Question about commodities and the future

You don't see the forest for the trees. Expand it out. Would you also produce your own packing materials, produce all your own fuel, produce all the other things you have to buy to run a business?


Business is a gamble. You are gambling you will be able to sell X number of hogs at Y price whenever you get a litter of piglets. If you can't sell enough hogs or can't get enough money per hog you are going to lose money. Enough losses and you are out of business. Futures can allow you to plan on how much money you are going to have to spend as well as how much money you are going to bring in.

You are a future trader but just don't do it on a large scale. You have people who come to you and tell you they want to buy a half a hog in 6 months and you tell them how much it will cost them. You then know you will be able to sell that half a hog and how much you will get for it. You sell to restaurants and I'm fairly sure each of them tells you how many pounds of what they will need next week or next month and you tell them how much it will cost. This is what a futures contract is.


As I pointed out sometimes people are willing to spend a little more for something because it makes things easier for them.


I agree with the bailout mentality but its more of why should I get shafted when others aren't?


You missed the point. My point was you willing payed more for a product than you needed to. Why did you do that? Will not this extra cost hurt your customers due to you having to pass the extra cost along to them? (I know this was not a 100% business thing but for the sake of our example let's say it was.) As I pointed out you did a cost benefit analyst and found the extra cost was 'worth it' to you. For a major company buying tens of thousands of say hog bellies to make bacon the any extra cost of a future is worth it to them.


What do you mean NOW. This is just the latest link of a very long chain. Once there was a bill in the US House of Representatives to appropriating money for the benefit of a widow of a distinguished naval officer. There's a great story and speech from Davy Crockett on why it was not the business of congress to give away money. One thing he said was:

"Congress has no power to appropriate this money as an act of charity.

http://www.theadvocates.org/library/...-crockett.html

I agree!

I emailed mine and told them if they voted for it I would not vote for them. One did, and I didn't (I didn't vote for the other guy either). One didn't and I did.

__________________
Remember, when seconds count. . .
the police are just MINUTES away!

Congress has no power to appropriate this money as an act of charity. Every member upon this floor knows it. . .Davy Crockett

An average family of 4 would have 2 retirement funds of $20,000+ each, and 2 colledge funds of 5-10,000 each. So you are spending $10,000 to protect $60,000+ of investments.

There is no way the govt will be able to collect $10,000 from us to pay off the 700billion. They are simpley trading inflation for ecconomic stability. Like you, I don't know if that will work.

Letting it all fall in like a house of cards - well that probably isn't good govt policy either.

We are where we are. We have to look at the big picture. I don't know the answer, and perhaps the big bailouts (with more big bailouts coming) with ecconomic stimulus checks to all of us little folks is a horible answer.

Doing nothing & letting it all fall in is not the answer either, and I'm confused by folks like you who think to heck with everyone else & let it all crash.

But then, I'm confused by the list of things being done as well, so it's not like I'm trying to defend one course of action here.

I just don't understand where your course of inaction will get anyone anywhere? Letting it all fall down will force the SHTF scenerios many of you are worried about. There will only be that outcome.

I'm not sure the govt - Repb or Dem controlled - will come up with a real, working solution; but I'd prefer looking at their attempts rather than doing nothing & being certain of the outcome.

Futures traders, the point of this thread, do help to stablize the supply of 'things' we have available in this country. For doing that, they sometimes make money, sometimes lose money, & overall take a little bit of money for themselves. Like anyone else providing a service, they get the money they earn.

When any segment of society falls down - be it the poor, be it farmers, be it airlines, be it auto makers, be it investors & futures traders, govt typically steps in & tries - for rightly or wrongly - to help shore up those people who are failing horribly. If the govt doesn't step in, the failings often multiply & infect others, taking down many, many people who had nothing to do with the original problem. Like you, I hate that rotten people get free money; but the bigger picture is something to at least look at & think about, and it seems you are not bothering to look.

I can respect your position on this, if you can show you understand the consiquences of your very black & white, ridgid views. In short, you realize you are willing to throw the baby out with the bathwater? That is what I understand you to say?

