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Good argument. Fails in reality. Derivatives began as insurance contracts that worked fairly well between interested parties that actually wanted to move physi

Good argument. Fails in reality. Derivatives began as insurance contracts that worked fairly well between interested parties that actually wanted to move physical product and reduce risk (say farmers and supermarkets). However, most of these markets have mutated and are mostly used for speculation by agents who have little to no interest in the actual delivery of said commodities (Glencore) - and are in fact more interested in pricing manipulation and monopolistic/oligopolistic market control than acting as a volatility store. Derivatives work well when the agents in the contract actually care about locking in the price of the commodity (say oil miners and airlines) - but when the people on either side don't care about reducing risk (say speculators and speculators) - things fall apart. In turn, pricing volatility and rents accrued to speculating market participants increase, harming both supply/demand parts of the physical commodity curve, and doing the exact opposite of what was intended. A more humorous take on this: http://www.youtube.com/watch?feature=player_embedded&v=QPf-D_r3Ni4 http://www.youtube.com/watch?feature=player_embedded&v=Q...

JumpCrisscross 14y ago
Glencore owns farms, mines, and production facilities around the world. It also has direct supply relationships to manufacturers, power generators, and food processors. It is not the example you were looking for. If you want an example of someone who has "little to no interest in [accepting] delivery of said commodities", pick me. I'm a trader. What I do is analogous to the person at the Department of Agriculture who decides how much supply at a given price should be produced. Central planning has an aesthetic appeal, but especially when it comes to consumer discretionary products like raisins, it is a messy way of shifting the burden of forecasting from those unable (the farmers) to those with little incentive to get it right and an even lower chance of being displaced.
- confluence 14y ago
  > Glencore owns farms, mines, and production facilities around the world How is this evidence against my point? De Beers does the same with diamonds. Looks like they can manipulate prices easily enough. My argument against yours cannot be taken as me stating that central planning is good - but merely that derivative markets can become bad. Just because I hold a critical a position on a thing, it does not necessarily mean that I'm advocating for the use of an opposing thing. If I criticise capitalism for doing such and such - it does not follow that I advocate replacing capitalism with communism/socialism to fix such and such. I like derivatives and financial markets just as much as the next guy - but only when they are used properly - to reduce, and not to increase risk.
bcoates 14y ago
Derivatives don't so much reduce pricing volatility as allow people who don't want to be exposed to the risk to exit the market and leave it to the daytraders. Everyone in the food industry, by definition, is speculating on food prices, there is no reason to think the farmers are any more altruistic than the banks, and somebody has to make the market.
- apk17 14y ago
  That would mean that everyone is in speculation, as everyone is in some industry, and we are all at the receiving end of the food industry. The difference being, that farmers as well as consuments have an interest in sustained prices and in the product itself while banks are actually speculating - trying to convert money into more money without care for the consequences. (For consuments the sustained interest is obvious, but farmers are also interested in stability since they can't shift their investments around as easily and lossless as speculants can.)
DenisM 14y ago
What is your opinion on onion? It's the only food that has no derivative market, and it suffers from the highest volatility of all. This suggests that futures do smooth things out. http://money.cnn.com/2008/06/27/news/economy/The_onion_conundrum_Birger.fortune/ http://money.cnn.com/2008/06/27/news/economy/The_onion_conun...
- confluence 14y ago
  Pretty piss poor reasoning there. Both oil and corn production and demand far exceed onions by a significant order of magnitude. Saying onions are more volatile than corn is like saying that the fortunes of individuals are more volatile than those of society at large (i.e. basic probability theory). Both corn and oil are more diversified than onion - and in turn - exhibit a lower variance - futures market or not. Global onion production: 74,250,809 tonnes/year (2012 - http://en.wikipedia.org/wiki/Onion#Production_and_trade http://en.wikipedia.org/wiki/Onion#Production_and_trade) Global corn production: 817,110,509 tonnes/year (2009 - http://en.wikipedia.org/wiki/Maize#Quantity http://en.wikipedia.org/wiki/Maize#Quantity) (10x onions) Global oil production: 84,820,000 barrels/day (2011 - https://en.wikipedia.org/wiki/List_of_countries_by_oil_production https://en.wikipedia.org/wiki/List_of_countries_by_oil_produ...) -> 4,923,850,000 tonnes/year (70x onions)
  - lostlogin 14y ago
    I'm surprised onion production is that high. Corn is in so much stuff (And as far as I could tell while there, is in all US food) while onions aren't.
    - untothebreach 14y ago
      Corn is in so much stuff because it's production is subsidized by our government, and therefore is much cheaper to use than alternatives. This is why you see high fructose corn syrup used to sweeten foods more often than regular sugar. Sugar is (for the most part) imported, and sells at a much higher price than our subsidized corn products.

