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in-support-of-speculation

A recent World Development Movement report blames financial speculation and banks for increases in certain food prices and subsequently worsening world hunger. The report adamantly supports banking reform towards heavy regulation similar to the recent US Wall Street legislation.

Prices of basic crops and food processing have indeed increased over the passed decade. The culprits however, are not speculators. The report claims investment banks exaggerated bad crop yields. This is irrational. The primary purpose and good thing about speculators is the smoothing out of resources and risk, and therefore prices. Crops are very volatile and cyclical in nature. Speculators and investors use information about the future conditions to stabilize against commodities like wheat skyrocketing during the winter months. They are not ‘gambling’ like the report suggests, but internalizing risk. Deborah Doane of World Development Movement is wrong is saying, “Nobody benefits from this kind of reckless gambling except a few City wheeler dealers.” Everyone who chooses to eat a wide variety of foods in all seasons will benefit. Ironically, we never see reports blaming speculators for decreases in prices.

It’s true that the prices can be over speculated, but not much. It’s the speculators job to be as close to reality when forecasting as possible. More importantly, the speculative prices will eventually equalize to the real present price if there is excess. The report also blames food speculation for inflation. This completely ignores the fact the government controls the supply of money and therefore any real inflationary problems.

The report argues for strict regulations similar to the new US banking reform that limits food speculation as well as many other financial regulations. This is sure to have unintended consequences. Strict regulations will tighten the markets. Information about the changes in market conditions will become more costly and blurred. Future prices will become more prone to misrepresentation. The UK should not follow the US in its decline financial regulatory entanglements. Instead it should increase free trade to attract more supply and open undistorted opportunities for entrepreneurship in the food industry.