Tags: Newman | commodities | trade | invest

Expert Explains Food and Finance

By    |   Friday, 03 January 2014 06:36 AM

Culinary journalist Kara Newman spoke recently at the World Bank in Washington about her book titled The Secret Financial Life of Food: From Commodities Markets to Supermarkets.

In her introductory remarks, Newman stressed that she is not an economist, but rather had found this topic by beginning on the equities beat and gradually migrating toward food, focusing on commodities when the famed investor Jim Rogers recommended that investors "buy breakfast," which at the time meant orange juice and pork bellies, although the latter are no longer traded.

She proceeded to examine the elements of a hamburger and their trading on exchanges.

By way of background, Newman traced the development of commodities markets to advances in communications technology, which enabled prices to be transmitted rapidly from markets to investors and speculators; advances in transportation, which enabled commodities to be brought to market in good condition; and to an outbreak of anthrax in Britain, which led to a spike in demand for U.S. beef and to the advent of corn-fattened livestock in response to British taste.

Newman built her presentation around five "secrets" that she identified in the course of her work. Readers may have to concentrate very carefully in order to discern these ideas:

1. Volatility. Which commodities are traded on the now-merged Chicago Mercantile Exchange and Chicago Board of Trade, now known as the CME Group, is determined by whether there is enough price volatility to attract hedgers and speculators.

2. Prices affect planting. Farmers look to commodities prices as signals as to whether to plant their fields, for example, in corn or soybeans.

3. Prices affect protein choices. Since cattle eat corn and chickens eat soybeans, the prices of what the animals eat will affect which animals are raised.

4. Price discovery. For traded commodities, over a period of a year or so, commodities markets enable producers to hedge, in order to smooth prices and reduce risk.

5. Direct purchase. A movement has developed in recent years to purchase commodities locally in order to avoid middlemen and gain control over product quality.

The narrative was spiced by a reference to a scandal that broke the same weekend as the assassination of JFK, when Tino de Angeles, the self-proclaimed "salad oil king" from New Jersey, was caught swindling investors, including American Express, by rigging his warehouse to make a little salad oil go a long way.

She could have added stories about the cornering of the silver market by the Hunt Brothers in 1979 and 1980 and the electricity overcharges by Enron traders.

An ongoing scandal lies in the indifferent, often-conflicted regulation of the industry by the Commodity Futures Trading Commission, which enabled MF Global, a firm led by former Goldman Sachs CEO, former New Jersey Governor and former Sen. Jon Corzine, D-N.J., to divert the funds of customers to investments in European sovereign debt that was highly rated by the same firms whose bogus ratings caused huge losses to investors in mortgage-backed securities in 2008. The piecemeal measures the Commission has adopted still fail to ensure full segregation of funds.

(Archived video can be found here.)

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Culinary journalist Kara Newman spoke recently at the World Bank in Washington about her book titled The Secret Financial Life of Food: From Commodities Markets to Supermarkets.
Friday, 03 January 2014 06:36 AM
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