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Speculation and Criminal Manipulation of Food and Commodities Prices

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Lambert Stether blogs at Corrente.

Yet another market where the rule of law doesn’t apply. Check out the video from RNN:

From the transcript:

MICHAEL GREENBERGER, UNIVERSITY OF MARYLAND SCHOOL OF LAW: But there’s another problem here, and that is some of these participants—and I’m not saying who they are, but I’m sure there are enough there doing this that they are adversely affecting the price—are actually not just swamping the markets with investments, but they’re working with each other to drive the price up. That is a criminal problem. That is called criminal manipulation of the price. And that is why the president of the United States has now twice asked the Justice Department, once in April 2011 and once in March 2012, to please, please investigate these markets to see if there is criminal wrongdoing.

We had one remedial process fail by Wall Street lobbying, and that is limiting speculation to a reasonable part of the market. And the second part is failing because of prosecutorial laxity, which is going after people who are criminally working with each other to drive the price up. And the quickest way—within a matter of weeks, if there were a serious investigation undertaken, if the FBI was called in, if records were subpoenaed, if market participants were interviewed and the Justice Department at least gave an indication, as they did when they went after the Enron conspirators in the early 2000s, that they were serious about this, just the appearance of a serious investigation would cause the criminal speculators to scatter like cockroaches scatter when lights are turned on.

Hahahaha. Like a “serious investigation would ever happen.” This is Obama we’re talking about.

* * *

See also “The Food Bubble” back in 2010:

[Goldman et al.] kept on buying and buying and buying and buying and accumulating this unprecedented, this historically unprecedented pile of long-only wheat futures. And this accumulation created a very odd phenomenon in the market. It’s called a “demand shock.” Usually prices go up because supply is low, right? That’s the idea. There’s not a lot of supply, so the price goes up. In this case, Goldman and the other banks had introduced this completely unnatural and artificial demand to buy wheat, and that then set the price up. … Let me tell you, hard red wheat generally trades between $3 and $6 per sixty-pound bushel. It went up to $12, then $15, then $18. Then it broke $20. And on February 25th, 2008, hard red spring futures settled at $25 per bushel. This is completely beyond the pale, particularly at a —-

JUAN GONZALEZ: Almost ten times its historic price.

FREDERICK KAUFMAN: Yeah. It was just completely out of control. And, of course, the irony here is that in 2008, it was the greatest wheat-producing year in world history. The world produced more wheat in 2008 than ever before. … [Eliding material about "replication."]

JUAN GONZALEZ: And the result was, as the price went up, that there were food riots around the world.

FREDERICK KAUFMAN: Yeah.

JUAN GONZALEZ: And what about the human dislocation that occurred?

FREDERICK KAUFMAN: Yeah, in 2008, there were food riots in more than thirty countries. The global price of food rose over 80 percent. This had an effect not only on wheat, but on corn, on soy, on cooking oil, on rice. You know, people talk about globalization. “We don’t need to set prices or have tariffs, because we’re globalized. You know, people can buy their wheat, anyway.” Well, gee, guess what happened. … You had hunger. You had a disaster. You had a global disaster, because, remember, in America, we’re spending maybe 15 percent of our weekly paycheck on food, right? I mean, maybe you remember, a couple years ago, why was that dozen eggs so expensive? Why was that milk so expensive? Why was that meat so expensive? That’s 15 percent. For most people on the earth, they’re spending more than 50 percent of their daily income on their daily bread. And when their daily bread moves up 80 percent, they’ve just moved right into the ranks of the food insecure. And it was not only in Burkina Faso. This was in America. You had 49 million hungry families in America. You had one out of five children in America at soup kitchens. You had a million hungry people in Los Angeles.

So, I mean, it is unconscionable that Wall Street has completely lost touch with the reality. They’ve forgotten that there is their mathematical formula, there’s virtuality, on the one hand — “Gee, I can make a lot of money by making a formula” — and on the other hand, there’s reality. There are real things that they are affecting, and they’ve completely forgotten about it, to devastating effect.

