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post #21 of 33 (permalink) Old 12-13-2018, 08:45 AM
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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.
Why does someone need to handle the product to understand supply and demand?

I dont see how growing it will help you understand how much supply there is world wide and who is going to want to buy it. Please explain.

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post #22 of 33 (permalink) Old 12-13-2018, 11:16 AM
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What do you mean you have to deliver (as a seller) or receive (as a buyer), is that not the very definition of cash settlement? You trade cash instead of the commodity.

A buyer in the futures market cancels a 100M MT of wheat, does not take delivery, pays it out in cash. What happens to that 100M MT of wheat once the cash buyout is exercised? Is it dumped in the ocean, burnt, or is there a mechanism that says no more offers to sell can be issued till options to purchase on that initial 100M MT are in place?



No. None of this is linked to supply and demand. Its a casino. Paper is traded regardless of how many actual tonnes enter and leave the system on any given day. Unless someone can prove otherwise, because so far i have not seen anything to indicate this.



So, again, how does cash settlements of future contracts maintain free market principles of price discovery or supply/demand?



As for futures markets in barley, they certainly do exist. I have one right now on malt barley. Signed a contract a month ago at a price i liked and it will be delivered in the future to ensure i lock in a price that i want. You may argue that all the other elements of the casino are not in place like, say corn, but it most certainly is a futures market. I also have sold yellow mustard which has no way of looking at what is being offered for price 6 months from now. Well thats not 100% correct because there are production contracts out right now at $0.34c/lb for upto sep 2019 delivery so that to me meets the definition of a "futures contract" because i am agreeing to sell a certain product, at a certain price, at a time in the future. The reason for this arrangement is the buyer wants to assure he has a commodity supply, at a specific price, in the future. Yet there is no futures market for yellow mustard. Is that correct?



I could go on but perhaps someone wants to correct me where i am wrong here first because i must not be understanding something. I read so many articles on the wonders of futures trading for farmers yet all i see is how the commodity producer has lost the ability to be the price setter and instead has become a price taker as cash settlements has created. Much like what RunningRedHard is saying.

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post #23 of 33 (permalink) Old 12-13-2018, 11:44 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.
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.



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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.



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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.


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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.



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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.
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post #24 of 33 (permalink) Old 12-13-2018, 11:45 AM
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I can see your reasoning. However I don't think producers have ever been price setters even before the age of speculation. And isn't the very definition of a free market that neither producers or consumers are price setters but discover a price acceptable to both?

If we're going to talk about futures markets, we have to define our terms a bit. In my posts I use the term futures to indicate contracts bought or sold on a commodity exchange such as ICE, CBOT, or MGEX. Signing a deferred delivery contract for a commodity that is not currently traded on an exchange, such as your example of barley, is not a futures sale by that definition. But you raise a good point and you also answer a previous question I raised. There are, in fact, other methods of determining price. You've described one. A buyer puts out tenders at different prices and sees who bites. You've signed a contract for barley, so you and the buyer have settled on a fair price. But without a futures market, it's a bit harder to determine if the offer is as good as it should be. The contract price eliminates price risk for you, but does expose the handler to price risk. It's a legitimate way to do business and for most of us, this is pretty much how we do things, even when there's a futures market underlying a commodity.

