> So they do their magic, and -- again let's assume the article is correct and this was actually the cause -- wheat prices jump like crazy.
If you are not going to explain prices in terms of supply and demand, you need to have clear, compelling alternate explanation. Magic and assumptions don't cut it. If the "natural" (i.e. where supply meets demand) price of wheat is $3, it would be very difficult (and likely expensive) to establish an artificial price of $6. I am curious to know what that story is, exactly.
Food prices are not perfectly elastic when it comes to the basic staples like wheat, especially in the short term. People need a certain amount of food, and their choices come down to eat if you can afford it, or die. Demand by households doesn't change much with price, but they will pay anything from zero up to everything they have.
The price is therefore depends on the suppliers. Normally, competition between suppliers will bring the price down to near the cost of production. However, if there is a futures market filled with overly confident speculators, who buy the grains at a high price and push it even higher, the cost to all the owners of the stock when delivery is due will be far higher than the cost of production; if most of the market paid this same price, there will be no-one with the volume who can afford to compete and push down prices; the final price is likely to strike a balance between the loss of value from throwing away wheat because some people had to starve as they couldn't afford the price, and the revenue from selling the wheat at the highest price.
In effect, against inelastic demand, a futures market and confident speculators have the same effect as rational price fixing by a cartel.
Demand for grains is actually quite elastic. When the price of things like corn and wheat is low, farmers feed them to animals and people consume more meat. When the price increases, people consume less meat and more grain, and in doing so, consume a lot less grain.
In economies where people are too poor to afford meat, fluctuating food prices are a much bigger issue. But in the US, we use more food than we need to in order to enjoy a luxury commodity.
Extremely short & simplified version, because this is complicated stuff: Goldman, among other places, got an exemption to laws limiting how many futures speculators could own. This law was meant to prevent people from buying up tons of futures in order to manipulate the price. With that exemption gone, people who otherwise had little to no interest in the relevant commodity markets would buy tons of them and hang on to them.
The supply actually went up. But because people would repeatedly say things like "give me $N worth of oil," eventually others got wise and started selling oil for $N a barrel.
I've probably skipped important details and garbled something, but that seems like an OK thumbnail sketch.
If you are not going to explain prices in terms of supply and demand, you need to have clear, compelling alternate explanation. Magic and assumptions don't cut it. If the "natural" (i.e. where supply meets demand) price of wheat is $3, it would be very difficult (and likely expensive) to establish an artificial price of $6. I am curious to know what that story is, exactly.