old97fan and everyone,
Comparing the prices of consumer goods, especially for diapers, to the prices of commodities is akin to comparing the former Soviet Union to the anarchist state of Sudan. As I mentioned in an above post, “Commodity markets are physical markets, and what separates them from financial markets is that they are markets for spot assets as opposed to anticipatory assets like equities or bonds. The prices for spot assets are driven by spot conditions whereas the prices for anticipatory assets are driven mostly by expectations.” You fully neglect the spot market for commodities where you can buy the physical product at spot (cash) prices. Most notably correlation studies have shown that the relation between the Journal of Commerce industrial commodity price index (JOC) and the CORE Consumer Price Index (CPI) is insignificant. A 10% year-over-year increase in the JOC has 13 months later added only 4 basis points to the year-over-year percent change in the core CPI.
Most importantly how can one compare the price of diapers to commodities? Are diapers subject to the myriad of stochastic variables that commodities are? If a flood hits and wipes out half of the corn crop they can’t just run into the field and plant more corn like they can produce more diapers if half the diaper delivery trucks explode. And I ask you which is more likely? There is a certain window for corn planting, the tassels need a certain amount of time to set in the ground for the crop to grow and produce acceptable yields. The same goes for oil and all other commodities; they are stochastic markets, subject to geopolitical and natural disasters that curb supply. That doesn’t even cover the aspect of demand. When the chance of supply interruptions rears its head amidst never before seen demand, the futures market prices it in because we can’t spare a drop of oil right now.
To me most irksome supposition made is when you or anyone suggests that commodities are not supply and demand markets. Forgive me for being coarsely blunt, but I am futures trader or commonly known as a villainous speculator, that suggestion is sheer lunacy. The holy grail of the grain markets is the USDA Supply and Demand reports, these reports no doubt have the greatest effects on the price of grain futures. Oil has reports from the IEA and investors look at strategic petroleum reserves and price in demand in slumping economies. You may say well the American economy is down and we are not going to use as much oil at these prices. However a recent IEA report states, “90% of global oil demand growth is in diesel-hungry Asia (especially China), South America and the Middle East.” In addition the same 97 page medium-term oil market report said that….
“While recognizing that speculation can have a day-to-day impact on price moves, the fact that all producers are working virtually flat out and that there is no sign of any abnormal stock build gives a strong indication that current oil prices are justified by fundamentals. Similarly, while high forward prices may reflect concerns about peak oil or sustained demand growth, they too could only impact spot prices if they started to create a forward price premium sufficient to encourage stock building. Often it is a case of political expediency to find a scapegoat for higher prices rather than undertake serious analysis or perhaps confront difficult decisions.”
Here is a link to the summary of the report, http://www.iea.org/Textbase/press/pressdetail.asp?PRESS_REL_ID=267
You need to go back and read and understand the necessity of speculators; everyone does, including me. Southwest Airlines chose to hedge jet fuel by buying heating oil futures contracts and has effectively locked in 70% of it’s fuel at a price equivalent to $51 a barrel of crude oil. Who do you think provided the liquidity and even the sellers to allow Southwest to buy those contracts? SPECULATORS
Speculators are not gamblers; they are researchers who painstakingly pour over data of exports/imports, supply/demand all in the name of hoping to find the price of oil, corn, and other valued commodities. They are contributing to price discovery and providing liquidity and what should be a well-valued opinion. To limit speculation would be to say that the majority opinion is the least valuable. If that is the case then why does the government spend money on campaigns to encourage voting?
You know it’s funny my dad told me a story, a while back when he was walking up to the Chicago Board of Trade for work there was a group of farmers protesting with a sign that said “CBOT=Vagas”. Of course he got a chuckle that misspelling Vegas immediately diminished their credibility as protesters. But do you know what they were protesting? Low corn prices, they thought too many speculators and traders were purposely driving the price of corn too low.
I think it is important that everyone mention their careers along with a post, it might give an indication as to why they have directed their opinion the way they did. I am a futures trader but I promise I leave my bias at the door, I just look at facts and realities. You can’t use your emotions to trade, if I did I would be short oil at $90.
Casey
Son of a futures trader, futures trader, and just like the author “speculator”