As near as I can tell *perceptions* of supply and demand are the most fundamental drivers of futures markets, despite the speculators. Except for events like big fund sell offs, prices are mostly influenced by things like weather, crop size, etc.
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post #25 of 33 (permalink) Old 12-13-2018, 11:53 AM
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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.
Well said, and this is why I pay good money for a marketing newsletter that summarizes and analyzes the week's trends, indicators, and statistics. Gives us a bit of an idea of where things are heading as we plan our sales. I don't have time or the inclination to study things as closely as some like to do. So I don't mind paying people that I trust are fairly smart to do that for me. They give advice that I freely ignore.
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post #26 of 33 (permalink) Old 12-13-2018, 11:58 AM
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I could go on but perhaps someone wants to correct me where i am wrong here first because i must not be understanding something. I read so many articles on the wonders of futures trading for farmers yet all i see is how the commodity producer has lost the ability to be the price setter and instead has become a price taker as cash settlements has created. Much like what RunningRedHard is saying.
Farmers have NEVER been price setters. They have always been price takers and always will. The reason for this is that there is too much competition and farmers carry too much debt load. EVERY farmer is in competition with his neighbours and they are all on very different financial footing. As long as farmers insist on carrying high debt load, they will be price takers because they HAVE to sell certain amounts at certain times to make their payments. The "competition" part come in where, you may want, and be financially able, to hold out for a better price, your neighbour, that has high debt and is forced to sell to make his payments, keeps the price down by selling into a low market. The buyer don't HAVE to pay any more because they KNOW that some guys will be forced to sell anyway.
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post #27 of 33 (permalink) Old 12-13-2018, 01:02 PM
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I got you LTK, i see where i have something wrong in my overall view. 50 or100 years ago farmers did not participate in futures so were potential victims of manipulation. But the farmer does have a tool these days in that he can grow a multitude of grains, well more than one anyway. So if markets are down in one area he can shift to another grain. Now we can contemplate that all grains could be forced down by a few big players. In which case many players in the market is a good thing. So it depends how you look at things, in a truly competitive market place, if one company was driving down the price then another company would recognize the buying opportunity and purchase the cheap commodity thus destroy the first company's attempt to drive price down. It actually isn't the number of players (actual buyers and speculators) but the volume of funds available to them. 6 players with 40% of the purchasing power is still what is important in cash settled contracts regardless if there are 100 or 100,000 players.

But, getting back to history, yes - you had to demonstrate intent to receive a product in order to participate in buying futures. You never had to actually receive them and could do cash settlements, but you had to have bin space for example to hold the volume of the contract you were buying. Not just a desk. And that ultimately was what drove the change to wide open cash settlements was the ability to verify if a trader was in the position to receive a commodity or simply trying to flip paper to move markets. It is an interesting discussion. We got into this a year ago where block chain was a possible tool to link volume offered with volume received. If that were ever done it would be a heck of a good system i think.

And to get to Torriem comment regarding perceptions, this is ultimately what it comes down to and why i take the position that extensive cash settlements are a filter to price discovery. Perceptions are managed in a few ways, mainly by USDA and StatsCan forecasts and reports of large sales, as well as weather reports. The markets can be moved simply on the perceptions created and paper contracts exchanged rather than actual volume of commodity in the system.

Anyway, its good to hear some thoughts. My personal thinking is if cash settlements could be curtailed so that, say 25% of settlements were done in cash rather than +95% then we would have stronger market signals. I may change my view but right now that is where i am.

So we get back to the original post, if a large order is placed are you actually buying the commodity or just changing perception? Is it fair to say how many cash contracts are traded is relevant to figure out the right answer?
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post #28 of 33 (permalink) Old 12-13-2018, 01:10 PM
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And LTK i get what you are saying about debt and price takers. That factors into what i am saying. I started to get into it and how it plays in the whole futures trading idea but we are getting off track. I understand what you are saying, but it could be argued the other way if considering a world where debt wasn't how the system worked. One could also argue the futures system drives the ability to take more debt load rather than make savings part of a business model. Chicken or egg.
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post #29 of 33 (permalink) Old 12-14-2018, 12:19 AM Thread Starter
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Price fixing is still in my head , elevators buy by holding the future mirror in front off me as that’s the most honest playground.
But it’s going in a ocean liner to Timbuktu and nobody knows for what price they sell .
If I do the math on one bu wheat vs one loaf off bread �� I’m not feeling to good .
Same with barley or any other commodities.
I can’t keep track off who owns my retailer or elevator tomorrow,they should all use Velcro labels on their clothing for easy changing .
This crop year did not produce a lot off milling wheat around the globe and price should be around $10 .
But maybe Ltk is right farmers have too work the debt instead off let the market do the work.
NYT got yet another article about a refinery that bribes politicians to keep vehicles as gas guzzlers , selling more fuel (greed) .
Ahhh another doobie who cares anymore
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post #30 of 33 (permalink) Old 12-14-2018, 12:23 AM Thread Starter
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https://www.nytimes.com/2018/12/13/c...%20Environment

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