Fake news in the wheat market

Wheat prices spiked last week, reaching a three-year high, and then fell back down after Ukraine issued confusing statements on possible export limits. The trouble started when Ukraine said on Facebook that it planned to limit shipments of milling wheat. The ministry later tried to clarify things by saying that it was not discussing “strict limits” and would instead discuss projected shipment volumes with traders. The wheat price fell back pretty much to where it came from. The move can be seen on the following graph from Bloomberg.

The episode set off a social media storm. Some traders complained that journalists had acted irresponsibly by reporting on the original Facebook post without first checking on its accuracy. Others argued that the Facebook post was in itself a market-relevant event (even ignoring what it contained) and that needed to be circulated as quickly as possible. 

In an (excellent) article published after the event, Agricensus explained that,

The big two providers that control 56% of the market – Bloomberg and Reuters – have spent vast sums of money on improving latency by milliseconds – hoping that it gives their clients an edge in trading.

That puts pressure to print stories and market moving headlines, leaving reporters with little time to corroborate, double-check or even question the most ambiguous statements made by ministers and even world leaders.

Some commentators on social media complained that the episode was just another example of fake news. Others argued that you shouldn’t be trading on Facebook posts in the first place—and that if you want good information you should pay for it. However this ignores the fact that the original post was picked up by the big newswire services. And as Agricensus points out,

Global spending on financial market data analysis and news exceeded $28 billion in 2017, according to consultants Burton Taylor International – up 3.6% on the previous year and the highest growth rate since after the financial crisis.

 People are already paying huge sums for “real” news.

However, the idea that if you want real rather than fake news then you have to pay for it is one of the themes of Yuval Harari’s new book 21 Lessons for the 21st Century. The book will be released at the end of August, but in a prepublication interview Mr Harari tells The Guardian,

The idea of free information is extremely dangerous when it comes to the news industry. If there’s so much free information out there, how do you get people’s attention? This becomes the real commodity. At present there is an incentive in order to get your attention – and then sell it to advertisers and politicians and so forth – to create more and more sensational stories, irrespective of truth or relevance. Some of the fake news comes from manipulation by Russian hackers but much of it is simply because of the wrong incentive structure. There is no penalty for creating a sensational story that is not true. We’re willing to pay for high quality food and clothes and cars, so why not high quality information?

The Guardian has also published an extract from the book in which Mr Harari writes, 

In fact, humans have always lived in the age of post-truth. Homo sapiens is a post-truth species, whose power depends on creating and believing fictions. Ever since the stone age, self-reinforcing myths have served to unite human collectives. Indeed, Homo sapiens conquered this planet thanks above all to the unique human ability to create and spread fictions. We are the only mammals that can cooperate with numerous strangers because only we can invent fictional stories, spread them around, and convince millions of others to believe in them. As long as everybody believes in the same fictions, we all obey the same laws, and can thereby cooperate effectively.

He continues,

Joseph Goebbels, the Nazi propaganda maestro and perhaps the most accomplished media-wizard of the modern age, allegedly explained his method succinctly by stating that “A lie told once remains a lie, but a lie told a thousand times becomes the truth”. In Mein Kampf, Hitler wrote that “The most brilliant propagandist technique will yield no success unless one fundamental principle is borne in mind constantly – it must confine itself to a few points and repeat them over and over.” Can any present-day fake-news peddler improve on that?

Returning to the wheat market I understand that Ukraine always tracks and informally manages their wheat exports. Professional wheat traders were therefore surprised by the way that the market reacted to the Facebook post rather than by the Facebook post itself.

The post stampeded the herd—a herd that was already extremely nervous because of the extreme hot weather in many of the world’s wheat growing regions. Something else could have stampeded the herd: a rumour, say, or a big order hitting the screens—or even nothing at all. The herd was ready to stampede; it didn’t necessarily need an outside stimulus.

This type of situation is common in markets. Indeed, there was a lesser example just the week before when two famous wheat traders, Donald Trump and Jean-Claude Juncker announced that the EU would increase their purchases of US soybeans. The US soybean price rallied on the news and then fell again when the market realised that Trump and Juncker were not soybean traders after all.

There is an old commodity market saying that price will often go back to check out the extreme highs or lows made in a panic move, like the one in wheat last week. (This is not a prediction that the wheat price will return to last week’s highs, but I will be interested to see if it does.)

Finally, I had lunch with an old trader friend last week who reminded me that although traders love volatility, they don’t like political volatility; weather they can deal with, politics they can’t. Traders may or may not think that wheat prices will rise further on supply factors, but they have no way to foresee what the politicians will do in response.

As Bunge found out to their cost recently, it is dangerous to predict what politicians will do next, especially our present crop of politicians. As a result, traders normally increase the size of their bets in a fundamental market and reduce them in a political one.

Wheat has always been a “political” commodity; the current drought makes it even more so.