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Wall Street Speculators Raising Your Grocery Bill
By M. Joy Hayes, Ph.D., The Motley Fool
04/19/12
Over the past 10 years, prices for basic food commodities like meat, dairy products, grains, oils and fats, and sugar, have increased by an average of more than 125%.
Part of the increase is due to rising production costs and changes in supply and demand. But you also have Wall Street traders to thank for the higher price tags.
With no intention of buying the underlying food commodities, Wall Street dumps massive amounts of money into commodities futures in hopes of profiting from fluctuations in food prices. In the process, it's moving the market in its favor -- and emptying the pockets of consumers.
So what the heck is a future, and how does it affect your grocery bill?
The Fable of the Farmer and the Speculator
Suppose Speculator Smith thinks the price of wheat will go up in the future, and wants to make money off the price change. Smith can do this by purchasing a future in wheat. This future buys a specific amount of wheat at a pre-determined price to be delivered at a set date in the future, when the wheat future matures. If the price of wheat goes up, Smith's investment in his wheat future is worth more, and he can sell it at a higher price without taking delivery of the wheat.
So far, so good. The farmers benefited from the security of knowing they would be able to sell some portion of their crop at a set price at the end of the season. Smith's gamble paid off once the wheat price increased, but he also took on the risk of losing money if the price of wheat went down in the interim.
Here's where it gets hairy. Frequently, instead of a farmer being on the other end of the speculator's contract, there is another speculator.
In such a case, neither side owns the commodity and neither wants to own it. They are just on opposite sides of a bet on whether the price will go up or down. Before the contract expires, the loser simply pays the winner, and no commodities change hands.
But this speculation actually causes the prices of the underlying commodities to move. As the demand for futures rises, the price for those futures rises, causing the prices of the underlying commodities (including food commodities) to increase.
The problem has only grown in recent years, as financial companies have nearly doubled their investments in food commodities over the past five years, which has helped push food prices to 30-year highs.
And these price increases are passed on to consumers like you. Commodity speculation also pushes up prices on energy, among many other products we rely on.
Fuller Pockets for Wall Street, Emptier Fridges for the Rest of Us
The importance of this issue is magnified by the fact that about 46 million Americans -- about one in seven -- turn to food stamps to help them pay for food.
The effects of rising food costs are even more alarming in Third World and developing countries, where there are many poor people who already spend more than 60% of their income on food. According to the UN World Food Program, 115 million people have fallen into hunger as a result of sharp increases in food prices since 2008 and the global economic recession, which has caused food riots to erupt in countries like Mexico and Bangladesh.
While the recently passed Dodd-Frank Act calls for stronger regulation of commodity trading, Wall Street has been fighting tooth and nail to defang the regulations, and has undertaken legal challenges that have prevented the regulations from coming into force yet.
Until they do, don't expect your grocery bill to get any leaner.
By M. Joy Hayes, Ph.D., The Motley Fool
04/19/12
Over the past 10 years, prices for basic food commodities like meat, dairy products, grains, oils and fats, and sugar, have increased by an average of more than 125%.
Part of the increase is due to rising production costs and changes in supply and demand. But you also have Wall Street traders to thank for the higher price tags.
With no intention of buying the underlying food commodities, Wall Street dumps massive amounts of money into commodities futures in hopes of profiting from fluctuations in food prices. In the process, it's moving the market in its favor -- and emptying the pockets of consumers.
So what the heck is a future, and how does it affect your grocery bill?
The Fable of the Farmer and the Speculator
Suppose Speculator Smith thinks the price of wheat will go up in the future, and wants to make money off the price change. Smith can do this by purchasing a future in wheat. This future buys a specific amount of wheat at a pre-determined price to be delivered at a set date in the future, when the wheat future matures. If the price of wheat goes up, Smith's investment in his wheat future is worth more, and he can sell it at a higher price without taking delivery of the wheat.
So far, so good. The farmers benefited from the security of knowing they would be able to sell some portion of their crop at a set price at the end of the season. Smith's gamble paid off once the wheat price increased, but he also took on the risk of losing money if the price of wheat went down in the interim.
Here's where it gets hairy. Frequently, instead of a farmer being on the other end of the speculator's contract, there is another speculator.
In such a case, neither side owns the commodity and neither wants to own it. They are just on opposite sides of a bet on whether the price will go up or down. Before the contract expires, the loser simply pays the winner, and no commodities change hands.
But this speculation actually causes the prices of the underlying commodities to move. As the demand for futures rises, the price for those futures rises, causing the prices of the underlying commodities (including food commodities) to increase.
The problem has only grown in recent years, as financial companies have nearly doubled their investments in food commodities over the past five years, which has helped push food prices to 30-year highs.
And these price increases are passed on to consumers like you. Commodity speculation also pushes up prices on energy, among many other products we rely on.
Fuller Pockets for Wall Street, Emptier Fridges for the Rest of Us
The importance of this issue is magnified by the fact that about 46 million Americans -- about one in seven -- turn to food stamps to help them pay for food.
The effects of rising food costs are even more alarming in Third World and developing countries, where there are many poor people who already spend more than 60% of their income on food. According to the UN World Food Program, 115 million people have fallen into hunger as a result of sharp increases in food prices since 2008 and the global economic recession, which has caused food riots to erupt in countries like Mexico and Bangladesh.
While the recently passed Dodd-Frank Act calls for stronger regulation of commodity trading, Wall Street has been fighting tooth and nail to defang the regulations, and has undertaken legal challenges that have prevented the regulations from coming into force yet.
Until they do, don't expect your grocery bill to get any leaner.
