Grain Belt Bubble?

To the question of whether grain speculators ought to be reined in to keep food prices from spiraling upward, here’s the short answer from the Minneapolis Grain Exchange: No.

Commodity investors now control more than 4.5 billion bushels of corn, wheat, and soybeans on the Chicago Board of Trade alone—equal to 58 percent of what was in U.S. silos on March 1, according to the U.S. Department of Agriculture. But Layne Carlson, corporate secretary and treasurer of the Minneapolis Grain Exchange, has been telling Congress and the Commodity Futures Trading Commission this spring that other factors far eclipse the effect, if any, that speculators have had on grain prices.

“Speculators are essential to the marketplace,” Carlson says. “They add liquidity and price discovery. From our observation, the biggest factors [behind rising grain prices] have been a confluence of fundamental market factors. We have had two straight years of crop failures in Australia, Canada, and Europe—they all had lower wheat production because of weather. And the value of the dollar has dropped dramatically, and that makes our wheat a good buy.” With the cost of fertilizer and fuel for production and transportation on a steep ascent, “it’s the perfect storm,” Carlson says.

Some investors don’t buy that argument. In written testimony before U.S. Senate committees, Michael Masters of Masters Capital Management, a hedge fund based in the U.S. Virgin Islands, says institutional investors play an outsized roll in rising prices. “There is a crucial distinction between traditional speculators and index speculators,” he writes. “Traditional speculators provide liquity by both buying and selling futures . . . . Index speculators buy futures, then roll their positions by buying calendar spreads. They never sell. Therefore, they consume liquidity and provide zero benefit to the futures markets.”

No less a market luminary than George Soros of Soros Fund Management, a $17 billion hedge fund, agrees. Soros has given this Senate committee testimony: “Commodity index buying [is] eerily reminiscent of a similar craze for portfolio insurance, which led to the stock market crash of 1987 . . . . The institutions are piling in on one side of the market, and they have sufficient weight to unbalance it.” If they were to head for the exits as a group, he adds, “there would be a crash.”