Thinking of Investing in the futures market??

The world has been obsessed with oil prices. That’s as it should be, but it is clearly time to make room for an additional obsession. Corn prices closed above $7 a bushel Wednesday for the first time. The reason was that unusually wet weather damaged the American crop, and U.S. corn production was forecast to fall about 10 percent. Declines were expected, but not of this magnitude. Corn has risen 75 percent in the past year, while rice, wheat and soybeans also reached records.
There have been many theories about the reasons for oil price rises, ranging from the price of the dollar to conspiracies among speculators. The problem with these theories is that while they might explain oil, they do not explain commodity prices. The price of corn has risen not because there are speculators — although there surely are — but because of crop damage (among other factors).
What we are facing are dramatic increases in the prices of strategic commodities. A strategic commodity is one that is indispensable for a society in the short term. There are many commodities that we can substitute readily or do without. There are many commodities that we can put off using. But there are some commodities that are indispensable. Food is obviously the first strategic commodity, with grains constituting the foundation of all other foods save seafood. Oil is strategic but secondary. You can last without food for a few days, but you can manage without oil for a few weeks. Still, in the end, lack of either can wreck a society — or a life, for that matter.
The increase in oil prices has been orderly. You can buy all the gasoline you want if you are prepared to pay the price. Grain markets have been disorderly. Countries that normally export grains have banned their export. Some have placed export tariffs on grains. This has not yet become widespread, but we have seen the beginning of government interventions in these markets. Those nations that have food supplies have started holding on to them, hoarding them. Those that import food have had to scramble on the world markets to buy them. As countries increase barriers to export, the amount of grain and food available on the international markets decreases, raising prices even higher.
Food is not a commodity that governments can afford to play games with. The Bible recounts, in the Book of Genesis, how Joseph became the grain broker for the Pharaoh, stockpiling grain in the seven good years in anticipation of the seven lean years. Joseph originated agribusiness on behalf of the Egyptian government. The Egyptian government had to protect the country against famine in order to avoid an uprising driven by hunger. But the Egyptian government also used its dominant position in the grain markets to purchase vast amounts of land and enrich the state.
We are clearly moving into a lean period. Governments of countries that have surplus grain supplies are going to intervene in the markets to prevent famine — and inflation — at home. In the course of doing that, governments will be able to increase their domestic power by managing food distribution. A crisis of this sort will create a worldwide tendency to increase the power of the state. In a food crisis, the public expects the state to intervene on their behalf, and states will do just that.
This of course leaves countries that depend on food imports, or that are not efficient at controlling food exports, in a position where citizens can be priced out of certain products or, in extremis, find themselves facing malnutrition and starvation. The issue will not be the global availability of food. It will be the availability of food after governments have drawn supplies off the market to guarantee politically acceptable domestic food prices. In a truly extreme case, the logical recourse of the desperate is war.
This is not to say that prices have risen to that level. It is simply to point out that apart from the pressure it places on inflation in advanced industrial countries, the price increase, if it continues and sustains itself, can lead to global and regional chaos. It can certainly change the global balance. If we want to look at the beginning of the fall of the Soviet Union, it was really in the 1970s, when Soviet agriculture had a series of failures that forced the Soviets to buy grain on the global market. In due course, the United States took control of sales of grain to the Soviets and used those sales as an early lever to pressure Moscow.
A 10 percent corn crop failure on top of rising prices in all grains is not itself a catastrophe. But even more than oil prices, further pressure in this area can result in unexpected social and political ruptures within and between nations. We are not there yet, but a couple more shoves like we saw Wednesday might just get us there.