Farming can be a pretty risky business. Not only do farmers have to worry about bad weather or bugs destroying their crops, they also have to worry about food prices which can change dramatically between planting and harvesting.
To manage this risk, many farmers will fix a price ahead of time by signing something called a futures contract. Traditionally farmers would make these contracts with whoever would eventually buy their food—basically agreeing in January what price they will sell wheat for in June. Today however it is much more common for farmers to sign a futures contract with a financial investor or bank. Banks don’t actually want to buy the wheat at the end of the contract. They are instead betting on food prices; if prices change in their favor they can sell the contract before it expires and make money.
In economics talk, the people actually buying or selling physical food are called hedgers, because they are trying to limit (or hedge) the risk of change prices. The people making bets without actually buying food are called speculators. In the 1990s speculators made up only about 12 percent of the market, but after deregulation in the 2000s, that number is now up to around 60 percent.
Speculators can be good for farmers; they let them hedge on risk when there aren’t any real food buyers available to make a futures contract. But a lot of people worry that too much speculation can actually affect food prices in dangerous ways. The idea is that once a big part of the market is just guessing where the prices will go, and not actually buying or selling food, it’s possible for the prices to get out of whack with supply and demand. In this case, speculators could bid up not just the prices of futures contracts, but could also directly affect current food prices.
Not everyone is convinced this actually happens. A lot of economists think that the prices for futures contracts and current food prices are entirely separate. For speculation to affect prices, it would have to affect real supply or demand. These economists say that unless we see these real world changes—like farmers planting different crops or hoarding food—speculations probably isn’t affecting prices. Still other economists and many activists disagree, and think governments should limit speculation in food markets to keep prices more stable.