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Corn Futures Spark Riots as Speculators Take Trading to Limit
By Ian Katz and Ari Levy




Dec. 15 (Bloomberg) -- Luis Mesalles marks March 10 as the day that changed his
opinion on profiteering and the price of food.
Watching quotes from the Chicago Board of Trade on his Sony Vaio laptop, he says, he
was astonished to see corn futures tumble the maximum allowed 20 cents, then within
four hours rise almost to the limit-up. This wasn‟t good news for La Yema Dorada, the
Costa Rican egg producer Mesalles manages. It needs 8,000 tons of yellow corn a year to
feed the hens.
“Before then, I thought maybe speculation has a role, but I wasn‟t sure,” says Mesalles,
46, as he inspects the grain storage area behind his office in the San Jose suburb of Pavas
in Costa Rica. “But there is no fundamental reason the market can be limit-down and then
limit-up the same day.”
Like food producers everywhere from China to Cameroon, Mesalles has been forced to
adjust his business plans as prices lurch from one extreme to another. The corn futures he
tracks climbed 43 percent between March 10 and June 27 before plummeting 53 percent
in the next five months, to $3.74 on Dec. 12. Price volatility for corn is at its highest since
at least 1999, based on data compiled by Bloomberg, showing that more than supply and
demand is at work, Mesalles says.
Costs and Hunger
“The fact that prices soared and then they came down so much really does suggest that
there was a speculative element to it,” said Jeffrey Sachs, director of the Earth Institute at
Columbia University in New York and a special adviser to United Nations Secretary-
General Ban Ki-moon, in an interview. “They went up also because of strong demand
and also because of the collapse of the world economy.”
The commodities boom earlier this year sent food prices soaring, leading to riots in at
least 34 countries. The Food and Agriculture Organization, a UN agency based in Rome,
said in September that food costs rose 52 percent over the previous year, driving an
additional 75 million into hunger. More people don‟t have enough to eat than at any time
in more than three decades, partly because of the higher prices, the UN said.
Attention shifted away from the food crisis as commodity prices declined amid the
subsequent global credit crunch and economic slowdown. And yet tight credit and
increased costs for seed and fertilizer, as well as rising demand from an expanding global
population, mean the threat of famine isn‟t going away.
Speculators‟ Role Debated
The UN said last week that 963 million of the planet‟s 6.8 billion people are
undernourished.
One ingredient in this recipe for famine has been the volatility in food prices. The role of
speculators has been a focus of debate. Michael Masters, president and founder of the
hedge fund Masters Capital Investments in Atlanta, agrees with Mesalles. He testified
three times before Congress this year, urging lawmakers to impose new regulations on
commodity markets.
“When Wall Street decides that commodities are an asset class, it has a direct
repercussion on the price you pay as a consumer,” Masters, who started his hedge fund
more than 12 years ago, said in an interview.
Doug Hepworth, research director at Gresham Investment Management LLC, a
commodities investing firm in New York, disagrees with that theory. Demand from
expanding economies fueled the price surge and the financial crisis drove them back
down, he said.
Legislation Stalls
“I assert strongly that it was not the investors who pushed the prices up, and I assert just
as strongly that it wasn‟t the investors who pushed the prices down,” said Hepworth,
whose firm was founded in 1992 and manages about $3.5 billion, down more than 50
percent since July. Investors have been selling commodities amid a “nearly
unprecedented liquidity crisis,” he said.
The U.S. House of Representatives approved legislation in September that would limit
speculation on agriculture and energy markets by restricting the positions traders can take
on one side of a bet. The measure also would require foreign exchanges to file daily
reports on trading activities. The Senate didn‟t take up the bill.
The futures markets were designed to allow farmers to determine expected demand for
their produce and hedge against market swings by locking in prices for a period several
months in advance. Speculators, by contrast, have no connection to the actual commodity
and instead invest as they would in stocks, aiming to profit as prices change.
