7 ms·

The Folks Who Sell Your Corn Flakes are Acting Like Goldman Sachs

78 points by cs702 13y ago

cbr 13y ago
"Last year, the Global Financial Markets Association, a lobby group for banks, commissioned a study on whether trading houses are “too-big-to-fail.” Hoping it might convince officials to regulate these companies like banks, GFMA abandoned the study after Pirrong, its author, reached a different conclusion."
- GFischer 13y ago
  Seems like Pirrong was intellectually honest :) I looked up some links on his study: http://www.bloomberg.com/news/2013-05-15/commodity-trader- http://www.bloomberg.com/news/2013-05-15/commodity-trader- failure-seen-as-limited-economic-risk-in-study.html http://www.cato.org/publications/policy-analysis/inefficiency-clearing-mandates http://www.cato.org/publications/policy-analysis/inefficienc...
scarletham 13y ago
Isn't the title of this a bit misleading? Cargill doesn't sell corn flakes, it (possibly) sells physical grain to Kellogg's, or derivative products to hedge Kellogg's exposure.
- nonchalance 13y ago
  You clicked the link -> mission accomplished
- josefresco 13y ago
  If the point was to attract a more general audience to the subject matter I'd say the title was accurate enough.
- crucini 13y ago
  Agreed. The folks who sell corn flakes could refer to either a) Grocery and general merchandise stores or b) Consumer packaged goods companies.
- protomyth 13y ago
  I would say the title is an indication of how bad the article actually is. It is a shame they wrote such an information free article. Cargill is a fairly interesting company and like all big and small grain companies, they hedge their inventory. Grain is a very low margin business and it is very important to protect both the company and the farmer from market volatility. This does tend to put these companies in the financial instruments business and they do tend to expand past agriculture. disclaimer: worked for Cargill at one time and will not go into any depth other than to say the article is a bit information lite and the title is horrible, ill-informed dreck that I expect.
javert 13y ago
As everyone else is saying, this article is spreading fear for no reason. Working with financial markets is a key technique for commodities companies and always has been, particularly to hedge. The net result is that food prices are lower and more stable. The exception is onions. Onion futures were outlawed 50 years ago for "reasons" given in this article, and onions are more volatile than oil, which is the _most_ traded, speculated-on, and manipulated commodity. In summary, the author of this article is calling for forcible action that would hurt peoples' lives, potentially even disrupting world food supplies.
crucini 13y ago
I'm skeptical about the ban on insider trading in general. Now this author wants to extend it to a new sphere. Basically, an oil company, which knows a lot about the oil market, shouldn't be allowed to speculate in oil. Isn't this the mandated destruction of valuable market signals? Should we also ban car mechanics from buying and selling used cars, because their special knowledge gives them an unfair advantage?
- MartinCron 13y ago
  There's a huge difference between special knowledge and expertise and material non-public information that you know will move markets. Martha Stewart didn't go to jail for having any specialized knowledge, she went to jail because someone tipped her off that a company she was invested in was about to go south. She sold those shares to someone who had no reasonable way of knowing what she knew which is essentially a type of fraud.
  - cynicalkane 13y ago
    The point of the commodities market is to provide hedging instruments for commercial producers and consumers. It's difficult to imagine the commodities market being useful if you ban every potential customer and leave nothing but speculators.
    - MartinCron 13y ago
      Right. I was responding to the concept of insider trading in general, even after reading the article, I don't feel that I know nearly enough about the arcane commodities market to speak to that scenario.
  - fennecfoxen 13y ago
    No. The reason that trading on insider information is illegal isn't that some third party is injured (if anything, martha's sales caused the third-party get a better price than he would have otherwise!) It's illegal because the officers of a company and the employees of a company are supposed to be doing the job of running a company for the benefit of the shareholders, and there's opportunity for some pretty massive conflicts of interest if they're also playing games trading stocks / stock-tips instead. And also because people think it's "unfair", like the stock market's supposed to be a game or something rather than a place that you can buy and sell stock for a price which is well-correlated with the company's prospects. :P
fennecfoxen 13y ago
