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DAVID KRUSE

By Staff | Jul 8, 2011

I read an article circulated recently blaming high food costs, depicted as a food crisis, on speculation from Wall Street. That is an example of starting out with someone or something that you want to be guilty of a crime and framing them for it.

The article claimed, “Don’t blame American appetites, rising oil prices, or genetically modified crops for rising food prices. Wall Street’s at fault for the spiraling cost of food.”

First off, no crime was committed unless, like me, you think two decades – the 1980s and 1990s – of below-the-cost-of-production food prices was a crime. That got some producers so beaten down that even they think prices are too high when they are making a profit.

The author blamed higher food prices on Goldman Sachs and speculation. I guess that I have run out of patience with these fools who think the answer to rising food prices is the result of market manipulation.

It is not!

The author listed American appetites, rising oil prices and GMOs as suspects for rising food. Rising oil prices are a component as is the European Union rejection of biotechnology. The EU is starving people with its rejection of biotechnology now proven to boost food production wherever it has been adopted.

American appetites have almost nothing to do with it. The increase in food prices is supply and demand working properly. The demand comes from Chinese appetites, Korean appetites, Indian, Malaysian, Brazilian appetites as literally hundreds of millions of people in the past few years, have become economically emancipated enough to become real consumers.

They now have disposable incomes, willing and able to add new human increments to global food, fuel and fiber demand.

Investors (speculators) have recognized this fact though it appears to have escaped the notice of the author of the article I read. They have put money into the commodity sector because it is needed to provide the incentive to expand and grow global commodity production capacity to meet the new demand.

There is an old adage that high prices are the cure for high prices, as given the financial incentive to do so, farmers have always boosted production to meet or exceed demand. GSCI creation was not the fundamental boosting commodity prices, it just tracked it like the Dow does stocks.

The Dow doesn’t move the stock market, the stock market moves the Dow.

The GSCI is no different. Why is commodity speculation different than investing in stocks indices? There is no difference. Commodity market investment serves a useful purpose.

It will require investment of hundreds of billions of dollars into the commodity sector in order to expand global production capacity to feed, fuel and clothe the world and the GSCI is the tick on the tail of the dog relative to capital flowing into the sector globally.

It is a convenient scapegoat for end users who have been spoiled by decades of below-the-cost-of-production access to commodities to blame for having to pay market prices for the goods.

U.S. consumers never had to compete with Chinese, Indian, Korean and other consumers so directly for commodities before. The politicians will play to the whiners and attempt to manipulate prices lower with regulation.

The more success they have, the greater the gap between supply and demand will grow longer term as investment in new capacity is undermined. The recent attempt to lower oil prices by releasing government crude oil reserves will only dampen OPEC’s desire to invest in new oil production capacity.

Short term, lower prices resulting from the government intervention and market manipulation will create higher prices later as investment in new supply is depressed.

The GSCI is only the tape recording of the changing global commodity demand structure. New human demand has absorbed existing global commodity production capacity to which the commodity markets are responding appropriately to in order to provide the financial incentive to producers to expand global commodity production capacity.

If this were a test, the author who blamed food prices on GSCI and speculation gets an “F.”

I have the right answer, the same as 2 + 2 = 4. It is not that complicated. It is not sinister. It is not a conspiracy. It is real bonafide supply/demand fundamentals at work. Competitive markets are functioning on a global scale.

While they get the crying towel out for the people to which rising food costs soaks up their income, creating burdens, the truth is there is only so much food. Literally hundreds of millions of consumers who can now afford to improve their diets are buying more, paying more, raising the cost for those who can’t afford it, while shrinking supply.

Higher prices for food will produce more. The market left to its natural course will heal higher food prices with higher prices. That is the way the market works.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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