http://www.foreignpolicy.com/articles/2011/04/27/how_goldman_sachs_created_the_food_crisis?page=0,0 ...... But Goldman's index perverted the symmetry of this system. The structure of the GSCI paid no heed to the centuries-old buy-sell/sell-buy patterns. This newfangled derivative product was "long only," which meant the product was constructed to buy commodities, and only buy. At the bottom of this "long-only" strategy lay an intent to transform an investment in commodities (previously the purview of specialists) into something that looked a great deal like an investment in a stock -- the kind of asset class wherein anyone could park their money and let it accrue for decades (along the lines of General Electric or Apple). Once the commodity market had been made to look more like the stock market, bankers could expect new influxes of ready cash. But the long-only strategy possessed a flaw, at least for those of us who eat. The GSCI did not include a mechanism to sell or "short" a commodity. ......
I think that is what nitro post here in this thread before. But his link is for subscription. http://www.elitetrader.com/vb/showthread.php?s=&postid=2892990&highlight=goldman+sachs#post2892990
"The Food Bubble" http://frederickkaufman.typepad.com/files/the-food-bubble-pdf.pdf Doing God's work? Hmmm....
---------------------------------------------------------------------------------- ??? "The idea of the fund was not to trade short and long positions or hedge physical prices on delivery of the commodity. The fund ignored market views and only bought one side - the side on which value of the futures contract increased as the expected delivery price increased. The fund sponsor rolled over each contract into a new contract before the notional delivery date occurred. By rolling over the contracts, the fund became infinite, a rolling investment in an index of prices for commodities that never had an end date. Goldman and other banks made plenty of money from fees and float (the cash paid by investors was mostly held by the banks as long as everything worked well). A side benefit was the huge increase in the volatility of commodities markets. By flooding the markets with one sided contracts (especially on roll over dates), price movements became more severe. Absolute commodities prices trended relentlessly higher and higher." http://www.rooseveltinstitute.org/new-roosevelt/bread-and-derivatives
This too. "Over time, futures prices should converge to the actual delivery price for the commodity at the delivery date. The futures price is no more than the expected price of the commodity on delivery. On that date, the value of the futures contract and the value of the actual commodity are the same. In 2008, this relationship became unhinged, particularly in agricultural markets. This coincided with a shift of fund assets from energy to agricultural futures. Remember that the funds were designed to be perpetual and the roll over of contracts made delivery dates irrelevant. Because the holders of so many futures contracts did not care about actual delivery prices, the futures markets lost their relationships with the physical markets which are centered on delivery dates. Physical delivery (or âspotâ) prices increased as if futures were driving spot prices rather than the other way around. But they could not keep pace with the perpetual index prices." http://www.rooseveltinstitute.org/new-roosevelt/bread-and-derivatives
then mr. oneliner - how would you explain this convergence phenomena below?; SPX cash index and its futures also has this behavior. "I gave Mr. Silver a blank look. Contango, he explained, describes a market in which future prices rise above current prices. Rather than being stable and steady, contango markets tend to be overheated and hysterical, with spot prices rising to match the most outrageously escalated futures prices. Indeed, between 2006 and 2008, the spot price of Chicago soft red winter shot up from $3 per bushel to $11 per bushel."
The price of a contract is not going to converge with the actual price at the delivery date. It is a point in time not a segment of time. The author clearly does not understand futures.
Thanks for directly pointing us the most stupid part of the article so that I don't have to search myself. Contango tend to be the rule rather than the exception on ag markets. prices of different successive expiries are translating the cost of storing the commodity to resell it later. It corresponds to ranging or declining markets. Backwardation corresponds to a price shock/big bull market when there is a lot of demand/lack of supply now and there are more incentive for producers to deliver than store. That's when it becomes overheated and hysterical.Just check if prices were in contango on commodities during the bull market of 2008.