I'm sorry if I've taken this thread off-track, I'll stop with this. I'm not really arguing my point - I'm trying to understand your side - which seems to be let things fall apart & don't care about anyone else & how many fall down along the way. I don't know that the current attempts to cure things will produce anything positive - but I'm trying to sort out the good from the bad. Your way is a very fine principle, but it does seem to hurt a whole lot of little people along the way. I'm not sure that is proper either.

--->Paul

Speaking of fat cats. AIG executives were on the news AGAIN tonight. They were out on the town again, getting manicures and massages. This makes the second time they were called on this. I guess they just don't care. Boy I sure wish I could get someone to loan me a couple million to go out on the town. Oh I forgot that is Billions not millions.

Ham does not come from pork bellies. Pork bellies is where bacon comes from. Hams are generally cuts from the hind rumps of the pig. Trimmed pork bellies for bacon is the most actively traded part of the pig on the open market.

Well shut ma mouth. Nathan104, ya learn something new everyday!

It sounds like what we're coming down to is an argument of whether or not we should have the public, the government, insuring the investment risks taken by the gamblers. I argue no. If the investors want to buy insurance against their risks that is their choice. But they should not expect other people to bail them out when they lose money on a bad deal. They have the freedom to take the risks or not. They have the expectation that if they win they get to keep the rewards (after taxes of course). Likewise they should be willing to take the losses if they lose.

Unfortunately, now that one segment of the economy has been bailed out to the tune of $700 Billion, which will be taken out of our pockets through inflation and taxes, other industries are now demanding their own bailouts. This turns it into a never ending cycle of greed, demand and entitlement expectations. I say stop this now while it is still in the early stages and do not bail out any of them. Let them absorb their own risks and losses. They made their beds.

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SugarMtnFarm.com -- Pastured Pigs, Poultry, Sheep, Dogs and Kids

I wish I had enough new ideas and thoughts to really contribute to this discussion.

While some futures speculators will be partially bailed out with the $700B that the government is printing, the most of the bail out is not for those speculators.

While I might have a thing or two to learn here, it is my understanding that the banks and insurance firms lost most of their money on mark to market insurance schemes, risky mortgage debt, etc. I have read that some of the firms did gamble on futures based derivaties in order to hedge against the other risky mark to market bets. These also failed when the momentum of the collapse got underway.

As for the bail out, I am against it, even though I think and thought something had to be done to keep faith in the economic system.

I still go back to my arguement that there is mostly theory, again for a lack of a better term, at works in economics. I understand that theory becomes practice, and therefore gives us past experience to work from. What I argue is that no one really knows what the $700B will do for the economy, and it is all theory and blind faith that a cash infusion will work.

I am disappointed that more solutions were not offered other than the $700B bail out, with little regulation or oversight. I am angered that AIG spent more at a spa resort than my wife and I will earn in more than 10 years of work. Why wasn't AIG forced to front that money to save themselves instead of tax payer dollars???

Highland points out that speculation should not take place in the futures markets. On this point, I agree and disagree. I am greatly bothered to pay $4.19 a gallon for gas that has been 'run up' by speculators. That really, really hurts. At the same time, speculation is part of the market, and has been for 150 years.

We still need to define "speculation" and "speculators". A farmer in Indiana that plants a corn crop in the spring to resell in the fall is also a speculator. He is speculating that there will be a buyer in the fall for more that what it cost him to grow the corn. A buyer of a corn futures contract is speculating that the purchase price will be higher at delivery than it is today.

What would ending speculation do to the markets, the buyers and the producers? My theory is that it would be good for the consumer and bad for the producer because prices would fall tremendously.

Again, I see both sides of the arguement. I cast an evil eye towards speculative traders just trying to get rich, while the poor and middle class suffer with high prices that eventually cause the economy to choke, or worse yet, cause the poor to go hungry. But speculators and brokers do keep the markets going, much due to the fact that higher prices pay the farmers to keep producing what we need, and offer a floor for those prices. As well, the markets have been working this way for 150 years, or longer.

