NY Times attack by innuendo: Commodity price speculation edition

I've written a few times [e.g., 1, 2, 3, ] about commodity price speculation, arguing that speculation hasn't been the cause of volatility in recent years.  My views on this haven't changed, but I'm open to new arguments for why I and legions of other economists might be wrong. 

Overall, I haven't found this topic to be a very interesting, because those arguing that Wall Street caused the food price crisis, or caused oil prices to spike, really haven't presented any kind of logical argument.  All they do is point to the fact that Wall Street has gotten into the commodity game more than they have in the past.  But this isn't news and it falls far short of an explanation for how their trading activities are affecting prices. I haven't seen a serious study claiming a link, only magazine articles and opinion pieces, all thin on substance.  Professionally, I don't see this as interesting work.  This review lays things out pretty clearly.

I've been waiting for this issue to die.  But it seems there are political winds that won't let it.  Yesterday the New York Times came out with a new attack on academics, particularly Craig Pirrong and Scott Irwin.  These guys have been doing some consulting work, mainly for oil companies and the Chicago Mercantile Exchange.  These companies have also been giving money to their universities.  The documentary Inside Job is referenced (a great movie, by the way).  

There is a lot of innuendo in the story, and I do feel uncomfortable about academic economists getting cushy consulting contracts with big trading companies.  Still, the scale of what's mentioned seems tame relative to the kind of consulting gigs that seem commonplace in the economics realm of academia, or even the levels of corporate cash given to universities. 

The story is most notable for what it lacks: how, exactly, are the various companies distorting markets in a way that hurts consumers and or producers?  Inside Job describes the shady business of securities backed by stated-income mortgages, how Goldman Sachs was shorting the products it was selling to clients, etc.  We can see that there were shady business dealings and how they probably helped to fuel the real estate bubble.  So, where's the real underlying story in commodity market trading?

I don't think this story measures up to the New York Times' standard.  It's sad, because there might actually be a story here, but it would require a lot more legwork by Kocieniewski   That story, however, is probably a bit less salacious than what Kocieniewski was shooting for. My guess (I welcome challenges--I'm not sure about this) is that the  real story is a battle between old-school commodity groups (ADM, Cargill, and other so-called "majors" that both speculate and store commodities) and new competition from Wall Street, like JP Morgan Chase and Goldman Sachs.  I would further guess that some of the strangeness in commodity prices over recent years, like futures prices sometimes not converging to spot prices, is partly a refection of this changing marketplace.  Note, however, that the "strangeness" in pricing of which I speak has basically zero relevance to producer and consumer prices.  

My vague sense is that incompleteness in these markets---the fact that future contracts are only for certain months and certain delivery dates---procures a special advantage to the majors who control inventories at delivery points.  I'd further guess that Wall Street players are getting into commodities partly for diversification, and partly because they figure they can skim some the rents earned by the commodity players. 

Anyhow, I don't have all the details figured out.  It's something I started to pencil out once, but, like I said, I don't see this as especially useful for larger-scale questions about supply and demand, policy, climate change, etc. So I figure I've got better things to do.  

For the record, I've never had a consulting contract with commodity group or Wall Street firm.


  1. Not up to NYT standards? Anyone who confuses the Bank of Canada with a bank should not even be writing.

  2. While the review article may be right about the oil market in 2003-2008, the vast majority of literature on commodity market dynamics finds nearly all of them to have far more volatility in prices than can be explained by fundamentals. Whether or not this volatility reflects speculation or is harmful is another matter and unresolved.

    Barkley Rosser

  3. Barkley: Citations please?

    It's a bit beside the point, but it's easy for me to see how fundamentals could cause a lot of variability. For one, commodity demand is very inelastic, especially in the short run. Two, most of the literature I've seen assumes interest rates are constant. Taking volatility in the macroeconomy into account, and latent uncertainties about fundamentals (e.g., what might happen in the Middle East, or with technological advance?), makes it easy to see how volatile prices might be.

    Of course, none of this necessarily connects Wall Street to commodity prices.


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