In defense of speculators

Recently, Joe “Pags” guest-hosted the Glenn Beck Radio Program.  On it, he introduced the idea that, in order to curb speculators, the government should make a law requiring anyone who speculate in a commodity show proof that they have the warehousing facilities to actually take delivery for the commodity in question.  He provided an analogy, which he referred to as “the Snickers analogy”, but which I didn’t hear.  More recently, Ed “Parsons” Schultz, on his radio program, criticised President Obama for giving a weekend radio address without “going after” Wall Street speculators.  Apparently, Obama spoke rather about women’s pay versus men’s pay; because making women more expensive to hire is certain to garner them more job opportunities.  But I digress.
 
SO we have a radio personality on each side of the political spectrum criticising speculators.  Both are ignorant of the fact that speculators provide a necessary service in the free market; a service that actually makes prices across the board lower in the long run, while at the same time improving our lives by bringing a wider variety of foodstuffs and other commodities into the marketplace.  Since Ed “Parsons” Schultz is obviously a buffoon on economics, and only opposes speculation because it means that someone could make money without stealing it through government laws; I will therefore focus on the self-proclaimed conservative Joe Pags’ argument against economics.
 
Imagine a strawberry farmer is planning for the next growing season.  He considers that, at harvest-time, he could get 50 cents a pound for his strawberries, or $1.50 a pound, depending on a variety of factors that he does not control.  He obviously wants the higher price, because then, he can buy a new tractor.  If the price tracks up to $2 a pound, he might consider buying a new house.  At 50 cents a pound, he goes bankrupt.  Even though he is quite good at the actual work of strawberry farming, he decides that growing strawberries is not worth the risk, and goes into some other, more predictable field.  The world is that much poorer for strawberries.
 
But consider that someone offers the farmer a guaranteed price, say $1.25 a pound for strawberries to be delivered at harvest-time.  Now, the farmer can plan.  The farmer wouldn’t be able to buy the new tractor this year, but he’ll pay the bills and save up for one next year.  He won’t go bankrupt.  Why would someone offer the farmer a guaranteed price?  Because the offerer is a speculator, who figures that (rightly or wrongly) the price of strawberries is going to hit $3.00 a bushel this year.  If it does, he makes a huge profit, and takes his family to the Grand Floridian in Disneyworld (and I’m talking his extended family).  If it doesn’t reach 50 cents a pound, well, our speculator is in trouble.  The point is not what the speculator does with his profits or losses, but that he enabled the strawberry farmer to grow strawberries this year instead of working for a telemarketer.
 
Joe “Pags” suggested an idea that, on the surface, seems plausible.  He wants to cut back on speculators who are merely “trading paper” and allow “real” speculators, the ones who are actually interested in taking delivery of the commodity in question, to do their job “the right way” (I suppose; or something like that).  The problem with “Pags”‘ proposal is that it restricts competition, which means lower prices for the stawberry farmers.  With more speculators in the market, the price for the strawberry futures contract is bid up.  Requiring speculators to own warehousing facilities would cause a different distortion in the market, as well.   Speculators would buy warehouses, then padlock them, never use them, and continue to “trade paper”.  What “trading paper” means is that the speculator who buys a strawberry futures contract is only in it for the profit he can attain.  He might have a certain amount in mind he wants to make off the contract, at which point he sells it to someone else.  In our example, the speculator, instead of waiting for $3.00 a pound, sells the contract (that he bought at $1.25 a pound) for $1.45 a pound.  Ten minutes after he bought it.  And he does this with a variety of commodities every day, because the speculator is in the “risk transference” business.  He takes on others’ risk and then transfers it on to others more able to bear it than himself.  While he is “trading paper”, the speculator’s warehouse, which was required of him to purchase, sits empty; and those who actually need warehouse space must pay more for it, or do without.  There are all sorts of distortions in the marketplace down the line, whenever we invite government to intrude into marketplace decisions.
 
However, Joe “Pags” wasn’t talking about strawberries at all; he was (I presume) referring to speculators in oil.  But the same lesson applies.  Replace “Strawberry farmer” with “Oil production company” and the scenario stays pretty much the same.  Oil production companies need to plan for the future as much as strawberry farmers, and they can plan better if they can get a guaranteed price for their product.  Companies that use oil can benefit from a guaranteed price, as well, since they will better know the costs of goods sold, and can price their products better.  The greater number of speculators, the better price both sides will receive for oil; the oil producers get a better price than they otherwise would with a product that has an admittedly volitile price history, and the oil-using companies get a better price over time, because more people enter the oil production industry than otherwise would (more competition in a market means better prices).  And there one has the benefit of speculation: more entrants into the market.  More competition is a good thing; it lowers prices and increases the quality of goods and services every time it’s tried.  Restricting competition in any part of the market only hurts market participants and, ultimately, consumers, who are the point of growing strawberries, producing oil, manufacturing plastic and strawberry pies, and speculating on it all.
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