On Speculation

In last week's issue of The Economist, Sir Richard Branson and others wrote to the Letters section with their take on speculation in commodities markets.  They rebut two main points from the original article.  Here is the second, most salient point:

... the article shares the common misconception that futures prices cannot affect spot prices because speculators do not take delivery of physical commodities, and therefore do not "hoard" in the traditional sense.  The reality, however, is that spot prices of many consumable commodities, including oil, and corn, are set by long-term contracts that are based on futures prices, allowing the tail to wag the dog.

Essentially what they are saying is that disinterested parties who only care about a price distort the market.  The Economist article Branson, et al. are responding to suggests that those who "hoard" commodities are the ones who affect the price and should therefore be held to account for any problems that occur within that market.

Hoarding is a component of the producer's ability to impact supply in order to achieve a better price, but this is essentially a longer-term position than speculation.  So is taking land out of production, which is what an influential group of potato producers did last year.  Speculators are doing no such thing.  They have no place whatsoever in the supply chain.  They are not "investing" in farmers or processors.  With globalization, food demand is going to remain relatively strong, and parties who are part of the supply chain will continue to find usefulness in commodities markets.  Speculator involvement in this market is absolutely unnecessary.  Branson summarizes it best:

There is strong evidence that speculation exacerbated the last oil and food bubble.  Speculation will fuel the next one too, unless meaningful speculative position limits are established.

Commoditization and futures contracts are meant to allow farmers to reduce risk.  Reduced risk and a long-term outlook encourage better, more environmentally friendly practices, development of alternative food markets, economically stable communities.  That's not what is happening here.  Let us hope change is not forced upon us by what Branson alludes to.