Government to Examine Swings in Crop Futures
March 25th, 2008It is absolute madness that commodities are bought and sold using leveraged vehicles in markets that allow participation by speculators; individuals and organizations who have no interest or connection to the underlying physical commodity.
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Participants who are trying to use the futures market in a legitimate manner, to secure supplies of goods, or to sell goods, at agreed upon prices in the future, are getting wiped out because the price action has little to do with the underlying supply and demand of the commodities!
—CBOT Resembles Carnival Act as Billion Dollar Black Box Operators Move In
Via: Business Week / AP:
Costlier corn flakes, pricier pizzas and painful pump fill-ups share more than top billing among consumers’ worries.
They’re all riding a roller coaster of commodity market prices, where peaks are unusually high. Like oil futures, agricultural futures have experienced dramatic highs and lows in recent months as Wall Street investors flock to commodities for protection from the falling dollar and slumping stocks.
But the ups and downs in futures prices are giving grain sellers and farmers financial vertigo. Instead of finding predictable prices for wheat, corn and other crops in futures markets, they’re getting daily price jolts and no refuge from uncertainty.
That has prompted government regulators to examine what forces, if any, have thrown the markets off balance.
The Commodity Futures Trading Commission said last week it will meet with farmers, traders and grain sellers next month to assess the recent price jumps.
The loss of equilibrium has rattled large grain merchants that buy wheat and other crops and sell them to food processors like Kellogg Co. and General Mills Inc.
“There has been a huge influx of capital from index funds and pension funds to the point now where futures markets are not reflecting actual supply and demand,” said Todd Kemp, spokesman for the National Grain and Feed Association.
As a result, Kemp said grain buyers have had to pay more to hedge themselves against future price shifts. Some of those expenses have been passed on to food processors and then to consumers. The futures volatility is adding to a cocktail of cost-raising factors that have pushed bread, cereal and other staples to record highs.
I too am invested in DBA and it is because I see food prices over the long term as going no where but up. This article seems to imply that the futures market is being whipped up by speculation but isn’t there an underlying cause as well – which is that food is getting more and more dear and it will continue to be so?
This article explains pretty well I think, what “tech traders” can do to the price of a commodity they really have no heart in.
http://news.silverseek.com/TedButler/1206378069.php
Kevin,
I read again your post at the top of this article and can only wonder “where was I” that I didn’t get what you wrote at that time.
Thanks.
I’ll try to spend more time absorbing your train of thought. You are an excellent teacher and are several cars ahead of me on the train.
“I see food prices over the long term as going no where but up.”
Ouch. I usually use sentiment like that as a sell indicator. But I’m strickly using the squiggly lines and blinking numbers now.
Very early on in my trading career, when i was working for one of darth vader’s corporations on wall st, i had a mentor, who gave me a wonderful peace of advice:
always trade what you see, not what you think.
– cybele
“always trade what you see, not what you think.”
Exactly. The most boneheaded trades I’ve ever made in my life were based on what I thought I “knew” about the fundamental situation, the company, the commodity, etc.