At any point, an interesting conversation, and I have enjoyed reading the different viewpoints.

Clove

Clovis thinks elimination of futures contracts would be good for the consumer. I disagree. Without futures contracts, many farmers wouldn't dare plant a crop that didn't have a buyer or value locked in. If they held back, even a little, that would create a shortage, driving up the price and causing food shortages. Soon we'd have a whip-saw effect on all products.
If I can lock in a price for May 2009 corn, I know how much I'll need to get for my hogs in September 2009. If I can't lock in a price for my hogs high enough to make a profit then I won't breed my sows, I'll send them to slaughter.
Most of the futures contracts are held by those directly involved in the business. It tends to stimulate or reduce supply ahead of time, evening out the highs and lows.
Oil refineries buy oild futures, insuring a steady supply well into the future. Some investors/speculators thought the unrest in the Middle East would cut supply in the future, driving the price way beyond prersent prices for a barrel of oil. So they bought oil futures contracts for oil in the future. Oil companies had to continue to buy their oil futures contracts, but there wasn't enough oil in the future to fill those futures contracts. This increased the demand for oil in the future. Investors/speculators saw the price jump and bought even more oil future contracts. This drove the price way up. It was good business to buy oil at the well for $60 and sell on the open market for $200. Oil futures were bid up higher and higher as investors/speculators continued to plow more money into the oil futures. The guy that owned the well didn't profit and the refineries simply tacked on their slim profit. But 3% of $200 is a whole lot more than 3% of $60, so they neted much greater profits, too.
Some investors/speculators got caught when the demand for oil slowed, Saudis increased production, and the futures they'd bought for $120 was selling for $60.
As we shoot from the hip, we think that all speculation of comodities should be stopped. But the reality is that is stabalizes production and demand. The perceived oil shortage created a profit potential to the investor/speculator, just as we created a canning jar lid shortage in the late 1970s. The supply was there and the actual demand was level. But when we heard that there wouldn't be enough, we began to stock up. All across the land, folks were stocking up, creating a shortage. No matter the price, buy all you can find. I'll bet you've still got some of those lids in your pantry.

No, Clovis does NOT think that the elimination of futures contracts would be good for the consumer.

No where in my posts do I advocate the end of commodities markets, nor the end of futures contracts.

My point was to bring up that ending speculation could be good for the consumer.

What I should have clarified is this:

The end of speculation could benifit consumers, but would hurt producers, especially in the short term.

We don't want to hurt the producers, especially if it caused farmers to go out of business. Farmers feed the world, and produced, in some fashion, nearly everything I ate today. Why on earth would I want them to fail?

I am 110% for agriculture.

I was also trying to open a new discussion about speculation. It is an interesting topic.

What would happen if there was a law passed that said that the buyer of a futures contract had to accept delivery? Probably not a law that I would support, but nonetheless, an interesting topic to discuss.

I will say, and I will not waver from this: It is saddening to know that people in the world, destitute and impoverished, are unable to buy food to eat, while some make fortunes speculating on the same food others cannot afford to buy. I am refering to corn prices in the past year. Illegal? No. Wrong? No. Sad? Yes, at least to me.

At the same time, ending speculation on the futures market is not the answer to solving the world hunger problem.

I have enjoyed this thread greatly, and wish my words had been more clear in my earlier posts.

Clove

the futures market is an entirely different issue than the bailout.

so far as I know, no one is required to buy or sell futures if you don't want to. I believe it serves a purpose, and presumable the people that use it do as well, otherwise it would not exist.

i strongly opposed the bailout. it won't solve the problem. (witness the problems keep getting bigger. first it was "only" 30 billion for bear stearns, and within 6 months it was an additional 23 times larger at 700 billion.) None of the money goes to the millions of home "owners" who need to pay their mortgage. None of it goes to create any jobs. And now there's a long line of companies looking for their own bailouts (eg, autos now, probably steel, airlines, in the future.) And it hasn't prevented the stock market from tanking. and it hasn't prevented job losses and layoffs.

