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I looked up onions, lettuce and tomatoes (because burgers), and the volatility actually looks very similar. Am I missing something or looking at the wrong thing
by chirau 13d ago
I looked up onions, lettuce and tomatoes (because burgers), and the volatility actually looks very similar. Am I missing something or looking at the wrong things?
Tomato: https://fred.stlouisfed.org/series/WPU01130217 https://fred.stlouisfed.org/series/WPU01130217
Onion: https://fred.stlouisfed.org/series/WPU01130216 https://fred.stlouisfed.org/series/WPU01130216
Lettuce: https://fred.stlouisfed.org/series/WPU01130215 https://fred.stlouisfed.org/series/WPU01130215
- gradus_ad 13d agoThe weather affects all crops
- vishalontheline 12d agoAnd the cost of transportation.
- brookst 12d agoBut isn’t the point that futures trading reduces volatility from things like weather?
- hyperhello 12d ago“Absorbs” volatility might be more accurate.
- brookst 12d agoI will resist the urge to inquire about the difference between reducing and absorbing.
- collingreen 12d agoI won't. What's the difference here between resisting and absorbing volatility?
- kennywinker 12d agoNot a financial expert, but i think reduce implies it goes away, and absorb implies it’s still there but someone is taking it up. Like reducing the amount of water on the floor would be turning off the tap. Absorbing the amount of water on the floor is when you mop it up.
- hyperhello 12d agoThat’s exactly what I meant. I was only replying to the question as posed.
- harpiaharpyja 12d agoOr to bring it back to the original context... Reducing volatility would be reducing the impact of bad weather on your harvest, absorbing volatility is finding someone to cover your losses. (presumably by giving up some profits on the good years. It's like a financial low pass filter)
- SR2Z 12d agoVolatility is a natural consequence of weather, blight, etc., etc. To reduce volatility you would need to actually stabilize the supply of onions. What futures do is allow traders to shift risk from the future to the present. By pricing that risk, it's possible for people who depend on onions to pay a little more now in exchange for a guarantee about the future. It's not magically going to make onions less volatile (although high risk prices can spur investment which might) but it can reduce disruptions caused by volatility. The classic example of this is futures on jet fuel which allow airlines to weather random wars in the middle east, OPEC shenanigans, etc. Ticket prices are higher this way, but the existential threat of being forced to cancel a bunch of flights is gone.
- brookst 12d agoOh you’re talking supply volatility, where most of us are talking price volatility.
- brudgers 12d agoThe point is making money.
- mhh__ 12d agomany users of derivatives willingly lose money on them because the purpose of these contracts is to transfer risk to those willing to hold it.
- brudgers 12d agoMoney is the thing at risk.
- chadgpt6 12d agoIs insurance risking your money?
- brookst 12d agoYes of course. I’ve paid for car insurance for 30+ years and have never made a single claim. So far, for me, it’s a bad risk. I’ll keep paying though.
- articulatepang 12d agoPeople are willing to lose a small but predictable amount of money to avoid occasionally and unpredictably losing a massive amount of money. The former is a loss they can plan for and absorb. The latter might kill their business. Traders are often happy to take the other side of that trade because they can trade against many counterparties, collect a small premium from each one, and try to ensure their counterparties won’t all fail in a correlated way.
- brudgers 12d agoYes, it's not about onions.
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- quickthrowman 12d agoFutures are a mechanism to transfer risk from one party to another, more or less.
- brookst 11d agoTo reduce net risk for both parties, at the expense of also reducing chances of windfalls. To the farmer, futures mean no risk of having to sell when prices are low. To the buyer, futures mean no risk of having to buy when prices are high. The farmer also gives up the chance of selling when prices are high, and the buyer gives up the chance of buying when prices are low. The transfers go both ways, which is the magic.
- quickthrowman 11d agoYou’re leaving out the speculators who usually end up assuming the risk of both the producer and buyer.
- bz_bz_bz 12d agoNone of the products you’ve chosen have a substantial futures market, which is why the person you responded to chose corn to make their point.
- repiret 12d agoLettuce and Tomatoes don't keep well, which adds more seasonal variability and reduces the ability of a futures market to smooth prices. Compare with potatoes, which keep about as well an onions, and are farmed in the same areas. Look at onions and potatoes over a 5-year time span (because the default all-data time span is silly for this). It doesn't give enough control of the Y axis to make the comparison easy - for potatoes it shows me Y=40-320, for a range of 280; for onions it shows me Y=120-440, for a range of 320. This means that potatoes are more "zoomed in" and it's graph will exaggerate volatility relative to onions, but qualitatively, I'd say the potato graph looks smother just the same. This is exactly what economic theory says a futures market should do to the price.
- stymaar 12d ago> Lettuce and Tomatoes don't keep well, which adds more seasonal variability The more durable a produce is, the easier it is to transport over a large area, which will always smoothen price fluctuations. This alone could explain why lettuce and tomatoes have higher volatility than onions, which have higher volatility than potatoes, which have higher volatility than corn and weat. At least that's the null hypothesis that the hypothetical effect of futures should be compared to.