Forgotten? Did they ever know?

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44 comments

  1. jake chase

    While the “real” economy has been flattened because banks “aren’t lending”, there is unlimited bank credit for hedge fund speculation: stocks, commodities, takeovers, choice “public” assets extracted by austerity. All of this credit oozes out of Bernanke’s Fed. He may look like a harmless little mouse, but finance ain’t beanbag.

    1. Rcoutme

      Banks are lending, you just have to not need the money. If you need it, then they think you are a bad risk.

    2. nonclassical

      this is what Wall $treet desired all those “securitized mortgages” for-leverage=collateral to borrow, to monopolize-
      manipulate-speculate world commodities and derivatives markets…

      this is the reason (along with bushbama quantitative easing)
      for quadrupling prices of energy (bushcheney), wheat, rice, etc…

      what goes unnoticed is quite literally starvation=result of.
      U.S. media is complicit, downplaying documentation of…

    3. Carla

      Lambert says “Hahahaha. Like a “serious investigation would ever happen.” This is Obama we’re talking about.”

      I say “QUISLING. OBAMA IS A QUISLING.” Perhaps many others have said it first, but I haven’t heard it.

      Those of you not old enough to get it can just look it up.

  2. backwardsevolution

    Excellent article! Could it get any more crooked and disgusting? Obama, Holder, they chose you well. Two clowns dressed in suits who move their lips when the strings are pulled.

    And to add insult to injury, here comes the JOBS bill:

    “One of the businesses of Wall Street in the 1980s was the “bucket shop;” firms with networks of stockbrokers who defrauded senior citizens with phony stories about the businesses and prospects of the companies whose stocks they were selling. The companies for the most part existed only on paper, but they were legally registered with the SEC (Securities and Exchange Commission) leaving gullible and / or desperate “investors” with the impression that they were legally sanctioned by the government and therefore legitimate. And in fact, this business model moved to the mainstream of Wall Street in the tech bubble of the late 1990s and was only temporarily shut down with threats of prison terms.”

    http://www.counterpunch.org/2012/04/13/let-them-eat-money/

    1. jake chase

      Technically, these were not ‘bucket shops’,they were ‘boiler rooms’. A bucket shop is a firm that accepts customer orders but does not fill them. It ‘buckets’ the orders, waiting for a lower price, making not only a commission but a profit on the customer order. Of course, if the stock goes up, the bucket shop has a loss, although traditionally they often just disappeared with all the money.

      The SEC thought it was putting boiler rooms out of business with its Penny Stock Reform Act (1990), which made it unlawful for brokers to “retail” stocks priced at under $5. What resulted was several ‘mega boiler rooms’ which took the penny stock model to the world of $5 stocks. One such firm, based on Long Island, made over $100 million before being shut down in 1995. All the profits came from customer losses, although I believe one of the stocks actually became a successful company. It makes young women’s shoes. I believe the founder went to prison for stock fraud.
      The movie, Boiler Room, was a pretty good representation of that ‘financial services’ industry.

    2. Jack Lohman

      The profits are shared with the politicians, so don’t even go there. Until we get public funding of campaigns. And that won’t happen until we see a 100% turnover in November. Or a deadly rebellion.

  3. F. Beard

    “[Goldman et al.] kept on buying and buying and buying and buying and accumulating this unprecedented, this historically unprecedented pile of long-only wheat futures.” from http://www.democracynow.org/2010/7/16/the_food_bubble_how_wall_street

    Doing God’s work?

    He who withholds grain, the people will curse him, but blessing will be on the head of him who sells it. Proverbs 11:26

    Question?

    How much of this speculation was financed with counterfeit money otherwise known as “credit”? And how much did the rise in prices serve as the basis for even more credit extension ala George Soros’s “reflexivity?”

    It all goes back to the counterfeiting cartel, the means by which the rich steal the poor’s purchasing power.

