Specifically, dynamics have changed because securitized commodity-linked instruments are now considered an investment rather than risk management tools. Of late, this has been causing a self-perpetuating feedback loop of ever higher prices.
That means a bubble. Back to Frankfurter:
In a statement to the CFTC, Tom Buis, president of National Farmers Union, testified, "If (farmers) can't market their crops at these higher prices, we've got a train wreck coming that's going to be greater than anything we've ever seen in agriculture." Billy Dunavant, head of cotton merchant Dunavant Enterprises, was more blunt, "The market is broken, it's out of whack-someone has to step in and give some relief."
"The system is really beginning to break down," Mr. Grieder said. "When you see elevators start pulling their bids for your crop, that tells me we've got a real problem."
"I can't honestly sit here and tell you who is determining the price of grain," said Christopher Hausman, a farmer in Pesotum, Ill. "I've lost confidence in the Chicago Board of Trade."
David D. Lehman, director of commodity research and product development for the C.B.O.T.'s owner, the CME Group, said: "We know that the current global environment is creating challenges for many of the traditional users of our markets, and we are very concerned. But there are a lot of things that are changing and there is no silver bullet, in terms of a solution."
Mr. Fletcher does not blame the big institutional investors stampeding into the market. "But they have contributed to the problem by making these markets so much larger - so large that they have outgrown their delivery system," he said. "And that has detached the futures market from the cash market."
Unfortunately, this thinking is a self-fulfilling prophecy which ultimately may feed into a negative economic cycle where legitimate commercials are squeezed out of business thereby reducing supply, protectionism gains traction, trade breaks down, hoarding ensues, riots occur and wars erupt over access.
This may sound alarmist, but industry insiders are not buying into the one-size fits all answer that emerging economies are the primary factor driving up prices from the demand side, reinforced by supply-side shocks and peak production fears. In a slowing global economy hit by a major credit crisis and reeling from a falling dollar, it is likely that money flows seeking safe haven in hard assets is the key driver of recent volatility…..
Read that last sentence over. "In a slowing global economy…reeling from a falling dollar, it is likely that money flows seeking safe haven in hard assets is the key driver of recent volatility."
This means the world at large began adopting an "anything but dollars" policy back in 2008, and that same policy is reemerging with a vengeance in 2010 as QE2 gets underway. Tim Duy's suspicions appear to be spot on, this is beginning to feel like the beginning of a disorderly mess. From Duy again:
"The time may finally be at hand when the imbalances created by Bretton Woods 2 now tear the system asunder. The collapse is coming via an unexpected channel; a blast of stimulus from the US Federal Reserve. And at the moment, the collapse looks likely to turn disorderly quickly. If the Federal Reserve is committed to quantitative easing, there is no way for the rest of the world to stop to flow of dollars that is already emanating from the US."
More on this topic is addressed by Marshall Auerbach: