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post #11 of 33 (permalink) Old 12-12-2018, 11:48 AM
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100 years ago a futures contract was settled with physical delivery of the commodity. These days 90 to 95% of contracts are cash settlements. So it is a casino. I don't see how one can claim "price discovery" when $Millions of paper contracts are traded daily by people in offices with absolutely no intention or ability to take delivery.

Yet we are told this is all OK. Perfectly normal and a true representation of value of a commodity.

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post #12 of 33 (permalink) Old 12-12-2018, 03:41 PM
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Yes you got that backwards but you have a good grasp of how the markets work and how they can be used to your advantage. Not enough farmers understand this IMO.
I know that farmers who hold grain to sell should sell futures contracts to hedge the price, but aren't buyers doing the opposite? I'll have to think that through a little bit. Time for a refresher course. Even though we don't sell and buy futures on our farm, knowing how it works helps us make marketing decisions and analyze where the market seems to be moving. EDIT: End users, such as millers buy futures. Producers and intermediaries would sell futures because their ultimate goal is to sell the grain in their hands. At least I think that's the logic.
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100 years ago a futures contract was settled with physical delivery of the commodity. These days 90 to 95% of contracts are cash settlements. So it is a casino. I don't see how one can claim "price discovery" when $Millions of paper contracts are traded daily by people in offices with absolutely no intention or ability to take delivery.

Yet we are told this is all OK. Perfectly normal and a true representation of value of a commodity.
Sure. But many players speculating in the market create trading volume, which we as farmers depend on for placing hedges (or grain buyer hedges that back our delivery contracts). Without them, who would buy the futures contracts we offer? And although that leads to more price volatility, it also provides for people willing to buy and sell contracts, which makes the whole thing work. In many respects it weakens the ability of big grain companies to manipulate the market because there are lots of other players who don't actually care about the commodity in question. This is a good thing, in my opinion. Plus it's a zero sum game. If you dislike speculators, if you can cash in on a gain in the market you're taking those speculators' money. Worst case you've given them a bit of money, but the result for us is the same: we've locked in a price that we felt was fair. In short you can pretty much ignore the folks who aren't actually buying grain on the futures market.

Secondly, how else would you propose to determine pricing for a commodity to be delivered in the future? What other mechanism would both help us as producers and those who depend on a steady supply of product (the millers)? There are lots of specialty crops that don't trade on an open market like wheat. And you know what, making marketing decisions is so much harder with those crops. For example, pulses.

A few years ago I heard that Canola trading volume on the ICE was actually quite low, leading some to wonder if it would go away. If we lost futures trading for Canola, probably prices would track soybean futures.

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post #13 of 33 (permalink) Old 12-12-2018, 06:43 PM
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Ken wonít complain when the specs are caught in a short squeeze.

Completely agree on the volume torriem, sometimes when the price is going up itís just speculators driving it so we get to sell it. Only trouble is they also drive it down but it canít go up every day as good as that sounds.
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post #14 of 33 (permalink) Old 12-12-2018, 07:50 PM
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Its looking at one side of the coin. Futures trading with cash settlements is said to prevent an entity from cornering the market. Fair enough. So Canada is looking to be getting in to a situation of short on barley supply right now, lets say barley is sold out in Canada. Can you still buy and sell futures as if there is an infinite supply of barley? There is indeed an infinite supply of paper contracts. So, how can this be "price discovery"? It is not. It is simply trading what one person feels is the price of a piece of paper with another person who thinks that piece of paper is worth a different value.


As i say, the futures market is one thing, but to beleive cash settlements of contracts so that the supply of the actual commodity is totally lost in the volume of paper contracts is not how you realize true price discovery. When a future contract is written for delivery of, say 10,000 tons and only amount of the commodity is traded then we have a proper system. When you offer 100,000T and from that 1MT of paper contracts are created and destroyed then it is very hard to argue "price discovery". But here we are.



Just so we are clear, everyone thinks infinite supply of paper contracts is good for price discovery?
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post #15 of 33 (permalink) Old 12-12-2018, 08:03 PM
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I know that farmers who hold grain to sell should sell futures contracts to hedge the price, but aren't buyers doing the opposite? I'll have to think that through a little bit. Time for a refresher course. Even though we don't sell and buy futures on our farm, knowing how it works helps us make marketing decisions and analyze where the market seems to be moving.
When you sign a contract to sell to a grain company, of course, they are agreeing to buy. To hedge that position, the grain company has to sell that contract on the futures market. Buy on one side, sell on the other. Example, for simplicity leaving out details like basis, company contracts to buy 100T of your product for $100/T for may delivery. They then sell 100T of that product on the May future to hedge that contract against market movements. Come delivery time lets say the market went down $20/T. Even though the product is only worth $80, the company still pays you $100. They then buy back their hedge contract that they sold for $100 for the new price of $80 earning back the $20 that they lost by paying you $100 in an $80 market. On the flip side, if the market had gone up by $20, they would lose $20 a tonne when they buy back their hedge that they sold for $100 and now have to buy back at $120 but make that back when they take your product that they paid $100 for and sell it into a $120 market. That's a simplified version of how a company hedges the contacts they make with farmers.


