Mysterious discrepancies in grain prices "baffle" experts

THe experts are baffled why the futures (or derivatives) market prices are higher than the cash market prices (where the buyer actually wants the commodity). It only reason this "baffles" the experts is because those in the brokerage/financial community are reluctant to point the finger at speculators. Speculators do provide income to the facilitators to these trades, the brokers who have access to these markets.

This is happening not just with corn (the feed-stock to the evil Ethanol molecule) but with wheat and soy-beans too. Gosh could the cause be something other than the molecule that devoured the food supply - ETHANOL (AAAAAUUUUUGGGGGHHHHHHH!!!!!)


http://www.iht.com/articles/2008/03/27/business/commod.php?page=1


Whatever the reason, the price for a bushel of grain established in the public derivatives markets has been substantially higher than the price of the same bushel of the same grain at the same moment in the cash market(that is, the market where the buyer actually wants the grain and will take delivery of it.__JW).

When that happens, no one can be exactly sure which price accurately reflects supply and demand in these crucial commodity markets, an uncertainty that can influence food prices and production decisions around the world. Prices set in the U.S. markets are used as benchmarks for grain prices globally.

These disparities also raise the question of whether farmers, who rely almost exclusively on the cash market, are being shortchanged by cash prices that are lower than the derivatives market says they should be.

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The veteran traders and many farmers blame the new arrivals in the commodities markets - hedge funds, pension funds and index funds. These investors and speculators, they complain, are distorting futures prices by pouring money into the market in pursuit of strategies that are insensitive to traditional market signals.

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On edit:

For the record, it's not just speculators, but the economy going down the tubes that caused investors to get out of stocks and into commodities of every sort (speculators then seek to profit from the observed trend thus exaggerating it, making it worse.). Then there is the primary cause, the growing demand for food from nations such as India and China growing in wealth who are demanding more food, energy and manufactured products. That brings us to the exploding cost of energy which affects just about everything. Oil is currently priced 2.5 times its price in January 2007 http://tonto.eia.doe.gov/dnav/pet/hist/wtotopecw.htm

biofuels have played a part in climbing food prices but its a relatively small player in this scene. If somehow you could make the ethanol molecule dissappear over-night, the price of all grains would not come down magically the next day, sad to say. The cost of gas and diesel would just go up even faster and the cost of everything else would rise with it.

and not that current. corn, which I trade (yes, I am an evil speculator) has dropped about 25% in the last month.

That's for the front month futures contract

I think when speculators take over too much of the trading then the prices get distorted. IT does happen and I think that's whats happened in this instance.

I just thought it was ironic since it was a several months old article and posted AFTER corn etc. are way off their highs.

My other point is that this is nothing new. It has happened for CENTURIES. Tulip bulbs, to nifty fifty.

If you are going to have a two way auction price discovery system w/o a centralized authority setting prices, yer gonna see... to quote jp morgan... "fluctuating"

attention (so much so that you would think it's only Corn that is experiencing this - this is what those who assert (and perhaps sincerely believe) that demand for corn for ethanol is driving up ALL food commodity prices wold have us believe. That was the reason for posting this article. To show that all commodities are experiencing this and most of these grains and food commodities are not being made into ethanol. Their fall-back position they were forced to go to is that corn is competing with other crops and driving their prices up by driving down their acreage (corn competes with grapes and nuts?) but that argument is dispatched by an examination of the data(but for one case, that being soy-beans. Soy-bean acreage in 2007 lost out to corn and wheat's increases).

The article indicates these fluctuations are worse than what the veteran traders have seen before. But even if it's nothing new that doesn't mean it's something we have to tolerate. If speculation or computer driven buying are distorting prices too much we can take action to correct it (well at least re speculation. Computer trading That's a more complicated problem).

One simple thing we could do is bump up the margin for buying futures - say to 25% I think that would have a very healthy affect on bringing down the 'froth'.

The choice is not between economically pathological markets and "a centralized authority setting prices", the favorite bugaboo of those who live in "the (tading) pit". We can take steps to reduce market distortions caused by excessive speculation when it distorts markets. Humans do have brains and we can use them for our own betterment, if we are willing.

Here's the corrected version:

Mysterious discrepancies in grain prices baffle "experts"

http://www.nwrage.org/index.php?name=News&file=article&sid=2225

When there is a shortage, prices go up. At the moment world stockpiles have been falling for years and are at a 35 year low, which means production has not kept pace with consumption.

A party with a need to guarantee future supply locks in contracts in the futures market. That these contracts are also high only reflects a lack of optimism; we need more than just a good harvest or two to solve the problem, and nothing promising is on the horizon.

No question about that- but how will nations and exchanges deal with it?

Pretty complicated stuff.

indeed, I'd be surprised if it were the other way.

The futures prices reflect uncertainty about the market.