    1. MB

      Since 2005, I have avidly watched the financial shows (CNBC, Cramer, then FAst Money then Options Action on fridays (which is now being introduced into Fast Money. When 2008 hit, you could see the trending (particularly with Fast Money Hedge traders) of where the “fast money” would be going, and when the “trade” was getting tired, or where the “rotation” was going. In aggregate, all aspects were discussed. About a year ago, I really tuned into the middle of the night coverage from Europe, and you can see it all unfold, like a rolling event, from Europe to US to Asia.

      The trends are announced: when the crisis hit, the money flocked to corporate lending and securities (not common stock, when money supply was being exponentially expanded, the traders set to the equities market, when the dollar was in the tank, it was gold and commodities and metals. The world markets and “rotation” is just seasonality. To everything, there is a season, isn’t there? Early in, early out – take your gains. The laggards and non-trend establishers are usually left holding the bag at the end.

      When unexpected “shocks” and anxiety occurred, the trade was the VIX – the volatility index. If you can’t make money on the actual products, make money on the uncertainly and anxiety, like a bookie betting on anything and everything – like in central america – will the chicken poop in the right square? So funny.

      ETFs, another “play”. The funds that allow you in and out like regular stocks with programmed trades, and the more levered up, the better. Levered up meaning multiples of gains if you win, ditto if you lose. Perfect for Hedgies. And if you know how to actually manipulate the street (and those watching the trading blocks at the larger firms can watch it and KNOW what’s going on), then you can step out of the way, or cancel your trade. This is all aside from the actual opaque manipulations that set up the unsuspecting market participants – the black box work by larger firms such as GS, etc.

      In options, you can make money “playing” the spread, i.e. betting on the spread – but you make your own spread and can hedge yourself if it goes with you or against you, if you know how to do it. And that each market, whether equities, Bonds, Currencies and PMs (precious metals) and now Rare Earths, there are always two sides to the trade and many machinations to each side. Until I studied this over time it was all opaque. And much more casino than strategic store of wealth for growth and value. Why did I start this rant? Because when I see the “rotation” into commodities: food, energy, etc., and then subsequently to fertilizers for crop season, etc., you know that inflation is the end result. And starvation. And the casino for money will result in starvation for many. And it’s devastating in ways that the casino participants cannot comprehend, because they don’t connect their behavior with suffering in the world.

      1. nonclassical

        of course those who followed “deregulatory legislation” could evaluate along the way…

        final straw for us was credit card co. lobbyists writing new bankruptcy laws…

        who didn’t know by then-from this one whole helluva lot of ameriKans (“K-Street”) were going to go bankrupt…?

      2. Carla

        @MB: re: starvation.

        We knew this was coming as soon as Wal-Mart put their emphasis on food.

  4. F. Beard

    But hey, what can the poor do? It’s not like oppressing them is dangerous, is it?

    “You shall not wrong a stranger or oppress him, for you were strangers in the land of Egypt. You shall not afflict any widow or orphan. If you afflict him at all, and if he does cry out to Me, I will surely hear his cry; and My anger will be kindled, and I will kill you with the sword, and your wives shall become widows and your children fatherless. Exodus 22:21-24 New American Standard Bible (NASB) [bold added]

    1. kris

      F.Beard
      I have no problem with Goldman. They do not use “loan loss” accounting and do not handle retail money. If they go under, ti’s just them and super wealthy people’s money who must be aware of their investment.
      However, JPM and BAC are a disgrace. They not only do not care for simple people’s money, but they consider simple people as really, really unworthy to be humans.

      1. F. Beard

        However, JPM and BAC are a disgrace. kris

        Speaking of JP Morgan:

        In the early days of the American Civil War Morgan financed a scheme, known as the “Hall Carbine Affair”, that purchased 5,000 dangerously defective Hall’s Carbines being liquidated by the U.S. Government at a cost of $3.50 each. The rifles were later resold to the government as new carbines lacking the safety flaw at a cost of $22. The audacity of the scheme included not only the $92,426 loss by the government and the selling of weapons known to maim their operators to an army in need of firearms, but the guns were also sold prior to ownership, thus the guns were paid for with money from their sale back to the government. Some authors have suggested that Morgan was somehow unaware that the guns were being resold, however scholarly opinion regards this as “implausible”.[3] from http://en.wikipedia.org/wiki/J._P._Morgan

  5. Sleeper

    Please let’s not ever wish for the Department of Justice or the federal law enforcement including the FBI to get involved.

