this sort of thing, and how much had to do with speculation?
GHOSH: Well, the tragic story is that once again it was entirely, almost, but certainly dominantly driven by speculative activity, by the financialization of the commodities markets. And a classic example of that is actually what happened in the wheat market. If you remember, around June we started hearing stories of how they are going to be–there’s a drought in Russia, there’s a bad harvest in Ukraine, we’re going to face all kinds of difficulties in terms of global wheat. And between June and December, the wheat price in global trade doubled. Okay? It turns out afterwards, now that we have the data, the FAO data are telling us that actually wheat production in the world as a whole increased over those six months, and wheat demand in the whole world hardly increased at all. So there was really no real demand-and-supply reason for those massive changes in wheat price.
JAY: When this speculation takes place, and you had certain investors betting long, and, let’s say, either because they’re also owners of these commodities, some of the big players are actual commodity owners, they own wheat and such, but still someone has to bet against them on the other side to play–to make the bet. So how do they get people to–how are they able to kind of create this atmosphere, on the one hand, that prices are going to go up, on the other hand, find somebody that can bet that they’re going to go down?
GHOSH: Well, it’s really that you have–it’s not necessarily that you have to keep finding somebody that is betting that they’re going to go down, because what you really do is shift the market sentiment on expectation that the price will rise. And then the ones who really can make money are the ones who get out before the crash, which is inevitable once people realize that there isn’t really a real movement. This is the nature of bubbles, that you can create a bubble because either a significant player shifts in and moves the price up a little bit, or because you have media sentiment that is making everyone believe that, yes, this is a period of rising prices because of all these other real economy factors, and then, having created that sentiment, you ride the wave. And if you’re able to jump off before the wave bursts on the shore, then you’re the one who makes the profits.
JAY: Now–. Sorry. Go ahead.
GHOSH: Yes. Now all the retail investors who’ve been following you are the ones who are holding the losses.
JAY: Now, how much does hoarding have to do with this? I’m reading stories in the financial press about, for example, boats filled with oil sitting off the coast, waiting for the spot market to go up before they’ll land the boat. There’s a recent story about Glencore had–has a boat filled with Gulf oil. They’re paying $16,000 a day to rent the oil tanker, but they don’t want to bring it ashore until they wait for oil prices to go higher again. The–we read that Glencore and Goldman Sachs are doing it in nickel. They’re renting or owning now enormous wharehouses–I’m sorry, not nickel; aluminum–where they’re storing aluminum, waiting for the price of aluminum to go up. How much does that–do we know if that affects food as well?
GHOSH: I think it’s probably affecting the foods, especially the grains, as well. The trouble is that we really have no information on private stockholding at all. We have no idea how much is being held by big companies, where it’s being held, how it’s being held. And this is in fact one of the things which allows a lot of rumor and speculative activity to run free in the markets. You know, if I could tell you, there are basically three big changes in the latest bubble that we’ve experienced compared to the previous bubble. You remember the previous bubble, 2007-08?
GHOSH: The latest bubble that we’ve had last year, and which is really ongoing in a way right now, has a couple of other features. The first is that, you know, the OTC trade, that is, the over-the-counter trade, the completely deregulated activity, that has declined quite significantly. And that’s probably because financial players are realizing that the Dodd-Frank bill, and maybe European Union legislation, is going to force them to abandon over-the-counter trading. So they’re moving onto regulated exchanges. But in the regulated exchanges, because the position limits are set very high or because there are many other things that actually do not effectively regulate these players, you’re still able to influence the market in all kinds of ways. The third thing that is happening is that it’s no longer just the financial players who are causing these kinds of price movements. Earlier, we have said that, you know, there are index traders, there are banks like Goldman Sachs who have huge commodities divisions. There are other such agents that are really entering the market and who are purely financial, who have no interest in holding the commodity. Now there’s a growing proportion of people who are in it for the speculative gain, for the change in price, but they’re also holders of commodities. So that has really complicated the picture.
JAY: And there’s nothing that I know of in any of the regulatory proposals or regimes that are being discussed that would actually force any kind of disclosure. Is there, in terms of what’s being held, what’s being hoarded? ‘Cause it seems to me there’s sort of a relationship between the speculative activity and the hoarding. Like, you know, if you’re going to–if you own a commodity and then you bet long on the commodity, it’s in your interest to hold on to that commodity and kind of force the market up, and then you get the speculative psychological bubble that takes place, which also then affects well, why would I sell now? I saw an interesting story about just an ordinary rice wholesaler, I guess you could say, in India, and it was in a documentary he was interviewed, and he had a big storehouse filled with rice, and he was saying, well, why should I sell it? I looked at the future markets, and I know the price of rice is expected to go up in three months, so why wouldn’t I wait three months before I sell my rice? I mean, does that not play a role?
