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Question about commodities and the future

1524 Views 46 Replies 14 Participants Last post by  menollyrj
I have been wondering how the price of commodity futures affect the price of the groceries we buy. I just saw that orange juice and pork belly futures are way up does that mean that orange juice and ham at the grocery store are going up in price? And if so how long does it take once the future prices go up for it to affect the prices at walmart? Any smart people out there want to help me out?:)
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So the speculator is one more middle man jacking up the price of food to take his profit without actually doing any work. Like the farmers market example, it is best to cut out the middle man and have the finisher farmer buy piglets directly from the farrower farmer. I knew there was I reason I didn't like or trust Wall Street and its ilk.
Not really. I call the farmers I buy hay from, or just speak with them last year when they dropped it off, and let them know how much I want. Then last week the first one dropped off hay and I handed him his check. That was a direct sale with no middleman and no hay futures involved.

He knows I'll take what I said and I know he'll deliver. Not much more one can expect in life. He does find it funny that our pigs eat hay for the winter but after a few years he got used to it. :)

Getting someone else involved in the transaction would just complicate matters and increase the price I pay or decrease the money John received for his hay. No need for that. I still fail to see any value in the stock market, commodities markets, 'futures' and speculation. More importantly, if those people make a bet and lose they certainly should NOT be bailed out. This $700,000,000,000 waste of our money, er, bailout, is a travesty. It just proves that the whole system stinks and does not work. If The stock market, commodities, futures and all that were real then we wouldn't be doing this bailout. Those investors would just have to eat their losses. They gambled, their loss.
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In the hay example, what do you do when the guy you spoke with last year tells you that half his hay got rained on and a hay broker offered him $3.00 a bale for the rest of his crop? Makes you wish that last year you'd had a solid agreement on this year's hay. You can go right on with your cozy "understanding", but all to often we eventually get stung.
It's not a cozy 'understanding' its an agreement to each do our best. It is as locked in as is possible. Adding a middleman to the equation won't lock it in any more. Paper contracts won't lock it in any more. Paper contracts are broken left and right. You can sue but they can just close up their business and you're just as stuck.

The protection is having alternatives. I never single source my inputs nor do I sell to a single source my production. To single source either, to depend on just one seller or one buyer, would be folly. There are several farmers that I buy hay from. I never give anybody 100% of my business because I want to maintain a relationship with all of them. This way if John doesn't have as much hay as I want this year I call Ray and get extra from him, or Brad, or Jen, or... That is smart and simple. No need for a middleman.

Buyers, like yourself, would move to buy hay ahead of time next year. This "stock-piling" creates an even bigger shortage. People, unable to buy hay at $3.00 a bale, start running adds looking for hay for next year. I offer ten lots of 1000 bales at $4000 each lot.
Bad move. Don't buy hay years ahead and stockpile it. Hay loses quality in time.

Hilery Clinton had a Futures Company "invest" $10,000 in cattle futures. The price goes up and down every day. They managed to sell hers when the price was up and buy them back when the price was down, over and over. In a years time, she had $100,000. Simply amazing woman.
That is about the most perfect example I have ever seen of why futures trading, stock markets and commodity markets are BAD. She did nothing. She produced nothing. She added no value. She was the classic middleman stealing her little bite of pie as she passed it down the table over and over. That is such rude behavior. What she did do is simple gambling. And then these people who've gambled and lost big time are now expecting the rest of us to bail them out to the tune of $700 Billion and rising. I STRONGLY object to my money being redistributed to these investors. They gambled. They lost. They deserve the fruits of their gamble - to lose their shirts. To protect them and give them the candy because they scream and carry on in a temper tantrum is sending exactly the wrong message, teaching exactly the wrong lessons. Now as a result we have the auto industry, the airline industry, the home heating fuel industry and others all demanding that they get bailouts too. This is very bad.
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Other folks, it is not so simple or easy. The world is a little bigger than you make it out to be. :) When there are several 100 million people to feed in this country, and 6 billion to feed around the globe - then it gets a little more complicated.
But does it really need to be so complicated. I argue that the cities are making it far more complicated than it should be. That's part of the whole buy local issue. This points out just how unsustainable cities are.

Fortunately it is a somewhat free country and you can do it which ever way you want. The trouble is I should not have to bail you out when your investments fail. That is my objection. So the banks / investors made bad choices. They gambled. They lost. Tough. They should not get any bailout. They should take the hit and if it puts them out of business that is their problem. I object that $13,500 of my money, plus interest, has been redistributed to the rich fat cat investment bankers in this $700 Billion dollar bailout. It is that simple.

If your friend quites raising hay, you can perbably find 100 bales someplace else.
Yes, I never single source. I have multiple farmers that I buy hay from. I never give any of them 100% of my business because I want to maintain a relationship with all of them. This way if John doesn't have as much hay as I want this year I call Ray and get extra from him, or Brad, or Jen, or... That is smart and simple. No need for a middleman.

