Common Tragedies

Thoughts on Environmental Economics

Commodity prices – WTF?

Posted by Rich Sweeney on April 10, 2008

More on food prices. From the inbox:

BLS data say that food prices are increasing on the order of 3.5-4.5% with grain prices up only about 6.6%, but commodity prices for grains have skyrocketed. Any idea why there is a difference? Even the local bakery in Ithaca has a per loaf bread charge that tracks prices of flour and other grains and is updated weekly, so it doesn’t seem like it should take much time for commodity prices to hit consumers.

My response was basically, “I got nothin”. Then another friend directed me to this article from last week’s NYTimes, which at least let me know that I’m not the only one clueless here. Basically futures and cash market prices for wheat and soybeans have been all out of whack for some time now and nobody knows what the eff is goin on. As Scott Irwin of Illinois says in the article, “These are highly competitive markets with very experienced traders. Yet they are leaving these profits alone? It just doesn’t make sense.”

Any smartypants CT readers care to put forth an explanation?

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4 Responses to “Commodity prices – WTF?”

  1. Lou Grinzo said

    My guess is that it’s part of the flight to commodities as an inflation hedge. I can’t claim any expertise in this area (I’m an economist, so by definition I know nothing about real-world money stuff), but I’ve seen many references to this mechanism being at work to push up the price of many commodities.

  2. Rich Sweeney said

    Ha. Apparently it wasn’t clear when I said, “Basically futures and cash market prices for wheat and soybeans have been all out of whack for some time now and nobody knows what the eff is goin on.”

    I see why capital might flow to commodities to hedge against inflation, but my question is how do you explain the ridiculous spreads between cash and futures prices for the same exact good? In other words, why aren’t hedge funds renting trucks and clearing out those soybean bins in Whole Foods?

  3. El Macho Grandisimo said

    I chalk it up to the loss of any idea of what the dollar should be worth (given our mammoth”structural” budget deficit). Iwas here during the last energy price spike, in the 70s. That’s when we coined the word “stagflation.” We thought oil was different from all other commodities, and would continue hpward forever.

    In other words, people who would normally hold cash (after an asset price crash) are thinking twice about the US dollar.

  4. David said

    I don’t know much about how these particular markets are set up but, like the article said, differences between the spot price / cash market and future / derivative market price should be quickly arbitraged away. I wonder (and this is just speculation on my part)if the reason it isn’t is concerns about counterparty risk – ie, the creditworthiness of the people you’re taking derivative contracts out with on the futures market. Arbitrageurs might be reluctant to step in to exploit price differenetials if they’re worried that, although they get the bet right, they won’t end up getting paid. And so they’re not stepping in. The credit crucnh would be exacerbating these fears right now.

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