Originally Posted by Mr. Wiz

Do you think if the trading of the commodity was stopped and the end users were the ones that created the demand that the price would go up the same amount?

I'm not saying one way or the other. I'm just asking the question because this is something I don't completely understand. It just seems to me the traders in the middle are making a profit by adding cost to the end user without adding value. Unlike oil, peanut butter is something we could easily live without. Maybe we should all boycott peanut butter and see what happens. It certainly would be an interesting experiment.

The generally accepted idea is that the trading of futures contracts should stabilize the magnitude of price swings in a market. With futures, producers can spread out the sale of product and/or take advantage of seasonal and event factors. Without futures, crop insurance and agribusiness planning become very difficult since the only pricing signal would come at harvest times or when those able to store product sell ( you can imagine storage of physical product as another type of futures manipulation).

Over the long term I expect and believe that prices will oscillate around the same values either way (higher actually without futures due to the added costs of uncertainty ). In a well supplied and flexible commodity market (like peanuts) - over time - one expects the price to be close to the cost of production - plus the profit required to entice someone into doing that work. When prices get much away from this price - either a bunch of people get into it and drive the price down or people go broke and get out.

You have proposed that the middle man is not adding value - that is certainly not the case or people would not be paying them. All over the world, and through all history, middle men have be highly valued.

Originally Posted by Mr. Wiz

Nice, I ask an honest question and all you got is insults.

...

Originally Posted by radix2

Tree it looks like you are thinking that a 13% reduction in supply should be related to some specific (like 13%) increase in price ?- that is not the case. What you wrote makes sense if demand suddenly dropped by the same amount as the supply - but there is no reason to think that that would happen - unless the price rises to the point that 13% less is sold - the question is - how much does the price have to rise to generate 13% less sales.

The term for this behavior is price elasticity - which varies from product to product - factors to consider are how critical the product is, and how easily it can be replaced by another similar product.

In the case of a critical item that cannot be replaced by another - it is easy to see that even a small reduction of supply below demand can drive the price to huge increase.

When looking at perishable goods like peanuts, IMO commodity futures contracts are very well anchored to actual commodity prices. Remember that real producers can sell their future inventory at these prices - a speculator on the other end of the deal will suffer a real loss if the product or contract cannot be sold at that time at a profit. High prices will generate increase planting the next growing season. Driving prices back down.

I appreciate your honest answer. I certainly have a lot to learn about trading commodities. But rather than use an opportunity to educate, three posters here have used the opportunity to declare I don't understand the free market, a pretty broad term and certainly simpler than commodities futures.

As to the trading, like Jim said about the folks who made money on futures, when they wanted to make peanut butter, don't these big outfits, like Smuckers, actually bypass the futures trading by securing contracts on their own with suppliers? It seems to me, this was an important issue when oil skyrocketed. SW Airlines had far reaching advance contracts and were buying jet fuel at about one third of the going price. I assumed they agreed to these contracts directly from suppliers and bypassed the oil futures markets. Is this not correct?

If it is, aren't the commodities markets becoming redundant, if the buyers and/or sellers are large enough concerns to act without the market?


And thanks for your thoughtful and instructive posts on the subject.

Originally Posted by radix2

The generally accepted idea is that the trading of futures contracts should stabilize the magnitude of price swings in a market. With futures, producers can spread out the sale of product and/or take advantage of seasonal and event factors. Without futures, crop insurance and agribusiness planning become very difficult since the only pricing signal would come at harvest times or when those able to store product sell ( you can imagine storage of physical product as another type of futures manipulation).

Over the long term I expect and believe that prices will oscillate around the same values either way (higher actually without futures due to the added costs of uncertainty ). In a well supplied and flexible commodity market (like peanuts) - over time - one expects the price to be close to the cost of production - plus the profit required to entice someone into doing that work. When prices get much away from this price - either a bunch of people get into it and drive the price down or people go broke and get out.

You have proposed that the middle man is not adding value - that is certainly not the case or people would not be paying them. All over the world, and through all history, middle men have be highly valued.

That is not all that is going on. It is only part of the story:

http://www.foreignpolicy.com/article...he_food_crisis

If you see a crisis, there is a good chance that Goldman Sachs will be there.

Originally Posted by Sherlock

That is not all that is going on. It is only part of the story:

http://www.foreignpolicy.com/article...he_food_crisis

If you see a crisis, there is a good chance that Goldman Sachs will be there.