Likewise I never sell to just one buyer. I sell our pork to many different customers. If one customer goes out of business, as has happened, it is not going to hurt me too much. There are other buyers or I'll just adjust my production down a little.

Single sourcing is foolish, on the buy or sell end of things. There is no need of commodity futures or middlemen sticking their fingers in the pie. More importantly, if they are there they are gamblers who should take their losses just like they demand their winnings. Chin up and all that.

For the world at large, & for people living in cities & no hope of personal transactions with individual farmers - speculators are what keeps food on their tables.
Well, that rather proves my point. I've been saying all along that this whole bailout, market crashes and economic recession is a city problem not a rural problem. City people made the problem and they're the ones who are going to suffer the most, as it should be. The middlemen are part of the problem. I object to bailing them out. They gambled. They lost. They should take the hit.

Bailouts is another topic entirely. Can end up between a rock & a hardplace. I agree with you in principle, entirely. When it comes down to collapsing our ecconomy & all - then it becomes a more difficult question.
Perhaps it is time for 'collapse' of those elements that are inefficient like the middlemen, investors and huge banks. If GM can't produce better cars its time to let them fold or change. There are other car manufacturers, in this country and elsewhere, who do produce better cars and do it at a profit. Actions like the bailout protect bad elements so they can continue. Evolution and improvement won't happen if the government keeps blocking out this culling of the weak. Change can be necessary to survival.

Which is the worse evil, to bail out the big cats, or let the small individuals sink along with them?
It is not an either-or situation. There are better alternatives. Let the big cats and any other speculators fail. Let them lose their shirts. They gambled. If they had won they would have wanted to keep as much of those winnings as possible. If they lose they should take the hit.

The problem is the government has said that they are going to concentrate the bailout on helping the few biggest ripoff artists, er, I mean investors and won't bother to help the many of those that are too small to 'bother with'. If you're "too small to save" then tough luck. The government has ruled that the bailout money can be used by these fat cats to buy other businesses, for employee bonuses, to pay stock dividends. That is a travesty. It's just handing over my money to the fat cats. This isn't about saving the economy or country, it's about keeping a small class of wealthy people in money. Let them sink in the morass of their making.

It is unreasonable to demand that working families come up with $13,500 each to pay these fat cats. There are better ways to spend $700 Billion dollars that would help our economy. The bailout as they are doing it is evil.
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That works fine for small transactions. What if you were spending hours each day dealing with dozens of suppliers to buy 10,000 bales of hay each and every month? How much would it be worth to be able to call one person?
Then I would produce my own hay. Vertical integration. We're already working on that for about three to five years from now. I'll continue to buy other people's hay but I also want hay under my own control.

The you have the budgeting factor. The more you know how much things are going to cost its much easier to budget.
That is a fallacy of price locks being so good keeps popping up. With this line of thinking someone loses when prices go up but there is a price ceiling at the other end. That can drive that person out of business which puts people out of work, etc. Someone suffers with this system of futures and there is a middleman in the the middle taking a bite of the pie so everyone suffers just a little bit more.

A current example of this is the people complaining about having locked in fuel back in June for home heating. Now prices are lower and they want to get out of their contracts. Open a newspaper. Read all about it. The home heating suppliers are now asking for a federal bailout too. This bailout mentality has given people the idea that the nolonger are taking any risks yet they'll still want the rewards. Bad. Very bad.

Yes and no. It may add some to the cost but most companies see the extra cost as worth it in other ways. I've been checking out your blog watching the progress on your greenhouse. Why did you spent the extra money to buy ready mix concrete rather than make your own?
You're confused. That choice has nothing to do with futures. I bought truckloads because of the volume. For that job I buy ready mixed concrete by the truck load because they have a bigger mixer. Other times I buy the cement, also from the same company, and mix it with sand and gravel (from our land and from a different pit) to make smaller batches of concrete. I pay cash. No middleman. No future commodity brokerage. Simple purchase.

How much money could you have saved by cutting out the middle man and buying your own cement, sand and gravel, supplying your own water and mixing it yourself on site? I'm willing to bet you did a cost vs benefits analysis and decided the extra money spent was offset by the time and labor saved.
Yes, and that had nothing to do with commodity futures and neither the concrete company nor I am looking for a government bailout when poof, the weather turned colder, they need to add hot water and charge me $6 more per cubic-yard to cover the cost of heating the water. We simply do business. It's that simple.

On (the bailout) I fully agree. This is like a parent who bails his kid out of jail time and time again. The kid never learns as long as the parents do this. One of the things my kids hear and have heard over and over is; Actions have consequence.
Glad to hear that. Sadly, now that the government has bailed out one group we have half a dozen other industries demanding bailouts. I foresaw that and it is one reason I wrote my congresscritters and asked them to oppose the bailout. There will now be an endless cycle of demand for the new entitlement of being bailed out. They are producing a zero risk society.


Sugar Mountain Farm
in the mountains of Vermont
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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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Highland points out that speculation should not take place in the futures markets.
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.

Without futures contracts, many farmers wouldn't dare plant a crop that didn't have a buyer or value locked in.
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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