GHOSH: Oh, absolutely. But, you know, in fact, that used to be the traditional form of speculation, hoarding. That used to be how people did speculate in commodities. That was the only way you could do it is by holding on to it in the expectation of the price rise. And in India, in fact, we have things like anti-hoarding laws and, you know, the usual target whenever these prices rise is to go out there and attack what are called the godowns. They’re the warehouses of traders and others who would be hoarding these commodities to wait for the price increase. The difficulty today is that we really have very large multinational players. We have no idea what their level of stock holding is, because there is no disclosure requirement as such in any particular market. And in any case, if these are global players, you really don’t know where they’re holding it and in what form. And these are interacting with the financial play. In fact, often it’s the same commercial player who is doing both, if you like, the commercial holding of that stock and the speculative activity.
JAY: Now, one of the places where this fight’s–regulatory fight’s taking place right now is, as I said, in Washington, the Dodd-Frank bill, and there’s a big fight over whether there should be real position limits or not. Can you explain what that’s about?
GHOSH: It’s defined in terms of the volume of the commodity that you are buying. And the idea behind a position limit is actually to ensure that no single player can unduly influence the market. The difficulty is in terms of how you define the position limit, because it’s been a–earlier regulators were going along with the idea that, oh, if you’re a commercial trader, you should have very large–the sky is the limit for your position limit, because, you know, after all, you will be needing this, and you are–you are engaged in it only for your commercial activity.
JAY: Well, this is an example of that would be in airlines that tries to hedge the price of jet fuel, so they buy a lot of–which seems to have some legitimacy to it.
GHOSH: Yes, exactly. You know. So you will say, alright, if you’re an airline company, you’re going to need a lot of aviation fuel, so, you know, we–the sky is the limit. I think we have to get over that now. We have to say, well, your position limit is maybe a year’s demand for the aviation fuel. Or if you are a large trading company, let’s say, a Cargill or Glencore or one of these, your position limit would be six months’ worth of your turnover in a particular commodity, something like that. We’d have to [crosstalk]
JAY: Which is to try to say, if it’s part of the actual hedging of real selling is one thing; if it’s really just about speculative pressure, it’s another.
GHOSH: That’s right.
JAY: And where are we at in that fight? I–it really is not getting–it’s getting so little attention here in the United States, but it’s actually–there’s a–the battle’s taking place as we speak, is it not?
GHOSH: It is. And what is really scary about this battle is that so much of it happens behind closed doors, because this is not now about the law. It’s not about legislators. It’s really about the rules and regulations. And so these are things which are decided on by people in the Securities and Exchange Commission or people in the Commodity Futures Trading Commission, or it’s really decided by people who can be very susceptible to financial lobbies.
JAY: And the lobbies–the lobbying’s enormous.
GHOSH: Oh, absolutely, and they’re very active, and they’re very energetic in trying to make sure that the rules are such that they can carry on doing what they’re doing.
JAY: So if people are thinking, well, what can I do about it, I guess, in terms of what demands people might make on their politicians, what would you suggest?
GHOSH: I would say that the politicians, the public at large, have to demand from all of these regulatory commissions a very, very clear description of the exact rules and regulations that they are putting in place. And, well, of course it requires huge financial and legal literacy among the public at large, but at least they have to be organizations from civil society or groups that actually look through those to figure out what they really mean and whether they will be successful in enforcing the kind of regulation that is required. There is really no public knowledge, either about the nature of these rules or the implications of these rules.
JAY: And should there not also be some questions raised, either whether it’s in antitrust legislation or even some issues of public ownership, how much concentration of ownership there is in food? For–I was just–for example, I follow this company Glencore, and one of the investors in it–. Glencore is apparently the biggest commodities trader-owner in the world right now. And the sultan of Brunei, apparently, is one of the larger investors. And the sultan of Brunei, not only does he own a big piece of Glencore, which is a major owner of Russian wheat and foodstuffs and other kinds of commodities all over the world, but he also just turned around with his sovereign wealth fund and bought the biggest poultry producer in Turkey. There seems to be a real scramble to buy up the–who makes and produces the world’s food.
GHOSH: Yes. Well, you know, this has been one of the very concentrated sectors now in the world for a while, really over the last two decades. In the United States there are really four or five major producers who are controlling about 85 percent of commodities trade. And the point is that they’re not just what is called horizontally concentrated, but they’re vertically concentrated. That is to say, these big companies control every part of the commodity, you know, process: the production; the–you know, they give inputs; they buy the output; they go all the way down to retail trade. And now, increasingly, they are the ones active in the futures market as well.
JAY: Thanks very much for joining us, Jayati.
GHOSH: Thank you. It was a pleasure.
JAY: And thank you for joining us on The Real News Network.
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