Here's the straight-up truth about the 2008 price spikes:
Traders who believed that commodities were in a bubble (which by definition is caused by speculation, you can't have a supply/demand "bubble") who acted on that basis and shorted the market, made money.
In the case of Wilbur Ross, he bought a decrepit Indian Airline as the most leveraged play on collapsing oil prices that he could find.
Here are a couple of other guys:
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“You have a generalized commodity bubble due to commodities having become an asset class that
institutions use to an increasing extent.”
-George Soros
April 17, 2008 Bloomberg article
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“Oil is a huge mania, and it is going to end badly. We've seen it play out hundreds of times over
the centuries, and this is no different. It's just the nature of a rip-roaring bull market.”
-Paul Tudor Jones II
June 2008 edition of Institutional Investor's Alpha Magazine
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One of these days I'll get around to Goldman's machinations in the summer of '08, meanwhile here's today's story.
From the Financial Times:
An Oxfam report that accuses banks trading agricultural commodities of “speculating on hunger” is transmitting high-voltage shocks across the fund management industry.
European banks are choosing either not to speculate on food prices on behalf of investors or to scrap funds tracking agricultural prices, following a scathing critique by the non-profit group’s Paris office.
The change in conduct has been dramatic. BNP Paribas, France’s largest provider of agricultural commodities funds, suspended a $214m agricultural fund. Crédit Agricole, meanwhile, shut three funds that permitted investors to speculate on agricultural commodities, although this was partly for economic reasons as the funds were small.
Similar action is being taken elsewhere in Europe. Landesbank Berlin, Landesbank Baden-Württemberg and Commerzbank in Germany and Österreichische Volksbanken in Austria pared down their exposure to the food sector in the aftermath of a parallel campaign that Oxfam Germany orchestrated last year. And executives from Barclays in the UK are seizing the moral high ground as well. They opted to “cease trading soft commodities” on their own, as “this activity is not compatible with our purpose”....
...A question emerges in the frenzy of Oxfam’s campaign, however. Does investment in ETFs or standard open-ended funds offering exposure to agricultural commodities actually push up food prices?
The point is up for debate. In one corner is Oxfam; in the other the investment bankers and commodity traders with commercial interests at stake. Oxfam’s critics cite studies from academics that suggest food-price volatility has more to do with rising demand and shrinking supply and less with the popularity of ETFs and open-ended funds tracking soft commodity prices.How about a big old Aussie "Good on ya" to the FT for getting this story ahead of the financial media behemoths?
As the controversy swirls, Deutsche Bank and Allianz, Germany’s two biggest commodity traders, have refused to back away from their exposure to agricultural commodities....MUCH MORE
The article mentions a report from Allianz that acknowledged:
“it cannot be totally dismissed that speculation supports excessive price developments”.Well, here are Deutsche Bank and Allianz on the question of speculators effect on food prices:
Deutsche Bank Research
„However, sometimes exaggerated market positions can temporarily
distort the normal functioning of the market – and this may have
serious consequences for farmers and consumers. There may be
grave consequences if speculators drive prices to a level that is no
longer in harmony with the fundamentals.”
distort the normal functioning of the market – and this may have
serious consequences for farmers and consumers. There may be
grave consequences if speculators drive prices to a level that is no
longer in harmony with the fundamentals.”
Source: Deutsche Bank Research: Steigende Lebensmittelpreise – strukturell oder temporär? –
Kurzfristige Einflussfaktoren, Trends und Implikationen (March 2011), page.7/8
Link: http://www.dbresearch.de/PROD/DBR_INTERNET_DE-PROD/PROD0000000000271533.pdf
Translation by foodwatch; original quote in German language:
„In manchen Zeiten können übertriebene Marktpositionen allerdings das normale Funktionieren des Markts vorübergehend verzerren – und dies kann möglicherweise ernsthafte Konsequenzen für Bauern und Verbraucher haben. Wenn Spekulanten die Preise auf ein Niveau treiben, das nicht mehr mit den Fundamentaldaten im Einklang steht, kann dies schwere Folgen haben.“
„This brings of course the possibility of positions distorting the normal functioning of the market, for instance due to
their sheer size. Such speculation can have grave consequences for farmers and consumers and is, in principle, unacceptable.
All in all, it is important for the good functioning of the food chain that commodity derivatives keep serving their
initial purpose of price discovery and hedging, to cope with price volatility. We advocate
more transparency in general. More regulation in the derivatives market overall will be
helpful in avoiding excesses.”
Source: Deutsche Bank Research:
Risk management in agriculture – Towards market solutions in the EU (September 2010), page 21/22
Link:
http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000262553.PDF
...MUCH MORE
Allianz Research
“However, taking into consideration the huge influx of funds and non-traditional participants into
commodity markets, it cannot be totally dismissed, that speculation at least supports excessive price
developments, and this in both directions. Even if speculative capital flows were not necessarily the
trigger for the price movements seen in 2007 and 2008, it seems reasonable that at least they
enforced price trends.“
Source: Allianz Research: Kathrin Brandmeir, Arne Holzhausen, Gabriele Steck;
Is speculation to blame für rising food prices? – A compilation of
facts & findings – Allianz Working Paper (June2012) – previously unpublishes,
markes as “for internal use only – confidential”, page 11
Link: published by foodwatch:
http://bit.ly/YrmWUg
...MORE
Thanks to Foodwatch for the links