That is fairly frightening:

The result of Wall Street's venture into grain and feed and livestock has been a shock to the global food production and delivery system. Not only does the world's food supply have to contend with constricted supply and increased demand for real grain, but investment bankers have engineered an artificial upward pull on the price of grain futures. The result: Imaginary wheat dominates the price of real wheat, as speculators (traditionally one-fifth of the market) now outnumber bona-fide hedgers four-to-one.

Today, bankers and traders sit at the top of the food chain -- the carnivores of the system, devouring everyone and everything below. Near the bottom toils the farmer. For him, the rising price of grain should have been a windfall, but speculation has also created spikes in everything the farmer must buy to grow his grain -- from seed to fertilizer to diesel fuel. At the very bottom lies the consumer. The average American, who spends roughly 8 to 12 percent of her weekly paycheck on food, did not immediately feel the crunch of rising costs. But for the roughly 2-billion people across the world who spend more than 50 percent of their income on food, the effects have been staggering: 250 million people joined the ranks of the hungry in 2008, bringing the total of the world's "food insecure" to a peak of 1 billion -- a number never seen before.

Originally Posted by Norman Adlam

I'm refusing to buy my normal cereal.

A 350g box went up from £2.99 to £3.19 - that's after it went up from £2.49 to £2.99 about a month previously! (So around a 30% rise in a about a month or so).

What confuses me is how nobody claims to ever make any money in business (well, until profit reports come in) and yet large price rises go somewhere!

It ain't going in salaries here (which have been falling), that's for sure!

I hear yaa Norm..

A 20 oz jar of Jiffy peanut butter up here, is hitting the $7.00 dollar mark. A smaller box of cereal runs $4.00 dollars.
Here's another, a 8oz jar of instant coffee is $8.00 dollars. A loaf of wheat bread is $3.89 and thats the short loaf size.

Originally Posted by Treetop

As to the trading, like Jim said about the folks who made money on futures, when they wanted to make peanut butter, don't these big outfits, like Smuckers, actually bypass the futures trading by securing contracts on their own with suppliers? It seems to me, this was an important issue when oil skyrocketed. SW Airlines had far reaching advance contracts and were buying jet fuel at about one third of the going price. I assumed they agreed to these contracts directly from suppliers and bypassed the oil futures markets. Is this not correct?

If it is, aren't the commodities markets becoming redundant, if the buyers and/or sellers are large enough concerns to act without the market?


And thanks for your thoughtful and instructive posts on the subject.

IMO there are plenty of articles these days that make all sorts of assertions about bankers (and of course Goldman Sachs in particular)that amount to basically conspiracy theories. Sherlock's particular article strikes me as this type. The comments under the article point out the shortcomings of that piece.

Can speculative bubbles happen in any human transaction system - certainly. But in any commodity system - by definition the prices under discussion propagate across all participants - if speculators bid up prices, actual producers can also sell at those prices (as well as users needing to buy) - so the market mechanism of bringing more supply to market to get those dollars will happen - if it is supply not needed - prices will still fall when unwanted supply drives down prices. Likewise at some point there is no greater fool for the speculator to dump his paper on.

Now, if the claim was that in a particular season - a large amount of money went into commodities and drove the price up, sure that can and has happened - but that is a particular type of human hysteria behavior - and can happen with or without a futures system.

Your point about the alternatives to particular contracts is a good one - if prices in one system become un-anchored to real value, then people to will go to alternatives or arbitrage to make money.
SW airlines and Smuckers may well have used normal commodity futures to hedge supply - even if they didn't it - would seem very likely that they would have used the published futures trades as the price discovery when they negotiated contracts.

As I think you know- it is the rise of China's billions in consuming as well as usage of food crops for fuel that provides the interest and belief in rising demand for food on the one hand and the very loose monetary policies at the Fed on the other that provides the narrative for commodities to be the place to be in investing today - in the end if the prices are too high there will be a glut that will restore reality.

I agree the article itself contained some language which was suspect of being biased, but the numbers are what caught my eye. This seems to be a sort of dormant scheme created in the same wave of deregs that brought us the derivative products, which came to life in the search for places to park all that capital. If it bears out to have truth in it.

The issue with SW was that they contracted pretty far into the future, the prices they were paying for fuel were completely out of wack with the market, in fact, their supplier was delivering at a loss, the supplier was buying fuel at market price. Of course, this didn't go on forever, the contract ended before the fuel price crisis was over.

I appreciate your explanation of how the commodities market has been mostly a tool for the good, to even out prices and actually to act as a check, but the speculation and cash entering these markets in huge proportions which eliminate the checks and balances effect and introduce a price pressure from issues that have little to do with supply. It is one thing when pure speculators are a minority in the market, the market will over power them. If the numbers in the article about the markets since all the cash was infused, from under $4 billion to $150 billion, from a minority of speculation to 80% of the players being speculating, it has to make something fowl.