What? People who use commodities to power their business are trading commodities futures on the futures exchanges??!?? Perish the thought!!!
- mhb 13y ago
  The difference is whether they're using them for speculation or (real) hedging.
  - fleitz 13y ago
    Actually that doesn't make a difference. The entire point of the free market is to provide for speculation. People buying and selling goods for real dollars where they have real risk is called 'price discovery.' It incentivizes discovery of information relevant to the market and dissemination of that information to the market via price. Lets take the example of corn flakes, I'll be a speculator, every day I watch the corn fields, one day I see a fire start on one of a field ostensibly representing half of that year's corn, I buy corn at any price knowing it will go up because the world's supply has just been cut in half. Next week I sell all that corn and take the profit as fruits of my labour. People who trade Wal-Mart stock will often request satelite images of Wal-Mart parking lots to estimate sales. Just imagine the ingenious ways commodities traders use to discover information about supply and demand. Farmers are completely free to sell their corn direct to consumers, but most prefer not to because that isn't an efficient or effective way of selling. Don't blame Cargill, blame farmer John down the street who wants the best price for his corn.
    - mhb 13y ago
      Yeah. Thanks. But the point of the article is that is is surprising (regardless of it making a difference), that companies who you would expect to be using commodities primarily for hedging are using it much differently.
    - GFischer 13y ago
      For big commodities like corn, that might not be a solution, but I'd like to build a startup that covers some huge market inneficiencies - for example, peppers grown 500 km from the city I live in are sold at U$ 1, while they cost U$ 4 at the supermarket.
forgingahead 13y ago
Can we please stop it with the breathless conspiracy theory posts here? Especially from sources like the New Republic.
JackFr 13y ago
This article is dramatically light on specifics and historical context and heavy on innuendo and fearmongering.
geuis 13y ago
I'd like to point out that this is a perfect example of how not to build mobile versions of a site. Due to changes in how iOS 7 Safari hides and shows the tool overlays when scrolling, they are now permanently displayed on this site. You never know when the browser interface will change like this. Also, Apple has really screwed up with this feature change in Safari. There's so much to like about iOS 7 but not this. I've been working with the beta since it launched and have been hoping for this feature to be reverted but it looks like it's going to production now.
- Domenic_S 13y ago
  Meh, Chrome on iOS has had peekaboo interface elements for a long, long time. It works fine 99% of the time until you run across a site like this one.
gaius 13y ago
This was extremely difficult to read. Let's start with: Goldman has not just become a commodities trader. It has been one since 1981! And the article goes downhill from there. And secondly, http://en.wikipedia.org/wiki/Futures_contract#Origin http://en.wikipedia.org/wiki/Futures_contract#Origin "The first futures exchange market was the Dōjima Rice Exchange in Japan in the 1730s"...
kyllo 13y ago
Here's why this exists: Say I'm Kellogg's. I make Cornflakes. I pay $x/ton for corn and I sell Cornflakes for $3 a box. Now say that due to a drought, the price I pay for corn is now 2x. I have to raise the price of Cornflakes now. Consumers don't want to pay $5 for a box of Cornflakes, and my sales drop. But if I buy corn futures when the price of corn is low, then when it goes up those become more valuable, canceling out some of my increased supply cost, therefore my business is less exposed to risk in price volatility of raw materials. In other words, it's for hedging. Now, there are various ways to exploit this unethically, for example if I as a commodity trading bank, actually have control over the prices of the commodities. We're right to be concerned about that. But commodities hedging itself is a good thing for the economy and we shouldn't spread FUD about it.
- jonnathanson 13y ago
  Correct, and to be clear, that is exactly what Kellogg's, General Mills, Coca-Cola, and other big food companies have been doing for years now. It's not uncommon whatsoever -- if anything, it's considered a best practice -- to hedge on commodities prices if your fundamental business depends on them. In and of itself, that big food companies deal in commodities futures (call and/or put) is neither surprising nor irrational. Things start to get scary when speculators dominate the markets for those commodities, and when commodities houses corner markets. The reverberations across various sectors of the economy would be frightening if anything went to shit at even one commodity shop.

