Thursday, June 05, 2008

The Enron of Farming?

As noted earlier today, the New York Times reports that investment funds and large private investors are flocking to food-production-related infrastructure, including “farmland, fertilizer, grain elevators and shipping equipment.” Investors claim that they will benefit “everyone,” because the new capital resources will lead to new infrastructure investment. However, there are those who are concerned that financial investors will be able to put their “put their thumb on the supply-demand scale by holding back inventory to move prices artificially.”

Any time I hear claims of Pareto-like market improvements, especially when new technologies are not part of the equation, I am skeptical. In this case, the new investment is related primarily to a belief in the market’s potential, and not deregulation, but the new investors in the article sound an awful lot like those who pushed for deregulation of the California electric markets and repeal of the Public Utility Holding Company Act (PUHCA). That should raise a few eyebrows.

Why? Well, Enron, for one, found that holding back electricity (by artificially cutting production) could be extremely lucrative. And with Enron, that kind of market manipulation was illegal. To my knowledge, there are no requirements that owners of grain ever sell their commodities. Such owners could legally and legitimately (if not morally) hold back their inventory until the market price was more appealing.

This risk always existed, but smaller farms probably did not have the same ability to "game the market" for long periods of time. It is true that there were already some large players in agriculture (see, e.g., Cargill and ADM), but now that farming is a major component of both food markets and energy markets, consumers and regulators have every reason to be on high alert.

Perhaps these new large investors will “bolster food production at a time when the world needs more of it,” but I rather doubt it, especially in the near term. If recent new investors in the energy industry are any indication, the new investors clamoring to get into the market are looking for ways to maximize wealth with current production, not build new infrastructure. These new financial investors are simply looking for ways to hedge their bets, not increase production. Perhaps this kind of market activity would eventually lead to more and better infrastructure, and thus increased food production. In the near term, though, the only beneficiaries will be the investors themselves.


Anonymous Anonymous said...

Recent congressional hearings on the price of gas seem to support the gest of this article. Bottom line is that we have a lot of "dark" money in circulation by the rich elites. Based on the hearings in Congress, this is a large part of the speculative bid up of energy today. This "dark" money is not regulated and hardly seen due to it not having the reporting requirements that other institutions that have abused the markets have had in the past. It is a huge mistake and one that we are all paying for as we use energy.

We need a Congress that can do its job in protecting our economy. It seems that all they can do is nothing while the moneyed elite enrich themselves at the expense of the economy. It is a system our Congress has allowed to develop over the years due to illogical arguments using buzz words like "free markets". Enron had their own buzz words. Both do have a connection. These same frauds are economic frauds. Many people have little ability to understand the economic theory of market manipulation and that of "cornering" the market.

One of the arguments goes like this: "Investors provide the liquidity to make markets more efficient". This may be true in some instances but in others it is the unregulated activities of this mechanism that leads to disaster, as the state of California found out with Enron. How many lessons do we need before we will stop buying specious arguments by big money? That probably has a direct relationship to the amount of money this dark money spends supporting Congressmen who buy into their view. It is not a good situation for the American economy.

One good answer to solving this question is pretty easy and was one of the suggestions in the recent Congressional hearings on energy. Separate the speculators from the real market participants by making them take or give delivery of the product. Another would be to bring out these investments from the "dark". A little light might help keep the wrongdoers out of the market place. Darkness sure doesn't help.

6/08/2008 6:01 PM  
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