The U.S. had 2 hurricanes and the price of Gas goes up = I understand. But then I start thinking about it... "Does the price go up world-wide?" I would guess that the answer is, Yes, because wars in the Middle-East has made the U.S. prices go up (i.e. due to the same Commodities market). So out of curiosity, I look at a list of Commodities: https://en.wikipedia.org/wiki/List_of_traded_commodities And this is when I become confused... Agriculture. Real Farmers. Opposite sides of the planet. Forget computers with OHLC charts. Forget import/export. Just farmers on a farm... "E I E I O" <-- O'McDonald song, in case anyone was wondering. Do Farmers experience changes in price in the same way as we do with Gas? As in, Do local U.S. Farmers care (become concerned) if an outbreak in pigs happens in China? Thanks for any insights.
You have to think about what the marginal price driver is and how much you can substitute a commodity from one part of the world to another. For example, natural gas is expensive to liquefy and transport. So a temporary shortage in Texas isn't going to impact prices in the Ukraine until the price difference exceeds that liquification and transport cost, if it can even be done at all given the paucity of liquification facilities. Oil, on the other hand, is a worldwide commodity that is transported everywhere so a price change in one area will quickly ripple to everywhere else as it's arbitraged out. Your pigs in China is a very interesting example of the more complicated picture. China in a net importer of pigs. However the U.S. pork industry generally doesn't export there because of trade barriers and hormones fed to U.S. pigs. So that means that the price of pork in the U.S. isn't impacted by a shortfall in China, right? Actually not, because China imports most of its pork from the EU and the EU trades with the U.S. So it's very possible that China takes up a bit of the supply from the EU that is back-filled from the U.S. That too is complicated though, because the EU has or will have trade agreements in place with Japan, for example, that are more favorable than those with the U.S. In all cases you need to look at the marginal price setter, that is the last ton of pork sold, which determines the price. It all becomes pretty complicated to model pretty fast.
Sig, I've read your post several times. Thanks. You seem very knowledgeable... Do you trade Futures (you used the phrase "arbitraged out")? It all makes me wonder, "What If?" <-- more about that in a moment. I trade Stocks and Forex, and every day I read the news (always written AFTER). The journalists will write, in a very authoritative style, why the Market moved Up or Down. For me it's often laughable. I even discovered (years before the concept of Fake News) that Yahoo Finance will re-write their Morning articles on days that the Market changes direction in the end. I say all of this because your paragraph about China reminds me of these types of news articles. Very knowledgeable, very authoritative, but for me as a trader, not very useful (i.e. I use pure TA to trade). Once again that's as a trader. For educational purposes, I find it very useful. I am going to go ahead and guess that you trade Futures. I am also going to guess that I just read/witnessed a small sample of the mental calculations you make in taking a trade. For instance, you wrote "a temporary shortage in Texas isn't going to impact prices". So now back to my "What If?" "What If - All Commodity prices are due to Traders?" If the majority of Traders believe an event is temporary (or insignificant) then they will not take a trade. The Farmer has nothing to do with it. It's just a thought that popped into my mind when I read your post. Wow, I just had another thought pop into my head while writing the last sentence. "What If the price of Gas would not have even went up if Traders were banned from the Market?" Very interesting. Thanks again for your post. Very thought provoking.
I have traded ag futures but as you surmised I found it so difficult to model because of the noise from trading that I wasn't successful and stopped (still do trade SPX FOPs though). So your assertion of "as a trader, not very useful" was spot on! I'm completely with you on the BS of a financial writing saying "commodity or index X moved 5 points because of Y" when there was no obvious big event and no-one can really say why it moved, let alone a journalist. One of my pet peeves as well. As for banning traders, I actually have experience in starting markets for niche commodities that aren't big/liquid enough to attract traders. I was running the marketplace, not participating. Those type of markets tend to all move toward a broker model, i.e. the producer calls a broker over the phone and the broker calls a bunch of buyers and sets up a specific deal for that batch of product, or vice versa. This is very inefficient and opaque, there's very little price discovery and no published prices, and the transaction costs are necessarily huge compared to liquid markets. I tried very hard to attract traders to that market because I though they would bring big benefits to everyone. Again this is me operating the "exchange", not participating in the market in any way, so obviously I am a bit biased since I make money off volume and you have to take that into account when considering my opinion. But that experience makes me believe that until you have enough volume to always have a bid/ask available from an actual natural buyer or seller traders, traders add value. I'm not sure any ag commodity has reached or will ever reach that level, maybe metals and energy will/have.
Interesting once again. From what you are saying, Traders bring the liquidity needed to have a "better" Market. This makes sense to me. Farmers are busy farming.
This article may help answer some of your questions. http://www.farm-europe.eu/travaux/are-futures-the-future-for-farmers-2/
comagnum, that article is perfect for this subject. Thanks. Traders are a Good thing: "the quality and success of a futures market is determined by its liquidity" Traders are a Bad thing: "there is evidence that speculation on futures markets can artificially increase the demand for agricultural products, and thus lead to higher prices on the physical markets" And the Conclusion on how Good and how Bad: "farmers are not yet sufficiently protected against excessive speculation and market abuse on agricultural futures markets" Meaning, Traders are mostly a Bad thing, which is why the EU wants to implement new legislation to limit Traders. Interesting.
In order to find any concrete evidence in that postulate, you need to follow the U.S. ag reports. Here's a primer. http://www.agcenter.com/Documents links and slide shows/Reforming the Futures Contract and Cash Trading of Cattle.htm They update their synopsis reports weekly and auction moves daily. They speak of the issues you are concerned with regarding imports and exports sometimes, and occasionally speak about pork, chicken and the other minor meats. Been reading them for a year or so each week, very insightful. But it as a sector I do not follow closely enough to gather any edge from these reports. Maybe you can? http://www.agcenter.com/newcattlereport.aspx
Which EU legislation are you referring to? By the way, commodities that are NOT traded in a regulated exchange tend to be more volatile( dangerous for poor little farmer or consumer ). Check WTI and Brent volatility Vs other kinds of crude that are only physically traded, or power...
The EU agreement I was thinking about was this one http://europa.eu/rapid/press-release_MEMO-17-1903_en.htm Completely agree with the volatility statement!