„Posed a Threat‟
“Congress recognized that unlimited speculation posed a threat to the commodities
futures markets” when it passed the Commodity Exchange Act of 1936, Masters said in
his June 23 testimony.
Investors put a record $9.9 billion into funds that track the Dow Jones-AIG Commodity
Index and other baskets of commodities in the first seven months of the year, according
to TrimTabs Investment Research. Assets under management peaked at $42.9 billion on
July 15, the Sausalito, California-based research firm said. Money flows have since
slowed, with an additional $1.9 billion added over the next five months, TrimTabs said.
The Reuters/Jefferies CRB Index of 19 raw materials -- including oil, corn and gold --
jumped 20 percent in the second quarter, the most in 25 years, following a 7.9 percent
increase in the previous three months. Then, as the housing crisis spread, short-term
traders and hedge funds sold positions wherever they could, contributing to a 25 percent
third-quarter plunge in the CRB Index.
$1 a Dozen
“Everybody got out at the same time, and that exacerbated the sell-off,” said Vincent
Deluard, an analyst at TrimTabs.
While the commodities bull market contributed to the global food crisis, the subsequent
decline hasn‟t done much to help corn importers like Mesalles. At $3.74 on Dec. 12,
down from the June 27 peak of $7.99, a bushel of corn is still 67 percent higher than the
$2.24 it averaged from 1959 to 2007.
La Yema Dorada, whose name means “The Golden Yolk,” is still paying 25 percent more
for the grain now than a year ago, Mesalles said. He figures feed accounts for about 35
percent of the retail price of eggs. Production costs are up to about $1 for a dozen eggs
from 66 cents over the past several years, reflecting currency swings, the price of
gasoline and the cost of corn, Mesalles estimated.
Cutbacks in Curridabat
In Curridabat, a working-class town near San Jose, the salesman who hawks eggs from
his pickup truck on Saturdays charged 3,000 colones ($5.39) for a 30-egg box in late
October, up from 1,000 colones in January.
Commodities price changes can take several months to reach consumers because
importers typically sell their inventory before passing along new costs. Mesalles, for
example, was buying corn in October for delivery in January.
“It‟s incredible how much the prices have gone up,” said Maricela Badilla, who lives in
Curridabat with her husband, Carlos Mora, and their 3-year-old daughter, Massiel. “We
have to keep cutting back.”
In January, Badilla made the Costa Rican breakfast known as gallo pinto -- a mix of
white rice, black beans and eggs sprinkled with cilantro -- about three times weekly. Now
she prepares it once a week at most, sometimes serving the dish with fewer eggs and
beans. She buys one stick of butter at the local mini-market instead of the two she used to
purchase.
„Eating Less‟
She calculated that what she paid 15,000 colones ($27) for at the mini-market in January
sets her back 30,000 today.
“We‟re not hungry, but we are eating less than we did before,” Badilla said as Massiel
jumped on the bed in her parents‟ room and watched the movie “Spider-Man” on TV.
With an annual income of about $16,260, the family is above the poverty line in Costa
Rica, where per capita income is about $10,300 a year. Badilla, 34, a secretary for a
decorations company, makes $540 monthly. Mora, 30, who used to work for the Ministry
of Public Education, started a new job in January as a computer support technician with
commercial bank Banca Promerica at $815 a month, a raise of about $275.
“We thought that would make the difference and put us where we wanted to be,” said
Badilla. “It was a lot more money.”
Cutting Luxuries
Mora‟s raise offered a chance for the occasional can of Pringles potato chips, which cost
about $2.50, a splurge they viewed as the sort of thing a middle-class income could
provide. For a few months after food prices rose, they switched to a cheaper local brand.
Now the family skips chips altogether.
They made other sacrifices, like getting rid of one of their two mobile phones, which
saved about $30 a month. For a while, to ration gasoline that costs $5.18 a gallon, they
stopped taking weekend trips in their 1988 Nissan Sentra to parks where they would
picnic and go swimming. They recently sold the car for $1,100.
“We‟re cutting out anything that could be a luxury,” Badilla said. “It‟s like Carlos‟s raise
never existed.”