    That these entities exist as some incorruptible. unbiased law enforcement is a myth left over from the Hoover years.

    Federal law enforcement actually acts as a political secret police whose real aim is to keep the populace dumb and happy.

    Note that in recent years these guys routinely use agents to provoke incidents of “terrorism” of “hate groups” of
    “far right or far left militia groups”.

    These always follow the same pattern – federal charges against some small outspoken group followed titillating details often of a sexual nature all reported in breathless detail by a fawning press.

    And note that the feds are more than willing to share the details in these case while in others particularly where there is a perceived need to protect “sources” the answer is always “we never comment on ongoing investigations”. some cases particularly civil rights cases the feds allow cases to remain “open” for decades.

    These guys are not knights in shining armor but rather mindless hacks.

    So what can we do ?

    Here’s a short list of items that might help.

    1) Vote
    2) Move your money
    3) Read the news from everywhere BBC, Al Jezera, Tokyo News
    4) Pursue your dreams regardless

    1. pws

      Well, sure, “Justice,” “The Rule of Law,” these are not reasons why the Justice Department would go into action.

      Political Self-Interest, though? Do these people actually want to win re-election?

      1. nonclassical

        …old union friend=late 80′s always assures union members vote is not so important as who COUNTS the vote…

        object lesson-Sequoia electronic voting machines counted recent florida election…3 elected officials were later found to have actually lost election, and were replaced.

        Response to mistake? No more hand counts…Wisconsin Scott Walker recall will be determined by Sequoia voting machines..

        if that isn’t enough detail, view “FREE FOR ALL”-Video the Vote on Ohio “vote shunting”-Michael Connel=Cheney’s I.T. man…whereby votes from entire precincts were “shunted” electronically to Tennessee basement to be tabulated, then “shunted” back to Ohio…

        1. Observer

          Democracy-shemocracy! All that vote counting and shunting is too much work – so “yesterday.” Do like Michigan does – simply appoint an “Emergency Manager.” You can then conveniently ignore the entire elected school board, city council or/and county commission and do whatever you want.

      2. Lambert Strether Post author

        Not necessarily. They can always duck into K Street, make a lot of money, and win the next election.

        They want to “win” elections in the sense that a good actor wants to read their lines well and milk the applause, but when this show closes, there will be another one.

        The dogs bark, and the caravan moves on.

  6. Elliot

    Speculation in commodities generally speaking is a huge problem, and even more so considering our government subsidizes it. Yep, that’s right, our government subsidizes commodities speculation. Even if it’s short-term, the tax rate is a blend of long-term and short-term capital gains, which results in an effective rate lower than general income. Just disgusting. Meanwhile people complain about carried interest (which is bad), but no one knows about the speculation subsidy that does even more societal damage.

    http://compoundingmyinterests.com/compounding-the-blog/2012/4/6/why-subsidize-speculation-in-commodities.html

    1. kris

      Wow, wow, wow.
      There are tax breaks for derivative gambling?
      Speechless….
      It will take me few days to get over this. Thx a lot.

  7. Schofield

    It’s not complicated the traditional two political parties now “run interference on democracy” for the corporations and the 1%.

  8. Cynthia

    Oil speculators are are playing a big role in driving up oil prices, but they wouldn’t be doing this if our major banks, the ones that have direct access to the Federal Reserve’s Discount Window, weren’t able to borrow money from the Fed as zero cost to them.

    Believe me, if the Federal Reserve were to suddenly raise short-term rates, even if it were only by a fraction of a percent, oil prices, including most other commodity prices, would drop like a rock. The stock market is also benefiting from an zero interest rate environment, which explains why stocks are on an upward tear, while earnings are still pretty sluggish.

