

The Folks Who Sell Your Corn Flakes are Acting Like Goldman Sachs - cs702
http://www.newrepublic.com/article/114577/commodities-trading-hedge-funds-spook-wall-st-banks

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crucini
I'm skeptical about the ban on insider trading in general. Now this author
wants to extend it to a new sphere.

Basically, an oil company, which knows a lot about the oil market, shouldn't
be allowed to speculate in oil.

Isn't this the mandated destruction of valuable market signals?

Should we also ban car mechanics from buying and selling used cars, because
their special knowledge gives them an unfair advantage?

~~~
MartinCron
There's a huge difference between special knowledge and expertise and material
non-public information that you know will move markets.

Martha Stewart didn't go to jail for having any specialized knowledge, she
went to jail because someone tipped her off that a company she was invested in
was about to go south. She sold those shares to someone who _had no reasonable
way of knowing what she knew_ which is essentially a type of fraud.

~~~
fennecfoxen
No. The reason that trading on insider information is illegal isn't that some
third party is injured (if anything, martha's sales caused the third-party get
a better price than he would have otherwise!) It's illegal because the
officers of a company and the employees of a company are supposed to be doing
the job of _running a company for the benefit of the shareholders_ , and
there's opportunity for some pretty massive conflicts of interest if they're
also playing games trading stocks / stock-tips instead.

And also because people think it's "unfair", like the stock market's supposed
to be a game or something rather than a place that you can buy and sell stock
for a price which is well-correlated with the company's prospects. :P

~~~
JackFr
That is the agency problem and bans on insider trading do not directly address
that. The agency problem is addressed through bans short-selling and put
options, as long as the officers and directors have along exposure to the
share price, their interests are aligned.

The ban on inside information is intended to attract capital by ensuring that
stock markets are fair and transparent. If the investing public believes that
the stock market is nothing more than a con to take rubes' money capital will
stay away, and keep capital from flowing to productive firms.

~~~
r00fus
> If the investing public believes that the stock market is nothing more than
> a con to take rubes' money capital will stay away

No way - now 401ks are the only retirement savings vehicle aside from striking
it rich through lottery or stocks. Guess how many people translate their
investment in a mutual fund to the actual stock market shenanigans?

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kyllo
Here's why this exists:

Say I'm Kellogg's. I make Cornflakes. I pay $x/ton for corn and I sell
Cornflakes for $3 a box. Now say that due to a drought, the price I pay for
corn is now 2x. I have to raise the price of Cornflakes now. Consumers don't
want to pay $5 for a box of Cornflakes, and my sales drop.

But if I buy corn futures when the price of corn is low, then when it goes up
those become more valuable, canceling out some of my increased supply cost,
therefore my business is less exposed to risk in price volatility of raw
materials.

In other words, it's for hedging.

Now, there are various ways to exploit this unethically, for example if I as a
commodity trading bank, _actually have control over the prices_ of the
commodities. We're right to be concerned about that. But commodities hedging
itself is a good thing for the economy and we shouldn't spread FUD about it.

~~~
jonnathanson
Correct, and to be clear, that is exactly what Kellogg's, General Mills, Coca-
Cola, and other big food companies have been doing for years now. It's not
uncommon whatsoever -- if anything, it's considered a best practice -- to
hedge on commodities prices if your fundamental business depends on them.

In and of itself, that big food companies deal in commodities futures (call
_and /or_ put) is neither surprising nor irrational.

Things start to get scary when speculators dominate the markets for those
commodities, and when commodities houses corner markets. The reverberations
across various sectors of the economy would be frightening if anything went to
shit at even one commodity shop.

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fennecfoxen
What? People who use commodities to power their business are trading
commodities futures on the futures exchanges??!?? Perish the thought!!!

~~~
mhb
The difference is whether they're using them for speculation or (real)
hedging.

~~~
fleitz
Actually that doesn't make a difference.

The entire point of the free market is to provide for speculation. People
buying and selling goods for real dollars where they have real risk is called
'price discovery.' It incentivizes discovery of information relevant to the
market and dissemination of that information to the market via price.

Lets take the example of corn flakes, I'll be a speculator, every day I watch
the corn fields, one day I see a fire start on one of a field ostensibly
representing half of that year's corn, I buy corn at any price knowing it will
go up because the world's supply has just been cut in half. Next week I sell
all that corn and take the profit as fruits of my labour.

People who trade Wal-Mart stock will often request satelite images of Wal-Mart
parking lots to estimate sales. Just imagine the ingenious ways commodities
traders use to discover information about supply and demand.

Farmers are completely free to sell their corn direct to consumers, but most
prefer not to because that isn't an efficient or effective way of selling.
Don't blame Cargill, blame farmer John down the street who wants the best
price for his corn.