In Costa Rica, Central America‟s wealthiest country, the annual food-inflation rate is 27
percent, according to government data. Families that have climbed out of poverty might
slip back into it if prices don‟t moderate, Finance Minister Guillermo Zuniga said.
„Volatility Isn‟t Over‟
Traders are betting on growth, based on December 2009 CBOT futures contract
settlements: Wheat will jump 13 percent, corn 12 percent and soybeans about 2.3 percent.
Forecasts for harvests support the trades. Because of the credit crunch, increased fertilizer
costs and the commodities price plunge, global production of wheat, the most-consumed
crop, may drop 4.4 percent next year, said Dan Basse, president of AgResource Co. in
Chicago and an adviser to farmers, food companies and investors for 29 years. Harvests
of corn and soybeans are also likely to fall, he said.
For their part, Costa Rican grain importers are expecting more price swings, said Evelio
Viquez, food production manager at the Dos Pinos dairy in Alajuela, northwest of San
Jose. “The volatility isn‟t over,” he said. “I‟m telling my customers to expect more.”
Hiccup Presses Investors
That may be because fundamental demand is still growing, says Gresham Investment‟s
Hepworth, whose 28 years in finance include stints on the New York Board of Trade‟s
Cotton Exchange, and the Coffee, Sugar and Cocoa Exchange.
When China, India and other economies were surging, so was demand for food, energy
and building materials, and that‟s where investment money flowed, Hepworth said. The
financial crisis that forced bailouts of Fannie Mae and Freddie Mac and sent Lehman
Brothers Holdings Inc. into bankruptcy caused a hiccup that pressed investors to raise
cash by selling anything they could, including commodities.
While the primary forces for rising prices are economic conditions, unusually large
investments of money do tend to fuel temporary increases, said Richard Spurgin, a
finance professor at Clark University in Worcester, Massachusetts, who has helped
design commodity indexes.
“Just as people deciding to get into Internet stocks exceeded the supply for some period
of time, they crowd out sellers and push the price up,” said Spurgin. “It‟s basic
economics.”
Wells Fargo‟s Bets
The run-up began in December 2007, when the stock and bond markets were sputtering
and the housing market was in freefall. That was when Wells Fargo & Co.‟s wealth-
management unit chose to get more heavily into commodities, said Ronald Florance,
director of asset allocation and strategy in Los Angeles. A memo went to Wells Fargo‟s
400 portfolio managers and 2,500 financial consultants.
In December, they upgraded commodities to “overweight” from “neutral,” meaning they
occupied an unusually large portion of total investments. The allocation increased to 4.5
percent of total investments, Florance said. Wells Fargo added shares of index funds
provided by Barclays Global Investors as well as funds that track the Rogers International
Commodity Index, founded by investor Jim Rogers in 1998. The move paid off as the
RICI jumped 13 percent in February, the best month since 1999.
„Pigs Never Do‟
Florance had seen enough. On March 18, with oil, corn and gold trading close to all-time
highs, he and Chief Investment Officer Dean Junkans decided to cut their commodities
allocation back to 3 percent.
“It was a remarkable move in an amazingly short period of time,” Florance said. “Bulls
and bears make money, pigs never do. We had made money.”
In Costa Rica, Luis Mesalles is still importing corn from New Orleans for the 400,000
hens at La Yema Dorada. Evelio Viquez, 48, is pursuing another angle at the Dos Pinos
dairy.
In August, he rented 400 hectares (988 acres) about 200 kilometers (124 miles) south of
San Jose to raise sorghum. The grain can replace 30 to 40 percent of Dos Pinos‟s yellow
corn imports, Viquez said.
“This was a fundamental decision to have less dependence on foreign grains,” he said.
“In times of crisis come all sorts of ideas.”
(Recipe for Famine: Part 6 of 7.)
To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net;
Ari Levy in San Francisco at alevy5@bloomberg.net
Last Updated: December 14, 2008 19:01 EST