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The Enron of Farming?

By Jim Chen at al.

As noted earlier today, the New York Times reports that investment funds and large private investors are flocking to food-production-related infrastructure, including ?farmland, fertilizer, grain elevators and shipping equipment.? Investors claim that they will benefit ?everyone,? because the new capital resources will lead to new infrastructure investment. However, there are those who are concerned that financial investors will be able to put their ?put their thumb on the supply-demand scale by holding back inventory to move prices artificially.?

Any time I hear claims of Pareto-like market improvements, especially when new technologies are not part of the equation, I am skeptical. In this case, the new investment is related primarily to a belief in the market?s potential, and not deregulation, but the new investors in the article sound an awful lot like those who pushed for deregulation of the California electric markets and repeal of the Public Utility Holding Company Act (PUHCA). That should raise a few eyebrows.

Why? Well, Enron, for one, found that holding back electricity (by artificially cutting production) could be extremely lucrative. And with Enron, that kind of market manipulation was illegal. To my knowledge, there are no requirements that owners of grain ever sell their commodities. Such owners could legally and legitimately (if not morally) hold back their inventory until the market price was more appealing.

This risk always existed, but smaller farms probably did not have the same ability to "game the market" for long periods of time. It is true that there were already some large players in agriculture (see, e.g., Cargill and ADM), but now that farming is a major component of both food markets and energy markets, consumers and regulators have every reason to be on high alert.

Perhaps these new large investors will ?bolster food production at a time when the world needs more of it,? but I rather doubt it, especially in the near term. If recent new investors in the energy industry are any indication, the new investors clamoring to get into the market are looking for ways to maximize wealth with current production, not build new infrastructure. These new financial investors are simply looking for ways to hedge their bets, not increase production. Perhaps this kind of market activity would eventually lead to more and better infrastructure, and thus increased food production. In the near term, though, the only beneficiaries will be the investors themselves.

Full post as published by Agricultural Law on June 05, 2008 (boomark / email).