--sgl

I think speculation creates a stable market - most all of the time.

I think that is good for the consumer, and not a bad thing for the producer.

With speculation, we have prices that fluctuate a bit. But with ample supply of [insert commodity here].

Without speculation, we get shortages of [insert commodity here].

It would be one wild roller coaster ride without speculators. That could actually be good for a small producer such as myself; but bad for consumers.

Look at your statement: If producers are hurt, they either raise prices or stop producing. How does this help consumers? They will be hurt in the long term.........

Just imho.

--->Paul

No, you've miss-understood my position. I have said before that it is a (semi) free country and people can do speculating, gambling, buy stocks, invest in 401K's. But don't expect me to want to bail them out. They take risks and should suffer the consequences when they have losses.

Personally I do not do any of those things. When I buy hay I buy directly from the farmer who produces it. I am not buying hay futures. I am placing an order for hay which will be delivered next year. That is not hay futures. It's not speculative trading. When I receive the hay I pay for it. Most years he charges what he agreed on the previous year. This year with the high fuel costs John asked me to pay extra and I paid him extra. I don't want to see him bankrupt because the fuel costs drove him into the ground. I care about him. That is one essential difference between these speculators and real people.

When I produce hogs I do not do it on speculation. I have herds. The animals are coming up to market age. Each week I take hogs to the butcher and then take the meat from the butcher to our customers. Some of the customers have standing orders that they would like every week. Others change their order week to week. Typically I arrive home with an empty van. Occasionally there's a little meat left over that goes into the freezer for future orders or sometimes I'm short a bit and someone on a standing order doesn't get quite as much as they would like. That's the way it works. Everybody understands and is happy with the system. When I deliver meat I get paid. There's no speculation or pork futures involved. There is no middleman futures trader in the system. It's simple. There is no need for speculators taking a bite out of the pie with every churn they make.

It's a free country and one can do speculation if one wants but its not necessary or desirable. Speculators are stealing money from the farmer by driving his prices lower and stealing money from the end consumer by driving their prices higher. The profit they take comes from somewhere. Even worse is that as in the oil example, speculators sometimes horde to artificially create a shortage and drive up the prices of things. This is why gas prices shot up so much. That in turn drove up the prices of plastics, fertilizer, food, shampoo and many, many other products.

Most importantly, when the speculator loses, they should not expect to be bailed out. People were speculating hugely on land and housing. This created the real estate bubble. Speculators bought up a lot of risky mortgages thinking they would make a lot of money. They lost. Oh, they got a boo-boo. Too bad. They took a risk and should not expect any bailout. I don't care if they are big fat cats are little people who invested in a 401K that was invested in something risky which lost. Either way they were gambling and lost. They should take their losses. They should NOT expect a bailout.

Perhaps some farmers may operate that way but this is a situation that has come to be created by the futures market itself. They became dependent on the guarantee. Many farmers do not use the futures market at all. I don't and I don't personally know of a single farmer that operates on futures contracts. I do know of a couple who used to operate that way who stopped and now operate like I do: produce a quality product, sell it, get paid, rinse & repeat.

One confusion that is being to tossed around here is that "future markets" = "any time someone says they'll buy something". No, that isn't the case. The future's market is an abstraction level where traders are swapping around pieces of paper or bits in a computer network. Those traders are not in agriculture or processing. They're not farmers. They're not bakers, they're not restaurants, they're not consumers. They're speculators like Hillary Clinton in the example given above. They swap the same paper back and forth between themselves for a while to try and run up their value. Each time they swap they hope to take a bite out of the pie. That's greed. Mean while the farmer gets only a small piece of the pie because the speculators take so many bites and the baker pays more for flour because the speculators took so many bites of the pie as it passed through their fingers multiple times. The speculators performed no useful economic function. They did not create any value. They did not create any products. The speculators are not producers. They are money changers. In the end the speculators are driving up the price of finished goods for the final consumers at the store. That is the nature of speculators in commodity futures.