JumpCrisscross 14y ago

Glencore owns farms, mines, and production facilities around the world. It also has direct supply relationships to manufacturers, power generators, and food processors. It is not the example you were looking for. If you want an example of someone who has "little to no interest in [accepting] delivery of said commodities", pick me. I'm a trader. What I do is analogous to the person at the Department of Agriculture who decides how much supply at a given price should be produced. Central planning has an aesthetic appeal, but especially when it comes to consumer discretionary products like raisins, it is a messy way of shifting the burden of forecasting from those unable (the farmers) to those with little incentive to get it right and an even lower chance of being displaced.

confluence 14y ago
> Glencore owns farms, mines, and production facilities around the world How is this evidence against my point? De Beers does the same with diamonds. Looks like they can manipulate prices easily enough. My argument against yours cannot be taken as me stating that central planning is good - but merely that derivative markets can become bad. Just because I hold a critical a position on a thing, it does not necessarily mean that I'm advocating for the use of an opposing thing. If I criticise capitalism for doing such and such - it does not follow that I advocate replacing capitalism with communism/socialism to fix such and such. I like derivatives and financial markets just as much as the next guy - but only when they are used properly - to reduce, and not to increase risk.

bcoates 14y ago

Derivatives don't so much reduce pricing volatility as allow people who don't want to be exposed to the risk to exit the market and leave it to the daytraders. Everyone in the food industry, by definition, is speculating on food prices, there is no reason to think the farmers are any more altruistic than the banks, and somebody has to make the market.

apk17 14y ago
That would mean that everyone is in speculation, as everyone is in some industry, and we are all at the receiving end of the food industry. The difference being, that farmers as well as consuments have an interest in sustained prices and in the product itself while banks are actually speculating - trying to convert money into more money without care for the consequences. (For consuments the sustained interest is obvious, but farmers are also interested in stability since they can't shift their investments around as easily and lossless as speculants can.)

DenisM 14y ago

What is your opinion on onion? It's the only food that has no derivative market, and it suffers from the highest volatility of all. This suggests that futures do smooth things out. http://money.cnn.com/2008/06/27/news/economy/The_onion_conundrum_Birger.fortune/ http://money.cnn.com/2008/06/27/news/economy/The_onion_conun...

confluence 14y ago
Pretty piss poor reasoning there. Both oil and corn production and demand far exceed onions by a significant order of magnitude. Saying onions are more volatile than corn is like saying that the fortunes of individuals are more volatile than those of society at large (i.e. basic probability theory). Both corn and oil are more diversified than onion - and in turn - exhibit a lower variance - futures market or not. Global onion production: 74,250,809 tonnes/year (2012 - http://en.wikipedia.org/wiki/Onion#Production_and_trade http://en.wikipedia.org/wiki/Onion#Production_and_trade) Global corn production: 817,110,509 tonnes/year (2009 - http://en.wikipedia.org/wiki/Maize#Quantity http://en.wikipedia.org/wiki/Maize#Quantity) (10x onions) Global oil production: 84,820,000 barrels/day (2011 - https://en.wikipedia.org/wiki/List_of_countries_by_oil_production https://en.wikipedia.org/wiki/List_of_countries_by_oil_produ...) -> 4,923,850,000 tonnes/year (70x onions)
- lostlogin 14y ago
  I'm surprised onion production is that high. Corn is in so much stuff (And as far as I could tell while there, is in all US food) while onions aren't.
  - untothebreach 14y ago
    Corn is in so much stuff because it's production is subsidized by our government, and therefore is much cheaper to use than alternatives. This is why you see high fructose corn syrup used to sweeten foods more often than regular sugar. Sugar is (for the most part) imported, and sells at a much higher price than our subsidized corn products.