Futures trading – good or bad for commodity prices?

Here’s a post from a Serious Home Baker who is very, very smart, experienced and educated. He was responding to the bitter comment of a wonderful guy who is a professional baker, struggling with rising prices of flour and other ingredients.

I no longer trade futures, but spent the 80’s and early 90’s on the floor of the Chicago Board of Trade trading options on futures.

Whenever prices are high, consumers are unhappy. When prices are low, producers are unhappy. The one thing they seem to have in common is that whoever’s unhappy, they blame the “greedy futures traders.”

I remember in the eighties when ag prices were depressed at terribly low levels – Illinois farmers then too blamed the “greedy futures traders.” One day they came to downtown Chicago en masse and surrounded the CBOT with their tractors to protest that supposed greed.

In 1971 Nixon blamed the monetary crisis on “the international money speculators” who “have been waging an all-out war on the dollar.” The real cause of course was Nixon’s refusal to honor the United States’ obligation
under the Bretton Woods agreement to exchange dollars for gold at the agreed-upon rate. That’s what led to the collapse of Bretton Woods – not speculation.

Even governments are generally unsuccessful in controlling markets. The Japanese government has truly been waging a concerted war on the yen, trying desperately to keep its value down in order that Japanese exports remain competitive. Even with that concerted effort and its giant resources, it has been unsuccessful. The Japanese yen keeps climbing, and is currently at all-time highs.

So how would a disparate, uncoordinated group of speculators manage to do what entire governments cannot?

The truth is that over the last several years, all asset classes have gone up together as the fed has been printing money at unimaginable rates. If you look at charts of stocks, crude oil, precious metals and agricultural commodities, you will find they are virtually mirror-images of each other.

Funny how no one complains about rising stock prices, or points the finger at market manipulation and greedy speculators. But when agricultural prices go up – which is really a reflection of the same phenomenon as rising stock prices – a scapegoat must be found.

Every futures transaction is a contract between two parties, one of whom agrees to buy at a certain price in the future, and another who agrees to sell at that price. So it’s a zero-sum game – for every dollar made by one speculator, another speculator loses a dollar. So how on earth would all the greedy longs (buyers) of wheat collude to drive the price up over the interests of all the greedy shorts (sellers)?

Also, did anyone happen to notice that last week in his congressional testimony, Fed chairman Bernanke took credit for the rise in stock prices, while blaming the rise in energy, precious metals and food on other factors?
Very entertaining.

Very well put, sir.

Wonder if this former trader knows my all-time hero, Rick Santelli?


About InvestingforOne

I've been investing in various assets by myself using a discount broker for many years. Over that time, I've developed some theories that others might find useful. Plus, there is more to investing than money. Time, talent, work, friends, family all go into developing a good and satisfactory strategy.
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