78 points by cs702 13y ago

cbr 13y ago

"Last year, the Global Financial Markets Association, a lobby group for banks, commissioned a study on whether trading houses are “too-big-to-fail.” Hoping it might convince officials to regulate these companies like banks, GFMA abandoned the study after Pirrong, its author, reached a different conclusion."

GFischer 13y ago
Seems like Pirrong was intellectually honest :) I looked up some links on his study: http://www.bloomberg.com/news/2013-05-15/commodity-trader- http://www.bloomberg.com/news/2013-05-15/commodity-trader- failure-seen-as-limited-economic-risk-in-study.html http://www.cato.org/publications/policy-analysis/inefficiency-clearing-mandates http://www.cato.org/publications/policy-analysis/inefficienc...

scarletham 13y ago

Isn't the title of this a bit misleading? Cargill doesn't sell corn flakes, it (possibly) sells physical grain to Kellogg's, or derivative products to hedge Kellogg's exposure.

nonchalance 13y ago
You clicked the link -> mission accomplished
josefresco 13y ago
If the point was to attract a more general audience to the subject matter I'd say the title was accurate enough.
crucini 13y ago
Agreed. The folks who sell corn flakes could refer to either a) Grocery and general merchandise stores or b) Consumer packaged goods companies.
protomyth 13y ago
I would say the title is an indication of how bad the article actually is. It is a shame they wrote such an information free article. Cargill is a fairly interesting company and like all big and small grain companies, they hedge their inventory. Grain is a very low margin business and it is very important to protect both the company and the farmer from market volatility. This does tend to put these companies in the financial instruments business and they do tend to expand past agriculture. disclaimer: worked for Cargill at one time and will not go into any depth other than to say the article is a bit information lite and the title is horrible, ill-informed dreck that I expect.

javert 13y ago

As everyone else is saying, this article is spreading fear for no reason. Working with financial markets is a key technique for commodities companies and always has been, particularly to hedge. The net result is that food prices are lower and more stable. The exception is onions. Onion futures were outlawed 50 years ago for "reasons" given in this article, and onions are more volatile than oil, which is the _most_ traded, speculated-on, and manipulated commodity. In summary, the author of this article is calling for forcible action that would hurt peoples' lives, potentially even disrupting world food supplies.

crucini 13y ago

I'm skeptical about the ban on insider trading in general. Now this author wants to extend it to a new sphere. Basically, an oil company, which knows a lot about the oil market, shouldn't be allowed to speculate in oil. Isn't this the mandated destruction of valuable market signals? Should we also ban car mechanics from buying and selling used cars, because their special knowledge gives them an unfair advantage?

MartinCron 13y ago
There's a huge difference between special knowledge and expertise and material non-public information that you know will move markets. Martha Stewart didn't go to jail for having any specialized knowledge, she went to jail because someone tipped her off that a company she was invested in was about to go south. She sold those shares to someone who had no reasonable way of knowing what she knew which is essentially a type of fraud.
- cynicalkane 13y ago
  The point of the commodities market is to provide hedging instruments for commercial producers and consumers. It's difficult to imagine the commodities market being useful if you ban every potential customer and leave nothing but speculators.
  - MartinCron 13y ago
    Right. I was responding to the concept of insider trading in general, even after reading the article, I don't feel that I know nearly enough about the arcane commodities market to speak to that scenario.
- fennecfoxen 13y ago
  No. The reason that trading on insider information is illegal isn't that some third party is injured (if anything, martha's sales caused the third-party get a better price than he would have otherwise!) It's illegal because the officers of a company and the employees of a company are supposed to be doing the job of running a company for the benefit of the shareholders, and there's opportunity for some pretty massive conflicts of interest if they're also playing games trading stocks / stock-tips instead. And also because people think it's "unfair", like the stock market's supposed to be a game or something rather than a place that you can buy and sell stock for a price which is well-correlated with the company's prospects. :P

fennecfoxen 13y ago

What? People who use commodities to power their business are trading commodities futures on the futures exchanges??!?? Perish the thought!!!

