Currently browsing posts about: Futures-markets

Adam Davidson in the New York Times Sunday Magazine asks how come dairy farmers have such a hard time making a living?

His explanation: Dairy farmers thought they were in the business of raising cows.  Wrong.  They are in the business of betting on feed prices.

…in the last decade, dairy products and cow feed became globally traded commodities. Consequently, modern farmers have effectively been forced to become fast-paced financial derivatives traders.This has prompted a significant and drastic change.

For most of the 20th century, dairy farming was a pretty stable business…at base, dairy-farming economics are simple: when the cost of corn and soybeans (which feed the cows) are low and milk prices are high, dairy farmers can make a comfortable living.

And for decades, the U.S. government enforced stable prices for feed and for milk, which meant steady, predictable income, shaken only by disease or bad weather.

…[But] by the early aughts, to accommodate global trade rules and diminishing political support for agricultural subsidies, the government allowed milk prices to follow market demand.

…Animal feed, especially corn and soybeans, became globally traded commodities with all the impossible-to-predict price swings of oil or copper.

Davidson points to the 1% of dairy farmers who have figured all this out and are big enough to hire derivative traders to manage their feed stocks.

Farm bill politics, anyone?

Dairy farmer readers: comments please.

The Food and Agriculture Organization (FAO), says FoodNavigator.com, is proposing “limited” regulation of food futures.

“Limited” doesn’t go nearly far enough.  Food futures need regulation, big time.

In a policy brief, FAO attributes the recent crisis over food prices to speculation on food futures.  Futures trading drove up the prices of food staples—corn, rice, and wheat—to record levels.

Commodity futures speculation is a form of betting that prices will go up or down. In the United States, commodity speculation is regulated, but apparently not nearly enough.

If, like me, you find this kind of trading incomprehensible, help is at hand.

Read Fred Kaufman’s extraordinary piece in the July 2010 Harper’s Magazine: “The food bubble: How Wall Street starved millions and got away with it.”

And applaud FAO for at least taking a tiny first step to getting speculation in food under control.