So I am basically trying to learn something and speculating myself. Considering a lb. of peanuts cost them $0.23 before the market price increase and 0.60 after. I cannot see a justification for a $1 increase in the price. All other costs are fixed, and are likely higher than the peanut costs, like advertising, processing, shelf space, jars labels and lids, boxes, shipping. I am convinced this price increase is not driven by cost alone, but some other convoluted metric. Perhaps weighing the price point for lost sales against the price point for increasing the profits per unit to realize no loss in yearly profits. If that is the case, more speculation on the speed at which the jars will move off the grocer's shelf at what price.

Originally Posted by Treetop

So I am basically trying to learn something and speculating myself. Considering a lb. of peanuts cost them $0.23 before the market price increase and 0.60 after. I cannot see a justification for a $1 increase in the price. All other costs are fixed, and are likely higher than the peanut costs, like advertising, processing, shelf space, jars labels and lids, boxes, shipping. I am convinced this price increase is not driven by cost alone, but some other convoluted metric. Perhaps weighing the price point for lost sales against the price point for increasing the profits per unit to realize no loss in yearly profits. If that is the case, more speculation on the speed at which the jars will move off the grocer's shelf at what price.

I guess I miss where the claim is made that the bump in peanuts is mainly due to cost pressures -- I was under the impression that the severe weather has caused a short supply. Isn't this the oldest story in farming ?- bad weather is bad or those who lose a crop, a windfall for those who are spared.

The mechanism for high costs driving up prices would be by driving farmers out of the business and making less competition for those that remain. I haven't heard anyone say that people are getting out of peanuts for cost/profit problems (there is no "free" pass through of costs to sales prices).

In the case of oil are traders, are they really adding stability to the market? It seems like the traders are reactionary and add volatility to the market and it's the end users that pay the price. If oil weren't a necessity like peanut butter is not, then the end users could choose not to buy and the ridiculous ride the traders create would be brought to an end. Would you continue to buy peanut butter regularly if the price doubled and halved and everything in-between every time a peanut farmer encountered some difficulty and the traders reacted? Isn't that what we see happening all the time with oil prices?.... There may be some trouble coming at some ME country and the price shoots up and then the maybe trouble never comes to pass or it's a highly exaggerated affair but the market reacted. Or did it? I didn't buy any more or less gasoline based on that news and I'll bet most people dont.

I don't believe the end users are as reactionary as traders. I think maybe in some instances traders add stability and in other instances they do just the opposite. But again, I'm just some regular guy on the street. I don't proclaim myself to be a professional. I'm just relating what I think I'm seeing.

Originally Posted by radix2

The generally accepted idea is that the trading of futures contracts should stabilize the magnitude of price swings in a market. With futures, producers can spread out the sale of product and/or take advantage of seasonal and event factors. Without futures, crop insurance and agribusiness planning become very difficult since the only pricing signal would come at harvest times or when those able to store product sell ( you can imagine storage of physical product as another type of futures manipulation).

Over the long term I expect and believe that prices will oscillate around the same values either way (higher actually without futures due to the added costs of uncertainty ). In a well supplied and flexible commodity market (like peanuts) - over time - one expects the price to be close to the cost of production - plus the profit required to entice someone into doing that work. When prices get much away from this price - either a bunch of people get into it and drive the price down or people go broke and get out.

You have proposed that the middle man is not adding value - that is certainly not the case or people would not be paying them. All over the world, and through all history, middle men have be highly valued.

Originally Posted by radix2

I guess I miss where the claim is made that the bump in peanuts is mainly due to cost pressures -- I was under the impression that the severe weather has caused a short supply. Isn't this the oldest story in farming ?- bad weather is bad or those who lose a crop, a windfall for those who are spared.

The mechanism for high costs driving up prices would be by driving farmers out of the business and making less competition for those that remain. I haven't heard anyone say that people are getting out of peanuts for cost/profit problems (there is no "free" pass through of costs to sales prices).

Well, honestly, I don't know what a crop of 13% less than last years actually means, as I haven't seen a breakdown of what the crop has been like over the past decade, but I know we have had worse droughts in the last decade, not more than a couple years ago and I don't recall this sort of price increase. So we probably don't have enough information from just the article to make any real conclusions. It does leave me feeling suspicious though.