It is a free country and you are welcome to do speculation, gambling, invest in stocks, 401K, etc. But you should NOT expect me to bail you out and I DO object to being forced to pay for this current bailout which is going to cost me personally $13,500 plus interest. I object on a personal financial basis, on philosophical grounds and because the bailout teaches the wrong lessons and will produce the wrong behaviors in the future. The bailout is a very bad idea. The investors took risks and should take their losses be they big or little. Perhaps this correction would then teach people the consequences of their actions.

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SugarMtnFarm.com -- Pastured Pigs, Poultry, Sheep, Dogs and Kids

Good point.

One could also argue that speculation creates new jobs and stimulates the economy.

With the recent run-up in oil, everybody and their brother have been locating and drilling for new sources of oil and natural gas. The WSJ featured an article about a guy in PA that was retapping wells that had laid dormant for years when oil was depressed. If I recall correctly, he hit the mother load on a well or two, and made about $2 million in profit. I also recall seeing that oil booms were taking place in TX and OK (?) recently while oil was still high. I would be curious to know if those booms are still alive and well, and if lay-offs have occured.

Again, I am fine with speculation, even though I believe it does carry a double edge at times. This includes the problem with world hunger, even though I understand that more crops were planted this year, which will help depress pricing back to levels that the destitute can afford. Let me be clear with this: I am not talking about an 'impoverished' American facing a 2 cent increase in a can of Coca-Cola. I am talking about the destitute that live on less than $100 a year, and live in cardboard huts. It is sad, for whatever reason, that they go hungry.

Still enjoying this conversation. I feel like I have learned new things, or at least obtained a new, sharper understanding of the economies at hand from this thread!

Clove

[QUOTE=highlands;3433549]No, you've miss-understood my position. I have said before that it is a (semi) free country and people can do speculating, gambling, buy stocks, invest in 401K's. But don't expect me to want to bail them out. They take risks and should suffer the consequences when they have losses.

I stand corrected. I did misunderstand.

LOL at the "get paid, rinse and repeat" line in your earlier post. Mind if I steal that one and use it myself?

Clove

Go for it.

-Walter

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SugarMtnFarm.com -- Pastured Pigs, Poultry, Sheep, Dogs and Kids

Buying contracts in the commodities market is a complex issue by itself. Mixing it up with Investment Firms that manage Retirement Plans is a whole new can of worms. Throwing in a Government bail-out of Financial Institutions that loaned out mortgage money to people that can't pay is a new kettle of fish, altogether. While these three topics have connecting pieces, they are, for the most part, seperate issues.
If I have a gut feeling that "Tickle Me Elmo" will be the hottest toy this Christmas, I will buy stock in the company that makes that toy. If I'm correct, I'll make a lot of money without actually owning the doll or helping with it's assembly. Am I a smart investor or an evil blood-sucker?
If I have a gut feeling that the world demand for corn will exceed the supply and I can buy a contract for 10000 bushels of corn in Aug 2009 for $3.00 a bushel, I'll buy it. If corn pushes to $4.00 a bushel by then , I make $10000. by selling my corn at market price. I never weeded a row. I never shelled an ear. Am I a smart investor or an evil blood-sucker?
If I am managing retirement funds for a group of people, I can put their money in a bank CD and get them a return on their investment of under 3%. If my company gets a chance to buy up a bunch of home mortgages, all payments up to date, earning 6%, can you fault me when people suddenly stop making their payments? Who could have seen that the value of homes would stop and then reverse its 60 year steady rise?
Henry Ford prevented suppliers from being able to control his profits. He bought Rubber tree plantations, iron mines, hardwood forests, etc. He built villages at each of these places so he could control the housing costs to his employees,too. Today, you can hedge your costs of inputs easier by purchasing futures contracts. You put the responsibility onto the back of the person that sold you the contract. If I buy 1000 pork bellies for August 2009, I can be assured that my Haypoint Baked Beans can keep that hunk of bacon, without cutting into my profits. However, if McDonalds starts putting three strips of bacon on their McMuffin, instead of just two, the price of pork bellies would jump and the seller of my contract might have to buy pork bellies at a price above what he sold them to me. That is how people lose in the Futures Market. Good for me, too bad for him.

