A Popular Economic Fallacy

There is one economic fallacy that enjoys extremely high popularity in Germany. TV stations and newspapers alike regularly report on it, politicians feign outrage at it, and many financial institutions involved in it are too spineless to defend themselves and rather stop doing it. We are referring to the speculative buying of futures contracts on agricultural products. According to the fallacy that so exercises German minds, speculators are 'driving up food prices and are thereby causing hunger'.

For many people this probably sounds plausible on the surface, the problem is only that it simply isn't true. Quite on the contrary: speculative activity in agricultural futures alleviates hunger rather than causing it, as Dimitri Speck among others has convincingly demonstrated. We have discussed his views in more detail in a previous article on the topic (see: “Is Speculation in Agricultural Commodities Evil?”)

As a reminder, we also want to repeat here what Murray Rothbard had to say on the role of speculators in the marketplace:


““Entrepreneurship is also the dominant characteristic of buyers and sellers who act speculatively, who specialize in anticipating higher or lower prices in the future. Their entire action consists in attempts to anticipate future market prices, and their success depends on how accurate or erroneous their forecasts are. Since, as was seen above, correct speculation quickens the movement toward equilibrium, and erroneous speculation tends to correct itself, the activity of these speculators tends to hasten the arrival of an equilibrium position.


There can be a reserve demand for a depletable resource, just as there is speculative reserve demand for any other stock of goods on the market. This speculation is not simple wickedness, however; it has a definite function, namely, that of allocating the scarce depletable resource to those uses at those times when consumer demand for them will be greatest. The speculator, waiting to use the resources until a future date, benefits consumers by shifting their use to a time when they will be more in demand than at present.”


(emphasis added)

In short, speculative activity in the futures markets for perishable goods is beneficial to consumers. It follows that whenever speculators drop out from this market, it will become less liquid and less efficient to the detriment of consumers. That doesn't keep left-leaning magazines from hailing such decisions as great victories:


“The financial sector continues to insist that the controversial practice of speculating on agricultural commodities does not cause high food prices. But some German banks disagree. Now DZ Bank, the country's fourth largest financial institution, has announced it has stopped the practice.

The DZ Bank is hardly one of Germany's best known banks. Many people have never heard of it, though it is the central institution of more than 900 savings banks and Raiffeisen banks, and carries a balance of more than €400 billion, making it Germany's fourth largest, behind Deutsche Bank, Commerzbank and KfW.

But thanks to a recent strategic decision, that might soon change. The DZ Bank Group and its subsidiary Union Investment have chosen to withdraw completely from speculation on foodstuffs, according to a letter the bank sent to the consumer watch organization Foodwatch that SPIEGEL ONLINE has seen. In the document, DZ Bank executive board member Lars Hille also calls for tighter regulations for the commodities market.

Foodwatch head Thilo Bode says the move sets a good example. "The decision shows they are taking responsibility for society. A control on trading volumes, like that being demanded by DZ Bank, is a basic precondition to prevent excessive speculation and the hunger crises it causes." He adds that other institutions should follow this example instead of doing all they can to thwart necessary financial market regulations.

The DZ Bank decision highlights the deep differences among German financial institutions when it comes to the controversial practice of speculating on foodstuffs. Commerzbank and several Landesbanken (state-owned savings banks) had previously announced their intention to back out of food commodities speculation. But neither Deutsche Bank nor Allianz has followed them. Both say that it has not been proven that speculation on foodstuffs results in hunger and shortages.”


(emphasis added)

Thilo Bode urgently needs to brush up on how markets actually work. Statism is deeply ingrained in Germany, as we have previously pointed out. The fact that free markets are best at allocating scarce resources has yet to be widely recognized. Contrary to 'taking responsibility', the managers of DZ Bank are engaging in a cheap PR coup – cheap for themselves, that is. They probably wanted to exit the business anyway (maybe they lost money? who knows) and decided to use the occasion to score a few cheap points (we cannot prove this of course. Maybe they are really simply ignorant). With that they unfortunately greatly harm the cause of consumers. It is one thing when unreconstructed etatistes make such bizarre claims, it is quite another when so-called capitalists are lending support to their delusions.


The Bureaucrats Pop Up

Like the proverbial jack-in-the-box, the EU's bureaucrats usually immediately pop up to add their two cents. As a rule this means a further restriction of economic freedom that will harm everyone is about to be imposed. In this case it would be especially harmful for those people in the world that are in danger of suffering hunger. People in the third world are already chafing under the nonsensical climate and trade regulations that the eurocrats have cooked up, which represent severe obstacles to capital accumulation in the poorest countries. Restrictions on trading in agricultural markets is going to add the risk that genuine food shortages will develop in the future. Luckily, the eurocrats have so far been successfully thwarted.

One wonders therefore if the actions of DZ Bank are not a kind of 'plant', similar to how the war on tax havens was revived and intensified when suddenly a treasure trove of data on Caribbean account holders appeared on the scene, seemingly out of the blue. We know by now how the ruling classes operate when they want to influence popular opinion so as to get the public to back their plans.


“DZ Bank would like to see "controls on transaction volumes, particularly the introduction of effective position limits for exchanges and central clearing platforms." In other words, DZ Bank would like to limit the degree to which hedge funds and other speculators participate in so-called over-the-counter, or off-exchange, trading. Such limits existed until the beginning of the 2000s, but were then eliminated as deregulation progressed. Since then, the share of speculators on agricultural commodities markets has risen from 30 percent to 80 percent.

European leaders are hoping to agree on financial market reforms, including position limits of the kind supported by Hille, at the end of June. But the financial sector has managed to significantly weaken the draft proposal, adding several loopholes, Foodwatch head Bode says. "The limits for speculators have been effectively neutralized," he says, adding that DZ Bank has positioned itself in opposition to many in its own sector.”


(emphasis added)

As is so often the case, the interventionist 'solution' may have the same goals the market would achieve if left alone, but employs the wrong means which ensure that nothing but unintended consequences will ensue. Then the cry for even more senseless intervention will go up. It is not possible to improve on the outcomes the free market can deliver.




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2 Responses to “More Food Speculation Nonsense”

  • zerobs:

    So comical. Every EU country is loaded with ag subsidies whose STATED PURPOSE is higher prices.

    Half the speculation is trying to guess at what cockamamie protection scheme the bureaucrats will cook up next.

  • SavvyGuy:

    I agree with the above, but the role of ultra-low interest rates as a culprit cannot be ruled out.

    In my experience, interest rates are the damping factor in futures markets where the contango is based on the cost of carry, which is dependent on the cost of money and also the cost of storage. The latter is also roughly dependent on the cost of money. In other words, the contango is very dependent on the cost of money, more than linearly but perhaps less than a power of 2.

    Markets are oscillating systems, moving from one extreme (buy-side highs) to another (sell-side lows). In between, the contango serves as a damping function, dissipating excess energy as the cost of carry, much in the same way as a shock-absorber dampens motion by dissipating kinetic energy into heat.

    Artificially-suppressed interest rates reduce the damping factor in markets, causing them to be under-damped and oscillate wildly. Crude oil went from $20 to $140 and back down to $32 over the past decade or so. Can this happen in other markets, including grains? Yup!

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