Originally Posted by Mr. Wiz

In the case of oil are traders, are they really adding stability to the market? It seems like the traders are reactionary and add volatility to the market and it's the end use...add stability and in other instances they do just the opposite. But again, I'm just some regular guy on the street. I don't proclaim myself to be a professional. I'm just relating what I think I'm seeing.

It is perfectly reasonable to see the anticipatory actions of the market as adding volatility - with continuous speculative trading, as you say - prices rise and fall prospectively in response to all manner of events - and you could argue that without these trades, the price would stay level until actual market shortage or glut occurs. The question is - what would the price response be in the face of the eventual market mismatches - and are there more market mismatches if there is little anticipatory action in the market. I don't think it is unreasonable to believe that waiting for actual shortage - or rotting food looking for a buyer - would cause very large price swings on market day - much worse than a contract negotiated under less immediate circumstance.

I think the basic benefits ascribed to futures and trading of commodities are - more trades gives better pricing (less bid-ask difference - allows other derivative businesses to exist, insurance, collaterization for financing - alignment of delivery to production scheduling - price discovery - balancing supply and demand.

Although it may not be intuitive, why is it wrong to think that value is very dynamic in reality ? The value of the commodity is not based on what it cost to produce, it is based on the dynamics of supply and demand.

Originally Posted by Mr. Wiz

In the case of oil are traders, are they really adding stability to the market? It seems like the traders are reactionary and add volatility to the market and it's the end users that pay the price. If oil weren't a necessity like peanut butter is not, then the end users could choose not to buy and the ridiculous ride the traders create would be brought to an end. Would you continue to buy peanut butter regularly if the price doubled and halved and everything in-between every time a peanut farmer encountered some difficulty and the traders reacted? Isn't that what we see happening all the time with oil prices?.... There may be some trouble coming at some ME country and the price shoots up and then the maybe trouble never comes to pass or it's a highly exaggerated affair but the market reacted. Or did it? I didn't buy any more or less gasoline based on that news and I'll bet most people dont.

I don't believe the end users are as reactionary as traders. I think maybe in some instances traders add stability and in other instances they do just the opposite. But again, I'm just some regular guy on the street. I don't proclaim myself to be a professional. I'm just relating what I think I'm seeing.

Sorry, but to me many of these excuses about "adding stability to the market" are just that. No different in appearance to when, for example, our government (or business) screws us and then says "it's for your benefit".

The bs want us Saps to applaud them as they stick the knife in!

And example of this was the fact that we had numbers of huge oil tankers, full up, anchored off our coast. They sat there until the price was pushed up.
That isn't "stabilising the market"! (Oh, OK, it's "stabilising the market price - UP"! )

It amounts to forcibly manipulating the market so that they gain and you lose! So much for the 'Free market' system!

Buncha greedy cowboys who need to be first up against the wall when the Revolution comes!

I think perhaps, with the help of the Sauds of course, the oil market was checked. It took quite a while and there is no doubt that the speculators outnumbering actual players likely got it off kilter though, and the Sauds opened the taps to try to get the price down to where they want it, which is what experts were saying all along that it should be considering the actual demand, which is between $80-90 a bbl. Instability is not really desired by the producers ;ole Saudi Arabia. Just like my peanut butter consumption, there was a definite downward pressure on consumption of oil during that time. And that fluctuates now almost exclusively with the strength of the dollar and typical seasonal issues. But in the end, market pressures won out, although there was damage done and record profits for the oil companies for a length of time. This was when a call went out for a windfall profits tax, by the Democrats....

If you were a big enough player you could game the system, couldn't you? Think about it, you have all these tankers filled with oil but instead of waiting for the price to go up you just start bidding it up yourself thereby adding value to your stores all by yourself. Then you can sell it at the higher price. As we've seen the price goes up faster than it goes down so you could sell off that oil that was originally in the stores for the higher price. As you sell off and your stores dwindle you sell it for less and less. Now that the price is down you buy up an bunch and fill the stores again and the process repeats itself. Heck, the whole industry could do this and we the actual end user get to pay the price. It's almost as good as a license to print money.

Originally Posted by Norman Adlam

Sorry, but to me many of these excuses about "adding stability to the market" are just that. No different in appearance to when, for example, our government (or business) screws us and then says "it's for your benefit".

The bs want us Saps to applaud them as they stick the knife in!

And example of this was the fact that we had numbers of huge oil tankers, full up, anchored off our coast. They sat there until the price was pushed up.
That isn't "stabilising the market"! (Oh, OK, it's "stabilising the market price - UP"! )

It amounts to forcibly manipulating the market so that they gain and you lose! So much for the 'Free market' system!

Buncha greedy cowboys who need to be first up against the wall when the Revolution comes!