Posted on 04/28/2008 3:24:31 PM PDT by kiriath_jearim
Would it be fair to say that commodities are still a buck a gallon?
We’ll see. Once the $ begins to really rebound, which should be after the fed indicates it’s done cutting either this week or the next meeting, IMO commodities are going to get hammered. Many, except oil, are already well off their highs (Wheat is down around 30%, gold 15%, silver 20%, etc)
"What we normally have is a predictable group of sellers and buyers -- mainly farmers and silo operators," he says. But the landscape has changed since the influx of large index funds. Fund managers seek to maximize their profits using futures contracts, and prices, says Warner, "keep climbing up and up."
He's calculated that financial investors now hold the rights to two complete annual harvests of a type of grain traded in Chicago called "soft red winter wheat."
I wouldn't want to be on the caught on the way down when those investors begin to sell and then panic sell. 2 seasons worth is a lot of crops that right now is owned by no one with no intentions of taking delivery.
The behaviour of mkt players in any perceived shortage situation is and has been very nearly identical throughout history. I devoted a chapter in my book a few years ago to this phenomemon.
You (or Warner) really consider that a fund will even bother with a mkt in which it might get 100-200 contracts a day on? Whatcha smokin', fella?
Now, Rough Rice futures might very well grow in terms of open interest this year -- frankly, I suspect it has already done so. Only the most reckless of fund mgrs will put CBT rice into the fund's portfolio in ANY other than a very small degree.
I was talking about the overall commodities market. While individual commodities do better/worse than others, the market tends to move as a whole. If the world does have a recession/depression this year and next year, commodities are going to get hammered at some point with deflation just like everything else. It will be the last thing but it will happen. It’s not ‘different’ this time.
April 28 (Bloomberg) -- As farmers confront mounting costs and riots erupt from Haiti to Egypt over food, Garry Niemeyer is paying the price for Wall Street's speculation in grain markets.
Commodity-index funds control a record 4.51 billion bushels of corn, wheat and soybeans through Chicago Board of Trade futures, equal to half the amount held in U.S. silos on March 1. The holdings jumped 29 percent in the past year as investors bought grain contracts seeking better returns than stocks or bonds. The buying sent crop prices and volatility to records and boosted the cost for growers and processors to manage risk.
Niemeyer, who farms 2,200 acres in Auburn, Illinois, won't use futures to protect the value of the crop he will harvest in October. With corn at $5.9075 a bushel, up from $3.88 last year, he says the contracts are too costly and risky. Investors want corn so much that last month they paid 55 cents a bushel more than grain handlers, the biggest premium since 1999. ``It's the best of times for somebody speculating on grain prices, but it's not the best of times for farmers,'' said Niemeyer, 59. ``The demand for futures exceeds the demand for cash grains.''
Commodity investors control more U.S. crops than ever before, competing with governments and consumers for dwindling food supplies. Demand is rising with population and income gains in Asia, while record energy costs boost biofuels consumption, sending grain inventories to the lowest levels in two decades.
I followed a couple of links and found the “book.” Thank you for mentioning that! We’re a computer nerd (code, systems) family, but we’re also interested in history and current international events (which might also help with service for foreign clients).
I've been a futures trader for 36 years, m'friend, and the rise in open interest in the last 5-6 years in futures mkts is, frankly, astonishing.
We have now a phenomenon unseen ever before. There have been commodity ''funds'' for years, no big deal and who cares. For the past few years, though, there's an entirely different type of 'fund' that has come into the futures mkts.
A couple of types, actually. One type is the NOLLSO: non-leveraged long-side only fund, which buys futures or spot product, takes delivery and stores the goods. Big shooters only, please -- this is a bloody expensive way to trade. Essentially, this type of fund is betting that it can hold goods long enough for the price to rise apace w/o being beaten up by carrying costs.
In some mkts, this policy is a statistical favourite, as long as one has the required capital: crude, copper, nickel certaily, tin perhaps, any of the less watched cash mkt metals, moly, indium and iridium, cobalt, antimony, gallium and so forth . Since by definition such funds use no leverage, they can withstand a year or so of mkt downturn very easily. Two or more years' downturn becomes very dicey, though.
The other type is what I call the 'genius' funds (with a deal of irony, to be sure). This bunch, led by B-school 'quants' who don't know hard winter wheat from their collective elbows, buys renewables, the grains, the oilseeds, the softs (oh, you don't know what softs are? get some information...). There's going to be a huge blowup with these guys: a couple of good crop years back-to-back and they'll be destroyed. Next year, this year, 3 years hence, who knows...or cares? It'll happen when it happens, and it's going to be brutal for them. I can't wait...heh heh heh.
To deny that vast amounts of capital are not flowing, and/or have not been flowing into physical commodities, though, whether futures or spot, is utterly beyond fatuous and borders on being purblind.
Anytime you want accurate and comprehensive information about historical futures prices, you might consider visiting my website, Time & Timing. Free trial for a month, any time. Grab the data and run, fine with me (or even subscribe -- it's dirt cheap considering the amount and types of information available).
I do get tired of seeing otherwise sensible FReepers yammer on about these mkts w/o a clue, though. Sigh... FReegards!
Fact of the matter is, right now, a farmer needs an extensive credit line to hedge his production in the classic fashion, for instance selling 70% Dec Corn against the crop he's planting now. To that extent only, Niemeyer is correct.
However, the farmer needs a far less extensive credit line to hedge his crop using a combination of futures, forwards, and options. That doesn't make for such ''interesting'' reading, though, because the average WSJ or Bloomberg reader wouldn't either be interested in OR understand the necessary strategies for this more complex style of hedging.
It's been true for years now, and is becoming more so every year, that the farmer who thinks that just growing a good crop will be good enough is deluding himself. Marketing the crop properly is more and more essential every year. The winners in farming will be those who market well -- and hedging is the cornerstone of producer marketing.
BTW, it’s fascinating (to a nerd like me) to see as to how changes in commodities, stocks, inflation in various places and other events are affecting currencies now. ...and some of the likely near-future consequences here and there.
BTW, Time & Timing is written in a rather odd amalgam of PHP, HTML, PNG graphics, and Javascript (for which, to hell with its inventor).
It seemed like a good idea at the time...cough, cough... ;^)
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