Monday, April 28, 2008

Food, food everywhere, nor any grain to eat.

With apologies to the dead poet who wrote the original. Bloomberg had a distrubing article on the effect of the futures market on the price of grain and foodstuffs. In a nutshell it decribes how speculation has driven the prices to a level of unbalance that prevents the markets from working as they should.
Commodity-index funds control a record 4.51 billion bushels of corn, wheat and soybeans through Chicago Board of Trade futures, equal to half the amount held in U.S. silos on March 1. The holdings jumped 29 percent in the past year as investors bought grain contracts seeking better returns than stocks or bonds. The buying sent crop prices and volatility to records and boosted the cost for growers and processors to manage risk.

Niemeyer, who farms 2,200 acres in Auburn, Illinois, won't use futures to protect the value of the crop he will harvest in October. With corn at $5.9075 a bushel, up from $3.88 last year, he says the contracts are too costly and risky. Investors want corn so much that last month they paid 55 cents a bushel more than grain handlers, the biggest premium since 1999.

``It's the best of times for somebody speculating on grain prices, but it's not the best of times for farmers,'' said Niemeyer, 59. ``The demand for futures exceeds the demand for cash grains.''
Futures are gambling and the speculators are gambling that whatever they buy today will be worth more keeping than eating.


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