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Sure. But many players speculating in the market create trading volume, which we as farmers depend on for placing hedges (or grain buyer hedges that back our delivery contracts). Without them, who would buy the futures contracts we offer? And although that leads to more price volatility, it also provides for people willing to buy and sell contracts, which makes the whole thing work. In many respects it weakens the ability of big grain companies to manipulate the market because there are lots of other players who don't actually care about the commodity in question. This is a good thing, in my opinion. Plus it's a zero sum game. If you dislike speculators, if you can cash in on a gain in the market you're taking those speculators' money. Worst case you've given them a bit of money, but the result for us is the same: we've locked in a price that we felt was fair. In short you can pretty much ignore the folks who aren't actually buying grain on the futures market.

Secondly, how else would you propose to determine pricing for a commodity to be delivered in the future? What other mechanism would both help us as producers and those who depend on a steady supply of product (the millers)? There are lots of specialty crops that don't trade on an open market like wheat. And you know what, making marketing decisions is so much harder with those crops. For example, pulses.

A few years ago I heard that Canola trading volume on the ICE was actually quite low, leading some to wonder if it would go away. If we lost futures trading for Canola, probably prices would track soybean futures.
Well said. Price volatility is a farmers best friend because if prices were stagnant all of the outfits that supply inputs would price them so it JUST barely pays for you to buy them and they would reap all of the profits from the farmers work and risk. With price volatility, that is a moving target and is more difficult for input suppliers to nail down. Of course, like any "best friend" price volatility can turn on you if you do not pay enough attention to it and sometimes even disappoint you without malicious intent.
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post #16 of 33 (permalink) Old 12-12-2018, 08:16 PM
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Its looking at one side of the coin. Futures trading with cash settlements is said to prevent an entity from cornering the market. Fair enough. So Canada is looking to be getting in to a situation of short on barley supply right now, lets say barley is sold out in Canada. Can you still buy and sell futures as if there is an infinite supply of barley? There is indeed an infinite supply of paper contracts. So, how can this be "price discovery"? It is not. It is simply trading what one person feels is the price of a piece of paper with another person who thinks that piece of paper is worth a different value.


As i say, the futures market is one thing, but to beleive cash settlements of contracts so that the supply of the actual commodity is totally lost in the volume of paper contracts is not how you realize true price discovery. When a future contract is written for delivery of, say 10,000 tons and only amount of the commodity is traded then we have a proper system. When you offer 100,000T and from that 1MT of paper contracts are created and destroyed then it is very hard to argue "price discovery". But here we are.



Just so we are clear, everyone thinks infinite supply of paper contracts is good for price discovery?
Are you suggesting that producers should not be able to sign contracts and sell before the crop is in the bin?. Every time a farmer signs a contract for crop that is still in the field he is a speculator.
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post #17 of 33 (permalink) Old 12-12-2018, 10:21 PM
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No, i am saying futures trading should go back to how it was originally intended. As i said in my first post - settlement on delivery, or get back to the courts and demonstrate an intent to receive a commodity on expiry of a contract. This is how free markets work - i have a product for sale and a buyer wants to take possession in the future. We come to an agreement. There is only xxx amount of product therefore supply/demand drives pricing and therefore is "price discovery". When there is no intent to receive a product and futures contracts keep being written and settled in cash there is no price discovery. The price is based on the perceived value of that piece of paper. You can be completely out of a commodity yet futures contracts will still be created and settled.



So here is where i say "side of the coin". We can argue that this system still works because the perceived value of that paper contract reflects on the actual commodity. People watching the commodity will buy or sell the paper as they see fit. But what happens is the spot price is always compared to the futures price so you don't see wide swings regardless if the commodity even exists. Unless you can sell direct to a buyer but then we are getting completely away from a discussion on futures in general.



So it seems to me, in a perfect world (ie 100 years ago) the futures market kept a better linkage to price discovery because you had to demonstrate you could supply or receive the commodity being traded. You could still cash settle also. This also created more volatility than with todays cash settlements that represent up to 98% of trades. That volatility favored the farmer in my opinion since he protected himself from low prices by storing grain, capitalized on high prices by selling while still participating in the futures by selling some production well in advance to protect against low prices.



It depends how you view it. Some like the notion that speculators can trade which ultimately dampens market swings (more participants). My personal view is the original structure of futures trading created more accurate price discovery so the farmer could participate in the futures while still taking advantage of short term volatility. And if that volatility led to low, sustained future prices you would look at another crop to grow which true price discovery would soon sniff out.
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post #18 of 33 (permalink) Old 12-12-2018, 11:12 PM
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The prices are now dictated by traders who never even touch the commodity (or likely even know what it actually is) and doesn't reflect supply demand at all.

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post #19 of 33 (permalink) Old 12-12-2018, 11:14 PM
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I happen to agree that paper trading should realistically be based only on actual product out there. At the very least, there should be limits. For example, having 10 times the number of contracts traded without product to back it up is subject to pure manipulation. It doesn't entertain reality, but entertains a gaming philosophy where there is winners and losers who don't even care about the quantity of actual product out there. They are trading positions.