mhb 13y ago
The difference is whether they're using them for speculation or (real) hedging.
- fleitz 13y ago
  Actually that doesn't make a difference. The entire point of the free market is to provide for speculation. People buying and selling goods for real dollars where they have real risk is called 'price discovery.' It incentivizes discovery of information relevant to the market and dissemination of that information to the market via price. Lets take the example of corn flakes, I'll be a speculator, every day I watch the corn fields, one day I see a fire start on one of a field ostensibly representing half of that year's corn, I buy corn at any price knowing it will go up because the world's supply has just been cut in half. Next week I sell all that corn and take the profit as fruits of my labour. People who trade Wal-Mart stock will often request satelite images of Wal-Mart parking lots to estimate sales. Just imagine the ingenious ways commodities traders use to discover information about supply and demand. Farmers are completely free to sell their corn direct to consumers, but most prefer not to because that isn't an efficient or effective way of selling. Don't blame Cargill, blame farmer John down the street who wants the best price for his corn.
  - mhb 13y ago
    Yeah. Thanks. But the point of the article is that is is surprising (regardless of it making a difference), that companies who you would expect to be using commodities primarily for hedging are using it much differently.
  - GFischer 13y ago
    For big commodities like corn, that might not be a solution, but I'd like to build a startup that covers some huge market inneficiencies - for example, peppers grown 500 km from the city I live in are sold at U$ 1, while they cost U$ 4 at the supermarket.

forgingahead 13y ago

Can we please stop it with the breathless conspiracy theory posts here? Especially from sources like the New Republic.

JackFr 13y ago

This article is dramatically light on specifics and historical context and heavy on innuendo and fearmongering.

geuis 13y ago

I'd like to point out that this is a perfect example of how not to build mobile versions of a site. Due to changes in how iOS 7 Safari hides and shows the tool overlays when scrolling, they are now permanently displayed on this site. You never know when the browser interface will change like this. Also, Apple has really screwed up with this feature change in Safari. There's so much to like about iOS 7 but not this. I've been working with the beta since it launched and have been hoping for this feature to be reverted but it looks like it's going to production now.

Domenic_S 13y ago
Meh, Chrome on iOS has had peekaboo interface elements for a long, long time. It works fine 99% of the time until you run across a site like this one.

gaius 13y ago

This was extremely difficult to read. Let's start with: Goldman has not just become a commodities trader. It has been one since 1981! And the article goes downhill from there. And secondly, http://en.wikipedia.org/wiki/Futures_contract#Origin http://en.wikipedia.org/wiki/Futures_contract#Origin "The first futures exchange market was the Dōjima Rice Exchange in Japan in the 1730s"...

kyllo 13y ago

Here's why this exists: Say I'm Kellogg's. I make Cornflakes. I pay $x/ton for corn and I sell Cornflakes for $3 a box. Now say that due to a drought, the price I pay for corn is now 2x. I have to raise the price of Cornflakes now. Consumers don't want to pay $5 for a box of Cornflakes, and my sales drop. But if I buy corn futures when the price of corn is low, then when it goes up those become more valuable, canceling out some of my increased supply cost, therefore my business is less exposed to risk in price volatility of raw materials. In other words, it's for hedging. Now, there are various ways to exploit this unethically, for example if I as a commodity trading bank, actually have control over the prices of the commodities. We're right to be concerned about that. But commodities hedging itself is a good thing for the economy and we shouldn't spread FUD about it.

jonnathanson 13y ago
Correct, and to be clear, that is exactly what Kellogg's, General Mills, Coca-Cola, and other big food companies have been doing for years now. It's not uncommon whatsoever -- if anything, it's considered a best practice -- to hedge on commodities prices if your fundamental business depends on them. In and of itself, that big food companies deal in commodities futures (call and/or put) is neither surprising nor irrational. Things start to get scary when speculators dominate the markets for those commodities, and when commodities houses corner markets. The reverberations across various sectors of the economy would be frightening if anything went to shit at even one commodity shop.