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If you look at old crop/new crop spreads over other commodities such as corn and soybeans it's clear that the disconnect between the front and back month is ent

by zer8k 3y ago

If you look at old crop/new crop spreads over other commodities such as corn and soybeans it's clear that the disconnect between the front and back month is entirely on the yield (and therefore the price) of the future harvest. In this case, the futures contracts going out to 2025 are pricing in a poor crop harvest (and therefore a higher future price). By construction the future will "collapse" to the cash price at expiration (modulo carry costs) meaning that the future is exactly representing the market consensus on future price. This is no different than a stock market where a stock's theoretical price is the consensus on discounted future cash flows of the company. If a stock had an expiration date then it would have to collapse to the "cash price" (e.g. the exact discounted cash flow) at expiration otherwise funny arbitrage things happen.

fngjdflmdflg 3y ago
>In this case, the futures contracts going out to 2025 are pricing in a poor crop harvest (and therefore a higher future price). May 2024 futures are also up almost the same amount.[0] You can call that betting on the future but it's a big stretch. It's obvious that it is largely reflecting the current market price. [0] https://www.cnbc.com/quotes/@CC.1/ https://www.cnbc.com/quotes/@CC.1/
- fngjdflmdflg 3y ago
  Since I can't edit anymore, it's a new comment. Here are the futures for March 2024 which already expired.[0] It is clear to see that this is not wild speculation. You are right however that people can still speculate on the harvest and demand of a commodity. But the nature of this speculation is very different from speculating on if Nvidia will be worth 2 trillion in the future. Additionally as futures expire that means you can always stay solvent by shorting a future that is soon to expire, which cannot be said with stocks (I realize that this is a separate point from the one I made initially). And the fact that futures expire itself causes there to be less speculation because the window of time for the asset to appreciate is much smaller. Taking your example of a stock that expires, Nvidia's stock would be much lower now if it expired next year. Commodities simply don't go up 100x like stocks do. When a commodities does go up, it make more sense to assume that yields went down or that demand went up. I didn't mean to say that it's impossible that traders speculate on commodities. [0] https://www.barchart.com/futures/quotes/CCH24 https://www.barchart.com/futures/quotes/CCH24 (takes some time to load)
  - zer8k 3y ago
    > commodities don't go up 100x like stocks do This is entirely due to the limit mechanism that tries to keep prices approximately in line with supply and demand. There have been several instances of grains in particular locking limit up during a blight over and over again. In recent history oil going negative is another example. If it wasn't for the limit mechanism (and in some cases, the literal government) stepping in they absolutely could 100x. When you're a goods supplier you'll pay nearly anything once prices reach your "uncle" level. The dynamics at limit are somewhat interesting as it's a case where the entirely market has consensus that "I need to buy (sell) now or I'm hosed". I wasn't suggesting you were saying you couldn't speculate on commodities. I was mostly suggesting that even removing traders the "speculation" occurring is due to the anticipated future value of that commodity. If it wasn't, then buyers and sellers would go to the cash market which while extremely volatile may also be a smart choice for at least some of the crop. IMO limit mechanisms are not nearly aggressive enough and I've been caught in a few of them myself. One of the few rare nightmare scenarios for a commodity trader. But making limits more aggressive would imply some form of price control which also would not be great.

by zer8k 3y ago

fngjdflmdflg 3y ago

>In this case, the futures contracts going out to 2025 are pricing in a poor crop harvest (and therefore a higher future price). May 2024 futures are also up almost the same amount.[0] You can call that betting on the future but it's a big stretch. It's obvious that it is largely reflecting the current market price. [0] https://www.cnbc.com/quotes/@CC.1/ https://www.cnbc.com/quotes/@CC.1/

fngjdflmdflg 3y ago
Since I can't edit anymore, it's a new comment. Here are the futures for March 2024 which already expired.[0] It is clear to see that this is not wild speculation. You are right however that people can still speculate on the harvest and demand of a commodity. But the nature of this speculation is very different from speculating on if Nvidia will be worth 2 trillion in the future. Additionally as futures expire that means you can always stay solvent by shorting a future that is soon to expire, which cannot be said with stocks (I realize that this is a separate point from the one I made initially). And the fact that futures expire itself causes there to be less speculation because the window of time for the asset to appreciate is much smaller. Taking your example of a stock that expires, Nvidia's stock would be much lower now if it expired next year. Commodities simply don't go up 100x like stocks do. When a commodities does go up, it make more sense to assume that yields went down or that demand went up. I didn't mean to say that it's impossible that traders speculate on commodities. [0] https://www.barchart.com/futures/quotes/CCH24 https://www.barchart.com/futures/quotes/CCH24 (takes some time to load)
- zer8k 3y ago
  > commodities don't go up 100x like stocks do This is entirely due to the limit mechanism that tries to keep prices approximately in line with supply and demand. There have been several instances of grains in particular locking limit up during a blight over and over again. In recent history oil going negative is another example. If it wasn't for the limit mechanism (and in some cases, the literal government) stepping in they absolutely could 100x. When you're a goods supplier you'll pay nearly anything once prices reach your "uncle" level. The dynamics at limit are somewhat interesting as it's a case where the entirely market has consensus that "I need to buy (sell) now or I'm hosed". I wasn't suggesting you were saying you couldn't speculate on commodities. I was mostly suggesting that even removing traders the "speculation" occurring is due to the anticipated future value of that commodity. If it wasn't, then buyers and sellers would go to the cash market which while extremely volatile may also be a smart choice for at least some of the crop. IMO limit mechanisms are not nearly aggressive enough and I've been caught in a few of them myself. One of the few rare nightmare scenarios for a commodity trader. But making limits more aggressive would imply some form of price control which also would not be great.