I do understand the idea of a miller requiring a steady stream of grain to keep his mill going. But if there is no real grain behind paper, how can his mill operate? Someone is taking this risk for the miller. These days, farmers are supposed to be speculators and risk takers and hold the bottom line position of the risk. True, you can sell next years crop right now. If there is no crop next year, I am afraid you will have to go bankrupt or get a huge loan to continue to operate. Someone has to pay for that? (The farmer!)

The system has been designed to live off the farmer's products and many middle man make a living doing just that.


As I said, stock markets had a purpose at one time and gambling wasn't it! They were there to fund rather large projects (gold mines, railways, factories etc.) and were a place to raise capital in order to do that. Now these markets are totally filled with day traders (speculators) and people hoping companies do badly (selling them short). In the marketplace now, for every winner there is a loser, the difference being the commission charged and insider knowledge. That should not be its purpose - it is a sideshow that net's the insiders much of the money. The mechanisms of puts, calls and shorts do not really benefit economies. They only benefit the traders and those that live off the backs of the system. It is parasitical system!

That is one of the reasons the system crashes at times. If 99% of the speculators take a short position in the market and all prices collapse, these speculators call the bluff and the institutions fail because they can't cover what they issued! It is all fine if the market goes against the shorters, then the institutions take the money and run and no one complains or is worried. If a market holds its own, say 50% short, 50% long, they still make lots of money! Each position has money built into it so that they can never lose. Also, keep in mind that when a gambler place trades or issue such things as a 10% trailing stop loss, someone else (ie. The Institution) knows it.

They can tip the market at will if they control enough of the stock in order to force you out. Corruption at play can often be found with the help of MSM manipulation. Simply announcing that a corn borer has knocked out 50% of the crop, will create a huge backlash. If someone knows how to play it, they stand to make a huge profit.

This was said to have happened at 911. Those who knew what was going to take place, shorted the airline stocks. When the event occurred, they cashed it in. It was one of the tattle tale signs of foul play and where gambling pays off and can be optimized.

No one still has answered how markets work with durum or specialty crops. This is where there is real market place competition. The Cargills (Macmillan Family), the Bundys of the world, Patterson, Pioneer and so on have to put out a bid price. This can be a huge benefit to farmers as there is much more volatility and more reality to the market place. Notice one thing about the commodity system, a lot of these organizations are private and are not accountable to shareholders.

If the rains don't hit India, the demand increases, the supply then decreases and the price increases. That is the way supply/demand is meant to work. Why aren't farmers speculating on fertilizer futures, glyphosate futures and so on? As a bottom feeder, that is out of your hands. Competition from the various firms is all that is required! Not true?

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post #20 of 33 (permalink) Old 12-13-2018, 09:41 AM
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No, i am saying futures trading should go back to how it was originally intended. As i said in my first post - settlement on delivery, or get back to the courts and demonstrate an intent to receive a commodity on expiry of a contract. This is how free markets work - i have a product for sale and a buyer wants to take possession in the future. We come to an agreement. There is only xxx amount of product therefore supply/demand drives pricing and therefore is "price discovery". When there is no intent to receive a product and futures contracts keep being written and settled in cash there is no price discovery. The price is based on the perceived value of that piece of paper. You can be completely out of a commodity yet futures contracts will still be created and settled.



So here is where i say "side of the coin". We can argue that this system still works because the perceived value of that paper contract reflects on the actual commodity. People watching the commodity will buy or sell the paper as they see fit. But what happens is the spot price is always compared to the futures price so you don't see wide swings regardless if the commodity even exists. Unless you can sell direct to a buyer but then we are getting completely away from a discussion on futures in general.



So it seems to me, in a perfect world (ie 100 years ago) the futures market kept a better linkage to price discovery because you had to demonstrate you could supply or receive the commodity being traded. You could still cash settle also. This also created more volatility than with todays cash settlements that represent up to 98% of trades. That volatility favored the farmer in my opinion since he protected himself from low prices by storing grain, capitalized on high prices by selling while still participating in the futures by selling some production well in advance to protect against low prices.



It depends how you view it. Some like the notion that speculators can trade which ultimately dampens market swings (more participants). My personal view is the original structure of futures trading created more accurate price discovery so the farmer could participate in the futures while still taking advantage of short term volatility. And if that volatility led to low, sustained future prices you would look at another crop to grow which true price discovery would soon sniff out.
All grains are still deliverable, if you donít believe me take a position on the board and leave it. You will eventually be told to deliver or take delivery of what you bought or sold.

I donít think anything has changed, could you not buy a contract and then sell it in the old days? Did each contract just have one transaction? Be pretty pointless to have a futures market if when you sold something you would have to deliver and when you bought it you would have to take delivery. Why not just sign a cash contract instead?

There is no barley futures or none that trade with any volume anyways. If there was and you decided to sell them when there was none around there is no guarantee that you could get out of that. You need someone to sell so that you can buy to even out your position. If no one will sell you have to deliver. They will likely let you buy at some point but it could be wildly expensive.

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