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Is the boom in global food prices over? I ask not just because wheat prices have fallen recently, but because Barings plans to launch a global agriculture fund.
This is a classic sign of a market peak. For example, after research in the early 1980s showed that small stocks out-performed larger ones, a host of small cap funds were created. Since then, the small cap premium has disappeared. And in the late 90s, lots of tech funds were launched.
This raises an important problem with financial innovation - the private costs and benefits of it can differ from the social costs.
From the point of view of individual fund management companies, the easiest new products to sell are those that exploit mug punters' desire to get onto a bandwagon.  Hence Barings' decision, even though there are already ways to trade agricultural commodities.
However, the financial innovation that would be really useful to society would consist in offering us ways to insure against big macroeconomic risks, such as deep recession or decline in particular industries or occupations. But the private cost of developing these, allied to the fact that those who would gain most from holding them are not wealthy, mean they go uncreated. In finance - as in the economy generally - innovation is poorly rewarded.
There's a precedent here. It took John Bogle 23 years between spotting that index trackers were a good idea and actually launching the first one. Which shows that the lags between identifying a genuine benefit and creating the financial product that'll serve it can be very long.

Comments

[reason]

Surely, the problem is not the private costs of developing such a product. The problem is that re-insurance is a very difficult problem because of auto-correlation. Who will reinsure against a depression? All the investments that they will make with their premiums will also go bust at the same time. The solvency of the insurer (or reinsurer) is a major issue with private insurance. You pay but have only a discounted guarantee of having your claims covered.

[dearieme]

Well said, Reason. I'd like to take out insurance against my occupational pension fund going bust (because of a large fall in equities) but everything I've thought of would carry a large counterparty risk that's also exposed to equities, or would be an investment that would probably fall in a depression, just like equities: e.g. commodities.

[kinglear]

Chris - I'm sure you've read The Black Swan, which is exactly the contra-big bet situation you mention. But as you say, the minute anyone starts selling somethging, the game's over. The best example was over 30 years ago when the Government started selling index-linked gilts. The rate of inflation has never been as high as it was on the day the issue was announced.....

[chris]

Reason - your point's a good one. But is it clinching? One asset is safe against deflationary depression - gilts. So holders of these could reinsure. And it should in theory be possible to insure against a local depression by trading with foreigners; Japan's "lost decade" of the 90s was insurable, as the rest of the world thrived.

[reason]

Chris - and if the gilts all come to market at the same time? And in a normal country, in a depression, shouldn't the currency value rise as domestic demand falls - so that foreign investments are worse less?

[reason]

oops - ... worth less.

[Hari]

Well, the food prices problem is getiing difficult to solve day-by-day.

[Mark Wadsworth]

That's a good list, but you missed off Real Estate Investment Trusts - a super tax structure introduced in January 2007 to enable property professionals to offload their overpriced commerical properties on the unsuspecting small investors, who since then have lost up to half their money. Thanks, Gordon!