As a former vice president of strategic research at Thomson Reuters, Kara Newman knows a thing or two about the business sector. As spirits editor for Wine Enthusiast and the author of “Cocktails for a Crowd” and “Spice & Ice,“ she also knows her way around a bottle. (Full disclosure: I have come to know her as a contributor to Sommelier Journal, where I am assistant editor.) And in the upcoming “The Secret Financial Life of Food: From Commodities Markets to Supermarkets” (Columbia University Press), she uses her expertise in both areas to explore “where, how, and why our food is traded — a critical but nearly invisible connection between the farm and plate.”
As her book shows, futures trading impacts the very contents of your pantry — not to mention the prices you pay at grocery stores and restaurants — in myriad cyclical ways. It’s an eye-opening read even for finance-challenged foodies like me, with far-reaching implications for those who aim to put their money where their mouths are. I asked Newman to elaborate on a few especially timely points.
The complexities of the economics of food
By Kara Newman
Columbia University Press, 2012, 208 pages
Although futures-market prices don’t affect grocery prices on a second-by-second or day-by-day basis, their impact does show up over the long term. It would be tremendously annoying if prices rode the roller coaster that futures prices do! But over months and years, we do see prices rise or fall, following the prices set for underlying agricultural commodities.
What’s important about shopping at farmers markets is that, to a degree, it allows people to “opt out” of the pricing set by commodities markets. Buying directly from a farmer, butcher or other primary producer means there’s a significantly shorter path from producer to end buyer. The transaction is based on immediate supply and demand, and it cuts out the middleman. It’s the processors, importers and so on who are taking on risk when they bring vast quantities of foodstuffs to the market — and they’re often the ones attempting to hedge that long-term risk though futures trades.
Given the recent scare over a bacon shortage, I found the chapter on pork bellies quite enlightening. Can you elaborate on why pork bellies are no longer traded, and what it means for the average consumer and the ethically conscious consumer?
Pork bellies stopped trading in July 2011, just as the contract had reached a 50-year milestone on the Chicago Mercantile Exchange. It’s amusing how far we’ve come from the days when no one even knew what a pork belly was. Originally they wanted to call the contract “uncured bacon!”
Pork bellies started trading because they store well when frozen. To traders, this was valued because the hog business used to be seasonal; the potential for scarcity, therefore, meant higher prices for those bellies in storage. At the most basic level, traders buy and sell based on scarcity and anticipated demand. When that scarcity diminished thanks to better technologies in agriculture and refrigeration, as well as improved bacon-making techniques, trading eventually stopped. It’s now a more stable market. That’s great news for people who like to eat bacon year round, but it doesn’t make for profitable trading. Traders and speculators thrive on buying and selling as prices in a volatile market pingpong.
I’ve asked economists: What does it mean for consumers that we don’t have pork-belly futures to kick around anymore? And the answer across the board is: “Not much.” Pork-belly contracts were a vehicle that outlived their usefulness, like egg futures and onion futures and many other contracts before them. Without the pricing mechanism that the futures market provides, prices might edge slightly higher at supermarkets — and for a little while, that might make pork from smaller producers a bit more attractive. But the average bacon lover probably hasn’t noticed even a blip at the checkout counter.
Since I know you best as a wine-and-spirits writer, your sidebars on wine and whiskey futures also caught my attention. How is soaring Asian, specifically Chinese, interest in high-end French wines affecting futures and the industry there?
Although coffee beans have a long history of formal trade in the U.S., potables such as wine and whiskey are still in their trading infancy. Bordeaux futures are nothing new, but wine funds certainly are, and we’re starting to hear rumblings about the nascent “whiskey-investment” industry, although it doesn’t seem to have developed much traction yet.
Growing interest in both products from newly affluent drinkers in China and elsewhere surely have created a market that’s ripe for trading. Particularly where wine is concerned, it has all the elements of uncertain supply and fluctuating demand. That includes the investment manager’s observation that many Chinese drinkers are purchasing wine to consume now, rather than to age — a trend that has the potential to impact supply down the road for older vintages, which could lead to higher prices — if what’s in the bottle is good, of course! Regardless of what’s being traded or how, though, it still comes down to basic supply and demand.
In the introduction, you credit as inspiration for this book an article in which a trader advised clients to “Buy breakfast.” Assuming those who advocate the locavore lifestyle might wish to invest in a socially responsible manner, do you have any concrete advice for them? For instance, per your appendix, non-GMO soybeans are traded on the Tokyo Grain Exchange. Is this a rising trend?
I don’t give investment advice, but socially minded investors can always buy stock in companies that share their personal philosophy. Another option is to donate to or get involved with organizations such as Slow Money, a national nonprofit that works for investment in sustainable foods and farms.
Top photo composite:
Author Kara Newman. Credit: Daryl-Ann Saunders
Book cover of “The Secret Financial Life of Food.” Credit: Courtesy of Columbia University Press