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.
Not at all. In fact, it's quite the opposite. The whole point of the commodity exchanges is for price discovery BECAUSE, before they came into being, large companies (like cargill) would tell the farmer what it was worth. They would come to an "agreed price" based on what the buyer TOLD the farmer because the farmer had no way of knowing what the TRUE supply and demand" position was in the world. That HAD to take the big companies word for it. Hence the introduction of the commodity exchanges to provide a price discovery mechanism that was basically controlled by many people "In the know" rather than just what one buyer was saying.
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.
The vast majority of the spot vs futures price difference is simply carry cost. There will be some future "premium" to entice producers to hold (nobody wants to buy an entire years worth of product in one month) but that is really just part of the carry cost.
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.
Are you suggesting that there were no speculators in the market 100 years ago??. If so, I would have to see some evidence of that because if that is true, the market would not have worked.
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.
From all the history of the grain markets that I have read, nothing could be farther from the truth. Even 40 years ago, farmers didn't participate in futures trading, In fact, very few if any knew that there was such a thing. The very first spot contract I EVER signed with a farmer was in 1986 and that was because we had all feed wheat (due to a spring storm that delayed seeding) and not one of my customers knew that such an option even existed. They were all hauling as fast as they could because the price was sliding and they had no idea that the price could be locked in. I'm pretty confident in saying that 100 years ago, when there were no phones and everything was hauled by horse drawn wagon that farmers had no clue about contracting spot let alone forward contracting.
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.
What I think you are forgetting is that speculators are VITAL to the market and are essential for price discovery. Speculators don't just buy and sell willy-nilly. They live by supply and demand. That is why the market, which is dominated by speculators reacts to things like USDA reports. Without speculators in the market, if there were only producers and end users allowed to play, as you suggest, the market would be skewed,likely in the end users favour because they have the resources to anywise the supply and demand chains better than any farmer and could manipulate the price in their favour. While it is getting much better today than even 15 years ago, farmers tended to draw their supply and demand conclusions by looking out the window. Speculators do nothing BUT study world wide supply and demand information and trade accordingly thus creating a TRUE value based on S&D. The more players you have, the more accurate the final figures will be.Whether or not they produce or use the commodity is irrelevant. In fact, by not having the emotional component of actually selling or using the product would make the speculator BETTER at true price discovery than the actual players.