The Hindu Business Line : Futures: Farmers lose, buyers pay, and Wall Street alone gains!

Home Page - Agriculture
Opinion - Commodity Markets
Agri-Biz & Commodities - Insight
Futures: Farmers lose, buyers pay, and Wall Street alone gains!

Even as the impact of the futures market on spot prices in India is being widely discussed, a raging debate is on in the US on how farm futures markets have ceased to be the play of farmers or consumers, and how multi-billion dollar index and hedge funds that had taken over the futures market in oil and metals, have finally also taken over the grain market.

S. Gurumurthy

Advertisement

Even as the Abhijit Sen Committee on commodity futures was furiously working on how to duck the issue of the impact of the futures market on spot prices in India, at about the same time, the very same issue was tormenting the US.

When Prof Sen was giving finishing touches to his report in March and April, suggesting, without evidence, that the spot price increases might, after all, be normal, a raging debate was on in the US — it is continuing even now — on how farm futures markets have ceased to be the play of farmers or consumers, and how multi-billion dollar index and hedge funds that had taken over the futures market in oil and metals, have also finally taken over the grain market.

Today world opinion, led by the UN, squarely blames the speculative funds for forcing food riots in Egypt and Haiti, not to mention the police firing! When the Sen panel was hinting at global price increases causing a rise in agro-product prices in India, how did it shut its eyes to the near unanimous view about how Wall Street-led speculation in farm prices — described as “parasitical and anti-social” by International Herald Tribune on April 16, 2008, a full week before the Sen panel gave its report — had forced the US and global farm prices to rise, and wheat and rice prices to double?

And more. Even before the Sen panel was thought of and when the MCX and the NCDEX in India were celebrating the rise of futures trading as heralding yet another level of liberalisation, a US Senate panel had investigated and conclusively found that speculative trading in the oil futures market was the principal reason why spot oil prices were shooting up.

A click of the mouse yields tonnes of data and analysis that demonstrate how the huge rise in oil prices have been — and even now are — driven by unprecedented speculation from Wall Street, courtesy the futures market. A stunning analysis on Dow Jones Online Financial News (April 24) reveals that huge hedge funds have taken a $12-trillion — yes, trillions — bet on oil through oil futures. If they succeed, says Dow, the world will be paying a near $1,000 — yes, $1,000 — for a barrel of oil in five years! But will that terrible thing happen? Dow concludes, “no one knows what will happen, but whatever it is, its effect will be huge”.

Dow also points out that “weary of being told by the West to pump more crude,” the Saudi Oil Minister, Mr Ali al-Naimi said: “Speculation in futures market is driving the prices. Today there is no link between oil fundamentals and prices”. Proof? Dow adds that the oil sellers have ‘net short positions’ (meaning they have sold more futures than they can honour in terms of delivery) which means that the oil prices should actually fall.

Instead, prices are rising artificially because the speculators have ‘net long positions’ (meaning they have bought more than what ultimately will be needed and delivered). On the Wall Street-funded steroid of artificial demand for oil futures, actual oil prices have skyrocketed. Later, Wall Street repeated this exercise in the metals market. In both cases, prices shot through the roof.

Futures Fallout

The current debate in US points to the fact that it is the turn of rice, wheat and other agro products now to suffer the fate of oil and metal. Bloomberg.com captured the essence of this speculation in its telling headlines “Wall Street Grain Hoarding Brings Farmers, Consumers Near Ruin”.

Like corporate stocks are owned through stock futures, grains stocks are hoarded by Wall Street funds through grain futures. Bloomberg points out that commodity index funds control through futures 4.51 billions of bushels of corn, wheat and soya-beans — equalling half of US stock as on March 1, 2008! Their holdings jumped 29 per cent last year.

On the classical view that futures help price discovery, should US farmers not celebrate high prices? They do not. They mourn instead. Bloomberg report quotes a representative of National Corn Growers Association as saying “it is the best of times for somebody speculating on grain prices; not the best of times for the farmers”.