    The only people who are being harmed by the Fed’s zero interest rate policy (ZIRP), besides those who have to work for a living and those who have to spend a large percentage of their earnings on food and fuel, are people like myself who are savers and who are risk-averse investors. I am very upset by this, and now you can see why.

    Again, let me reiterate that the primary driver of high oil prices isn’t the speculators, but it’s the Fed. So why are our politicians and media pundits hiding this truth from us? Why do they remain steadfast in pointing the finger of blame at the oil speculators, instead of at the Fed? It’s because they are being paid by Wall Street financiers to peddle the lie about how the greedy and evil oil speculators are driving up oil prices. That way the Fed is given carte blanche to print money like mad in order to artificially propping up the Wall Street economy, which, by the way, has totally divested itself from the Main Street economy. It goes without saying that corporate earnings and market fundamentals are much too weak to explain the ridiculous run up in stock and commodity prices.

    The Bears do a much better job at explaining what I just said:

    http://www.youtube.com/watch?feature=player_embedded&v=40hNSJEKUgo

    1. McKillop

      Why do you write as if you believe “the Fed”, and the speculators are not in cahoots?
      Why do people insist on believing that the people who are “our” governors are foolish dolts rather than malicious knaves?

  9. Deloss Brown

    I find it hard to believe that readers of NC would subscribe to the “wicked speculator” theory. Have you all heard of “global warming”? It’s real. Did you read about the drought in Texas? The crop failure in Ukraine? On the CME, Nov soybeans are at $13.62, TWICE what would have been an excellent price four years ago. Dec corn is at $5.37, $2 above what would have been a great price four years ago. Corn in China is at $9.77. Are farmers selling at these wonderful prices? Nope, we are not. We got burned two years ago when it didn’t rain, and while we like these prices, we are waiting, standing around staring up at the sky. IMHO it would be an excellent idea to vote for candidates who believe in science, and all the Republicans have sworn not to.

    1. Lambert Strether Post author

      Why are global warming and wicked speculators mutually incompatible? I would think they reinforce each other. Traders correct me, but I would think the wild swings that come from global warming would increase the opportunities for speculation, and not decrease them.

      1. Deloss Brown

        Yes, global warming increases the opportunity for speculation. Wild swings are speculation opportunities. But speculation, in fact, is probably driving the price of grain down this month, because in Chicago they think that planting a new crop (as we just did) ensures a big supply in November, ending the current shortages. We’re holding on to last year’s crop. My point, tediously expounded, is that unless we do something about global warming, it won’t matter to anyone what speculators do. As Carly Fiorina so succinctly put it, we are “worrying about the weather.”

    2. falun bong

      Deloss, please get a clue. If you follow this link you or I are easily able to trade crude oil, even though neither of us produce any oil, own any oil we want to hedge, and neither of us has any intention of taking delivery of any oil. These lifeblood commodities, like wheat and rice and cooking oil, should not be subjected to our selfish desire to make money through their price movements.
      https://www.cannontrading.com/futures-market-crude-oil-futures.php

  10. Hugh

    Michael Greenberger has been talking about this kind of excessive speculation for a long time. He was an established expert on this when I started writing about it some 5 years ago. But I would think by now just from all the time this has been going on, he would realize that the fix is in, Democratic or Republican Administration, it doesn’t matter.

    I don’t know that much about other commodities markets but with oil this began back in 1993 when non-commercial speculators like Goldman through its subsidiary J Aron were given access to the oil futures markets by the CFTC. Then in 2000 Phil Gramm inserted the Enron exception into the infamous Commodity Futures Modernization Act. This deregulated the over the counter (OTC) markets in oil, essentially rendering them opaque and easy to use for manipulation. Price manipulation in oil futures became really obvious from 2004 onwards. You only have to look at futures prices and how they don’t track with crises or supply-demand issues, that is they might increase in anticipation of a shock but then they don’t return to baseline after the event has passed. The Senate Agriculture Committee which has oversight for derivatives put out a report on this back in 2006, two years before the 2008 spike in oil. So this isn’t a case of nobody could have known. This has been going on for years aided and abetted by Congresses and Presidents of both parties. Nor should we be surprised that so little is being done now. The current head of the CFTC is Gary Gensler who worked at Goldman for 18 years.

