Bread & Houses
The price of one is up and the other is down. What do they have in common?
Much has been written about the housing market (with particular emphasis on my soon-to-be home base in California)—the subprime market, interest-only loans, predatory lending, zero down programs, etc. One of the factors that hasn’t taken its proper share of the blame is the practice of selling mortgages in large bundles on securities markets. In the past, a bank would offer mortgages (including subprime loans) according to procedures that would minimize the risk to their investments. Lenders then had a vested interest in making mostly good loans and fewer risky ones because they intended to hold the note for the life of the loan (the premise behind hometown banking, in the age before multinational banks). With the practice of selling off large lots of loans to hungry speculators, many lenders became less than diligent about making loans to qualified buyers (after all, what happens after the loans are sold doesn't affect the originator). When more money is available for riskier and riskier loan seekers, the prices in a market get inflated, as there is more money flooded into the system. When these mortgages go into default, the lenders that made the original loans aren’t left holding the bag, but people lose their homes and the market becomes glutted with foreclosures, driving down prices as quickly as they inflated.
But what does this have to do with the cost of bread? Wheat has suffered from a run up in price, as much as 45% year to date. The devastating Australian drought, most assuredly one of the many climate change-based challenges facing contemporary agriculture, has a lot to do with it, as does the increased interest in corn for ethanol production. These factors are important, and seem to get a good deal of press. However, the commodities markets and commodities speculators have a huge, if underreported, role in this as well-- just like in the real estate market. On the heels of the challenges faced by a dwindling wheat crop, commodities speculators have made a run on wheat, driving up the prices.
Much has been written about the housing market (with particular emphasis on my soon-to-be home base in California)—the subprime market, interest-only loans, predatory lending, zero down programs, etc. One of the factors that hasn’t taken its proper share of the blame is the practice of selling mortgages in large bundles on securities markets. In the past, a bank would offer mortgages (including subprime loans) according to procedures that would minimize the risk to their investments. Lenders then had a vested interest in making mostly good loans and fewer risky ones because they intended to hold the note for the life of the loan (the premise behind hometown banking, in the age before multinational banks). With the practice of selling off large lots of loans to hungry speculators, many lenders became less than diligent about making loans to qualified buyers (after all, what happens after the loans are sold doesn't affect the originator). When more money is available for riskier and riskier loan seekers, the prices in a market get inflated, as there is more money flooded into the system. When these mortgages go into default, the lenders that made the original loans aren’t left holding the bag, but people lose their homes and the market becomes glutted with foreclosures, driving down prices as quickly as they inflated.
But what does this have to do with the cost of bread? Wheat has suffered from a run up in price, as much as 45% year to date. The devastating Australian drought, most assuredly one of the many climate change-based challenges facing contemporary agriculture, has a lot to do with it, as does the increased interest in corn for ethanol production. These factors are important, and seem to get a good deal of press. However, the commodities markets and commodities speculators have a huge, if underreported, role in this as well-- just like in the real estate market. On the heels of the challenges faced by a dwindling wheat crop, commodities speculators have made a run on wheat, driving up the prices.
Washington Post writer Anthony Faiola has a very good article on rising food prices and their effects on the global community, in which he provides a min-history of the run on wheat in the commodities market (which has part of its impetus in the credit crisis):
Investors fleeing Wall Street's mortgage-related strife plowed hundreds of millions of dollars into grain futures, driving prices up even more. With fewer places to turn, and tempted by the weaker dollar, nations staged a run on the American wheat harvest.
Foreign buyers, who typically seek to purchase one or two months' supply of wheat at a time, suddenly began to stockpile. They put in orders on U.S. grain exchanges two to three times larger than normal as food riots began to erupt worldwide. This led major domestic U.S. mills to jump into the fray with their own massive orders, fearing that there would soon be no wheat left at any price.
It is time to take a long, hard, and heinously overdue look at how easy it is for a handful of wealthy and powerful investors to manipulate the prices of basic necessities—in these cases, food and housing. Needless to say, increased regulation would go a long way to insure sanity and long term stability in these essential markets (we are already seeing the worldwide chain-reaction of economic consequences from the credit/housing market bubble). As the clock winds down on the 2008 Farm Bill, I seriously doubt any kind of real reform will happen-- the message from the government on food prices has heretofore been something along the line of "let's wait and see what happens"-- waiting for a market correction that may or may not happen. What is certain, however, is that global agriculture is changing, and increased demand on farmland, population growth, and climate change are poised to fundamentally change how we get our food. Government has to be able to address these issues with some progressive forethought. Until that happens, we all are at the mercy of a powerful few-- and the hardest hit victims are those in developing countries. To quote Faiola quoting French Agriculture Minister Michel Barnier, “We must not leave the vital issue of feeding people to the mercy of market laws and international speculation.”
Well said, sir.
(Wheat is a truly beautiful plant)
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