I have been a naysayer of buying commodities because I equate it to flipping houses. When you buy a commodity where you do not plan on consuming it yourself you are adding no value and making it more difficult for those that do want to run a business. The analysts have been saying the commodity prices are the result of demand, not speculation.

I don’t believe it for a second. When the dollar became stronger did commodities drop? No. When supply surged did commodities drop? No. I don’t believe the market analysts because to me it is like asking accountants if they like the flat tax. Any accountant that would like a flat tax would be out of a job.

So the question is how do you prove that the market and speculation is responsible for this spike? I read an article where a commentator said the following:

Who you kidding? Futures cause commodities to diverge from their true worth all the time…not saying thats a bad thing…but don’t too quick to talk smack because the market can stay irrational longer than you can stay solvent.

Then it hit me, to see how much speculation is embedded in commodities compare those commodities which have no futures to those that have futures. I did some research and found the potatoe. Potatoes are a staple like wheat, and rice and they are used as a basis for many other products. Though potatoes are not traded on the futures market. Looking at the potatoes prices in Canada, I calculated and found that between 2004 and 2008 potatoe prices went up around 50%.

Let’s look at other commodities? From 2004 to 2008 oil tripled in price. Wheat and corn tripled. Soybeans doubled, though in 2004 it was a low point. From the same price notice how milk prices fluctuated. Similar deal to potatoes. This is interesting because it affirms that if a commodity is traded on the futures market there is about a 33% to 50% speculation factor built in.

This is a clear indicator that there is a bubble in commodities. Yes prices in general have gone up and they should, but not to the degree of the prices in the futures market. What bothers me about this is that you are taking food out of people’s mouths. India is banning trading of food, and other countries are rioting (1,2).

I agree governments have mismanaged the entire food chain, but the reason has to do with the problem that food is a core part of who we are. Without food we are nothing. We can live without stocks, without money, but not food nor water. And because humans have ethics and morality you are caught in a philosophical dilemma.

The bigger problem I see with this commodity bubble is that it will hurt us in the Western world. People will see this, look at the futures market and say, “see this is what capitalism is all about.” It is completely counter productive. And it only keeps those people in power that we don’t want in power (eg Chavez, Iran, etc) That is the problem I see because the companies that I invest in are producing products that will be sold into those countries. If those countries consider my companies as evil global corporations then my stock price will be hurt and then I will become royally p*****d. As Greenspan said, “sometimes there is irrational exuberance.”

Do I say you should not invest in commodities? No, go ahead its a free country and there is freedom to do what you want. Go ahead invest in commodities, but remember with every action there is a ramification. And that ramification might be your direct support of people we don’t want to support!

Update May 10, 2008 As I worried…

Sanchez works for the National Campesino Federation, a lobbying group for small farmers that has been active lately in protests against the rising price of food, notably a doubling of the price of tortillas. Here, NAFTA and globalization are dirty words.