~~~
GFischer
For big commodities like corn, that might not be a solution, but I'd like to
build a startup that covers some huge market inneficiencies - for example,
peppers grown 500 km from the city I live in are sold at U$ 1, while they cost
U$ 4 at the supermarket.

~~~
fleitz
Do you mean as in 500km from your city you can buy peppers for $1 and they
cost $4 in the city?

Or did you mean that there is a $3 price discrepancy for peppers between the
supermarket and the fruit stand?

~~~
GFischer
I meant that in 500 km from my city you can buy peppers for $1 and they cost
$4 in the city.

they're about $3 in the fruit stand and $4 in the supermarket.

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scarletham
Isn't the title of this a bit misleading? Cargill doesn't sell corn flakes, it
(possibly) sells physical grain to Kellogg's, or derivative products to hedge
Kellogg's exposure.

~~~
protomyth
I would say the title is an indication of how bad the article actually is. It
is a shame they wrote such an information free article.

Cargill is a fairly interesting company and like all big and small grain
companies, they hedge their inventory. Grain is a very low margin business and
it is very important to protect both the company and the farmer from market
volatility. This does tend to put these companies in the financial instruments
business and they do tend to expand past agriculture.

disclaimer: worked for Cargill at one time and will not go into any depth
other than to say the article is a bit information lite and the title is
horrible, ill-informed dreck that I expect.

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cbr
"Last year, the Global Financial Markets Association, a lobby group for banks,
commissioned a study on whether trading houses are “too-big-to-fail.” Hoping
it might convince officials to regulate these companies like banks, GFMA
abandoned the study after Pirrong, its author, reached a different
conclusion."

~~~
GFischer
Seems like Pirrong was intellectually honest :)

I looked up some links on his study:

[http://www.bloomberg.com/news/2013-05-15/commodity-
trader-](http://www.bloomberg.com/news/2013-05-15/commodity-trader-) failure-
seen-as-limited-economic-risk-in-study.html

[http://www.cato.org/publications/policy-
analysis/inefficienc...](http://www.cato.org/publications/policy-
analysis/inefficiency-clearing-mandates)

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forgingahead
Can we please stop it with the breathless conspiracy theory posts here?
Especially from sources like the New Republic.

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gaius
This was extremely difficult to read. Let's start with: Goldman has not just
_become_ a commodities trader. It has been one since 1981! And the article
goes downhill from there.

And secondly,
[http://en.wikipedia.org/wiki/Futures_contract#Origin](http://en.wikipedia.org/wiki/Futures_contract#Origin)
"The first futures exchange market was the Dōjima Rice Exchange in Japan in
the 1730s"...

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JackFr
This article is dramatically light on specifics and historical context and
heavy on innuendo and fearmongering.

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javert
As everyone else is saying, this article is spreading fear for no reason.
Working with financial markets is a key technique for commodities companies
and always has been, particularly to hedge. The net result is that food prices
are lower and more stable.

The exception is onions. Onion futures were outlawed 50 years ago for
"reasons" given in this article, and onions are more volatile than oil, which
is the _most_ traded, speculated-on, and manipulated commodity.

In summary, the author of this article is calling for forcible action that
would hurt peoples' lives, potentially even disrupting world food supplies.

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geuis
I'd like to point out that this is a perfect example of how not to build
mobile versions of a site. Due to changes in how iOS 7 Safari hides and shows
the tool overlays when scrolling, they are now permanently displayed on this
site. You never know when the browser interface will change like this.

Also, Apple has really screwed up with this feature change in Safari. There's
so much to like about iOS 7 but not this. I've been working with the beta
since it launched and have been hoping for this feature to be reverted but it
looks like it's going to production now.

~~~
Domenic_S
Meh, Chrome on iOS has had peekaboo interface elements for a long, long time.
It works fine 99% of the time until you run across a site like this one.