  11. wunsacon

    Tax the rich (to remove liquidity and thereby increase my buying power) or pay me interest on my cash. Otherwise, I’ll buy more wheat futures!

    I do not want to buy an overpriced house. Liquidity-fueled idiot buyers — in response to encouragement from our FIRE-sector overlords — have priced me out of that market.

    I do not want to buy an overpriced stock. Liquidity-fueled hedge funds have priced me out of that market.

    I do not want to buy bonds. They’ll pay me back in small fixed cash increments. That’s a problem because…

    I do not want to hold cash. Not while food, gas, education, health care, stocks, bonds, and homes rise in price.

    So, tax the rich (to remove liquidity and thereby increase my buying power) or pay me interest on my cash. Otherwise, I’ll buy more wheat futures!

    1. wunsacon

      “Those who don’t borrow from the counterfeiting cartel are priced out of the market by those who do borrow from the cartel.”

      - F. Beard

    2. abprosper

      No one is entitled to usury or any other form of interest payment or to earn from speculation at the publics expense. It may be legal but its at best amoral and its bad policy to boot

      As far as I am concerned almost all the speculative markets ought to be closed and if people holding cash want to make money they should be pushed to do something useful with it that increases real wealth not pushes around inflated money.

    1. financial matters

      http://www.atimes.com/atimes/Global_Economy/MG27Dj02.html

      A very secret agent
      By Chris Cook

      7/27/11

      There is a charade playing out in Washington at the moment in respect of the completely meaningless “debt ceiling” which the US maintains as a relic from the days of the gold standard.

      Congressman Sean Duffy: We had talked about the QE2 with [congressman] Dr [Ron] Paul. When – when you buy assets, where does that money come from?

      Ben Bernanke: We create reserves in the banking system which are just held with the Fed. It does not go out into the public.

      Duff: Does it come from tax dollars, though, to buy those assets?

      Bernanke: It does not.

      Duffy: Are you basically printing money to buy those assets?

      Bernanke: We’re not printing money. We’re creating reserves in the banking system.

      A very secret agent
      Once the truth of the hitherto secret – or at best, completely obscure – agency relationship between the Fed and the Treasury is understood, then the world view changes. The sun of the Treasury does not go around the Earth of the Fed: it is the other way around. The Fed is servant, not master.

      There is no shortage of dollars because every dollar’s worth of productive capacity – public or private; productive people or productive assets – in the US is the capacity to issue a dollar credit, which reflects the increase in the US national wealth which underpins the US national equity.

      President Barack Obama and his government should get busy creating national equity by instructing the Fed to create and issue the necessary finance for the creation of a new generation of US infrastructure; the transition to a low carbon future which the US can, and should, be leading; and in increasing the capacity of the US people to do so.

      Naturally, the financial process of putting the US back on its feet in this way should not be managed by the dead hand of the state, but by the entrepreneurial US private sector with a partnership stake in the outcome, and under the watchful eye of the people’s representatives.

      1. kris

        Sir
        Thx for the link. There’s so much to understand in that article that I’ve placed it separately to study it (not just read it).

      2. kris

        This is absolutely mind blowing as far as describing the system is concerned. I’ve read it 4 times, I think I should read it another 5 or 6 times to stick it into my brain.
        However, as far as solution is concerned:
        “President Barack Obama and his government should get busy creating national equity by instructing the Fed to create and issue the necessary finance for the creation of a new generation of US infrastructure

        Question: Who is going to accept to exchange Real Goods with so much Electronic Credits created by US Gov as far as commodities required to be imported to build all that infrastructure are concerned?

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