He says more: “Demand for futures exceeds demand for cash-grains”; “the divergence between futures and the underlying grain is so much that grain merchants have stopped bidding for new crops”; “futures are not worth the risk”. That is when wheat pries have doubled in one year and rice by 70 per cent since January, and the US farmers mourn, instead of bursting crackers! They rightly mourn the rise as the gain in grains futures belongs not to the farms but to Wall Street.

The US debates like the SJMs and CPMs in India do. But out here the Sen panels and financial media keep parroting how the Indian farmer — who incidentally sells his grains through weekly/bi-weekly shandies 90 per cent of which are at a distance of 6 to 16 km from their farms and to which 70 per cent of their buyers walk or bicycle — will become prosperous through agri-futures!

See the behaviour of the rice futures. US rice prices rose 70 per cent from January this year when US has enough rice and more. At least, some 15 per cent of the wheat produced is traded across the world, but, despite the fact that more than half of world’s population lives on rice, only 5 per cent of the rice produced is globally traded.

Rice shortage

In a sense, rice is more a local and not a global commodity. Again, within a country, rice is mostly locally produced and largely locally consumed. Says Nathen Childs, economist, also a rice expert, in the US Department of Agriculture (USDA), “most of the rice in the world is consumed within 60 miles’ of where it grows and, traditionally, very little of rice is traded in the global market. Yet, see how the US and global rice prices move – or ‘were moved’ from January 2008 to mid-April. The rice futures prices in US rose from $13.8 per bushel to $24.20. Reason? Fear of rice shortage in US? Not at all.

“Bottomline, there is no rice shortage in US. We have supplies”, says, not an official of USDA wanting to calm the prices, but, the President and CEO of California Rice Commission, who represents growers and millers of rice in the state, and who must be keen for higher prices. Here, he opposes higher prices for good reasons. For, the gain is not the farmers’; they have already sold the grain futures to Wall Street funds, who, as holders of the futures, are the gainers. What the farmers have lost and Wall Street has gained will ultimately be paid by the victim — the consumers!

Hoarding stocks

High futures prices hurt the farmers by turning buyers away from futures crops. Also see, what, when grain futures hit the roof, Wal Marts and Costcos, the ware-housers, who also hoard grain stocks, do to the consumers. On April 23, Sams Club, the wholesale division of Wal Mart, with 593 warehouses, announces that it would limit (read ration) bulk supplies to buyers!

And so does wholesaler Costco with 534 warehouses, mostly in US. When asked, Sam Club refuses to comment on whether the problem was caused by short supplies or by customers stocking up, anticipating a rise in prices. Even as Sam Club and Costco cause panic, on that very day, April 23, the US Rice Federation spokesman, David Cola, says: “There is no rice shortage in US”.

The US farmers resist, not celebrate, high prices of grain futures. The Washington Post of April 23 reported: “Farmers” and food chain executives “fruitlessly appealed to Federal officials yesterday” to “limit speculative buying” that is “helping to drive food prices higher”. Like the Indian establishment here, in the US too, the Commodity Futures Trading Commission (CFTC) counselled them to look, not at Wall Street, but beyond that, at the global scene and said that high prices are because of soaring world demand!

The National Farmers Union President, Tom Buiss, responded to the CFTC’s prevarication thus: “Something is wrong” adding that “the CFTCs refusal to reign in the speculators will force farmers and consumers to take the case to the Congress”.

The farmers and consumers have said in one voice that “they no longer trusted the commodity exchanges” — read futures — “to properly set prices”. The Montek Singhs here and CFTCs in the US defend futures in one voice. Yet, in the US, farmers and consumers know what is wrong; here, the middle-class consumer hardly cares to know what is futures, not to speak of the farmer who sells his grains in weekly shandies. The US media does its job by the US. But here...

(The author is a corporate advisor. His e-mail is guru@gurumurthy.net)

More Stories on : Agriculture | Commodity Markets | Insight

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page