Whisper it gently--well, OK, don't, scream in horror from the rooftops--but there's a possibility of a looming bacon shortage in the United States. I know, I know, it's almost as bad as the chaos that would follow in my native UK if the Marmite Mines ran out. But this does give us an opportunity to revisit Adam Smith and the value of speculators (originating with one of the few Frenchmen to ever get economics, Cantillon). Far from the usual cries we get from the left side of the aisle speculation is not unproductive, it is not valueless. It's a hugely useful signal about things that might happen in the future. And as such those signals allow us to take action to avoid those looming disasters--like, for example, the US entirely running out of that food of the Gods, the bacon cheeseburger (and I do not joke there, it is one of the great foods of the world).
So, here's the news of that disaster just over the horizon:
Bacon prices are on the rise as supplies shrink, which is bad news to breakfast fans
The country's bacon reserves are at the lowest levels in half a century.
In other words, pig farmers can't keep up with the world's sizzling appetite for those fatty, smoky strips of sheer eating pleasure.
The Ohio Pork Council, a Columbus-based non-profit, reported Tuesday that demand for frozen pork belly, frequently made into bacon, is outpacing supply.
I can hear the screaming starting from here and I'm in Europe.
Sound the alarms: The pork used to make bacon is at the lowest level since Dwight D. Eisenhower was president.
A report from the United States Department of Agriculture said the supply of frozen pork belly, from which bacon is cut, is at its lowest level since Dec. 1957, according to the Ohio Pork Council. The total pork inventory dropped 41 million pounds last month alone.
A terror, a terror:
The U.S. Bureau of Labor Statistics said the average price in U.S. cities of sliced bacon per pound $5.10 in December. In December 2006, the average price in U.S. cities for sliced bacon per pound was $3.45.
Doesn't it just make you shudder?
And now to be slightly more serious. This is exactly the sort of thing that a decent speculative market aids in preventing. Sadly though that futures market in bacon, the pork belly futures contract, has closed, so we've not got that well organised and liquid speculative market any more. Sure, there are boring technical reasons for this--the most obvious being that we tend to make bacon out of fresh pork bellies these days, not frozen ones and thus there's not the stock in warehouses we'd like to run a decent futures market:
The frozen pork-bellies futures contract, a staple of Chicago’s commodity markets for a half century, was unceremoniously killed after traders abandoned it.
That scene from Trading Places is well out of date now (in fact, I don't think frozen orange juice does much, if anything, these days either):
Way back, pork belly futures made sense. The bellies were frozen and set aside, then used to make bacon during the summers when the demand for it (think bacon, lettuce and tomato sandwiches) rose. But the pork belly landscape has shifted, said Shane Ellis, a livestock economist at Iowa State University. With bacon accompanying salads, hamburgers, even chocolate, it is on call all year now, removing some of the demand for frozen bellies.
Civilisation marches on and all that but on to the economics, to Cantillon and Smith.
Speculators, as we know, simply speculate. They buy and sell not on any calculation of the social use of their actions, they're purely in the price they pay now and the price they might get paid then world. They're concentrated purely upon their own interests and damn the rest of us. And that makes those over on the left side of that political aisle insistent that this is purely froth, something which adds no value to our civilisation. Except, as those two venerable gentlemen pointed out, there is indeed great social value derived from their activities. We'll leave aside the risk transference here and concentrate just on the price implications of there being speculation.
We've now got a futures market and as is the way with these things the forward time horizon tends to be around and about how long it's going to take to get a new supply of whatever it is. If corn takes a year to grow then we'll see our corn futures market having contracts which extend out around a year. Oil has longer contracts than that, eggs rather shorter (although there are obviously some exceptions, for liquid markets this is true). If it takes 6 months (and I know so little about agriculture I've no idea) to go from boar making friends with sow to bacon being available then we'd expect to have a liquid pork bellies market out to about 6 months.
And what that does is show us what the price of bacon is going to be in 6 months. But also, it shows farmers what they can make in 6 months by introducing boar to compliant sow. And that, in part at least, is what the value of a futures market is. The farmer doing the pig dating today can sell the bacon delivery for delivery in 6 months, setting today the price he will get then. And thus something like this, an incipient bacon shortage (The Horror! The Horror!) will be encouraging farmers to get on with encouraging the makin' of bacon.
At a deeper level this is just the old saw that prices are valuable information for us all about who wants what, how much of it and what price someone can gain by supplying it. The addition of a futures market is that it extends that price horizon out over the likely period of time it takes to produce the thing. And thus we get future expectations influencing production now and so no shortages in said future. Just because people are able to react now to potential shortages, and their higher prices, of the future.
The bottom line here is that futures markets, just pure speculation itself, is not a socially vapid or worthless activity. Rather, it's the very thing which ensures continuous supplies of things which have uncertain future demand, for said speculation moves prices, and thus production, through time, to all our benefit.
From 1961 to 2011, the pork bellies futures market aided in preventing a bacon shortage in the United States. And if that's not socially valuable I challenge you to identify something which does have said social value.