World hunger is another complex important topic. Again, it is a seperate issue from the above listed issues, with a few connecting parts.
If I only grow enough corn to satisfy my futures contracts, with a few bins extra, just in case there is a spike in price ( to put it another way, just in case other farmers lose their crop), I can stay in business. That means maintain my land and equipment, plus pay for my inputs: seed, fertilizer, fuel, etc, with enough left over to pay my mortgage on the land I farm and give me a fair wage.
I can't sell my corn for $2.00 a bushel and continue to farm. Many third world countries cannot afford to buy corn at a price that I can afford to sell it. I continue to farm, they starve. If I sell for what they can afford, I get driven out of business by debt. Is there a more fair way to do it?
If the US sends food and supplies to 10,000,000 starving people in some third world arid place with infertile soil, we can stop hunger for 10,000,000. In ten years, we'll have 60,000,000 starving people in that country. What then? At some point we have to realize that our efforts to help, just brings more suffering later on.
If you want to feed the hungry in another country, there are boxes down at the grocery store. Get some, fill them up and mail it to them. Don't expect the taxpayers (middle class) to provide for it. Foreign aid is the act of taking money from the poor people of a rich country and giving it to the rich people of a poor country. Wish it weren't so, but 'tis.

All of your contacts must be small or maybe medium size farmers. Many, many years ago when I was a young'n farmers would have a good chunk their corn, cotton and beans sold before the seeds went into the ground. They'd leave a little wiggle room just in case 1) they didn't harvest as much as they expected 2) the prices were higher at harvest.

When you are growing 200-2,000 acres of say wheat you really would like to know you are going to get at least what it cost to grow it.

__________________
Remember, when seconds count. . .
the police are just MINUTES away!

Congress has no power to appropriate this money as an act of charity. Every member upon this floor knows it. . .Davy Crockett

DH & I were having a conversation about cattle futures today, and then, when lurking here, found this thread. How enlightening! What I still don't understand is how do futures prices today affect my selling price six months from now? Or do they? If the cattle market's futures are high in August & Sept, does that mean that cattle prices are highest in August & Sept? Or that the contracts that are purchased in August & Sept are high (for some future delivery date)? Is the futures price a predictor of current price or price at some later time? (That sounded very confusing, and I wrote it. I understand that a future is a contract for a fixed price delivery at a fixed time, but I guess I'm muzzy after that.)

And, BTW, I have $$ in the stock market, and I can't believe that people just thought the market would go up and up and up forever. I mean, what goes up must come down, and if your portfolio was not structured correctly for your level of risk, shame on you. Not my responsibility to bail you out. Nor is it my responsibility to bail out a bank who made a mortgage they knew a person couldn't afford long term. Nor is it my responsibility to bail out a mortgage-holder who signed a contract they knew they couldn't possibly fulfill long-term. Part of being an adult is accepting responsibility for one's actions. Seems like our entire system needs to man up...

-Joy

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-Joy

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The reason a lot of people do not recognize opportunity is because it usually goes around wearing overalls looking like hard work. --Thomas A. Edison

Without doing some study, it is hard to tell why August and September seem high. You could look at 5 year charts to show when cattle futures are at their highest points.

There are often, but not always, reasons why futures reach high and low points, especially if they are record highs and lows. For instance, if mad cow broke out, it might have caused record lows in cattle futures. Then again, over supply of something might just happen, and force prices to new lows.

Of course, you could always ask a cattle person that has experience following the futures markets.

Clove

August & Sept are historically high points in cattle futures. DH & I just can't figure out why they would be high then, but we were trying to think of it in terms of buying and selling cattle, which I think is the mistake. They aren't selling cattle; they're selling paper that results in cattle at some point, which makes understanding how futures might affect our cattle sale price very convoluted...

-Joy

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-Joy

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The reason a lot of people do not recognize opportunity is because it usually goes around wearing overalls looking like hard work. --Thomas A. Edison