

Controlled experiment in futures markets: onions - emmett
http://money.cnn.com/2008/06/27/news/economy/The_onion_conundrum_Birger.fortune/?postversion=2008062713

======
steveplace
This is evidence that speculators are not to blame. If you remove speculators,
you remove liquidity. No liquidity, higher volatility, and higher probability
of price manipulation (think Enron).

It's also worth noting that the distaste for market speculation is inversely
proportional to how well the market is doing.

~~~
breck
This is evidence of nothing except that one number looks more volatile than
other numbers if you measure that number more frequently.

"Since 2006, oil prices have risen 100%, and corn is up 300%. But onion prices
soared 400% between October 2006 and April 2007, when weather reduced crops,
according to the U.S. Department of Agriculture, only to crash 96% by March
2008 on overproduction and then rebound 300% by this past April."

I mean, seriously? For oil and corn they compare two points, but for onions
they compare October 2006-April 2007, April 2007 - March 2008, and March 2008
- April 2008.

I could just as easily look at the change in onion prices between October 2006
and now, and then pick 3 arbitrary dates when oil prices hit extremes, to
"prove" how having a futures market makes prices more volatile.

~~~
steveplace
The selective timeframes showcase the volatility. If a security moves 5 points
in a week, and a year later it moves 5 points in a day, it becomes more
volatile.

Going up 400% in half a year versus 300% in two years is pretty volatile.

That being said, they probably use bad stats to dumb it down for the average
reader. What you want to look at is the {rolling stDev, average true range,
volume} to get a better feel for it.

Also, it's happened in other commodities that you _can_ trade contracts on,
but they are so thinly traded that they can make really big moves.

~~~
breck
"Going up 400% in half a year versus 300% in two years is pretty volatile."

But for all we know the latter item could have gone up 1,000,000% in the
interim and then settled down to 300% at the end of two years.

~~~
steveplace
Then they would have pointed that out.

I agree with your point that it's not the best statistic to show the basis,
but the underlying premise remains the same.

------
coglethorpe
An article about the onion and one from The Onion on the front page. I'm in
tears.

~~~
pchristensen
"I'm in tears" Puns ftw!

------
byrneseyeview
I worked at a wholesale onion company when I was about fifteen, and one of my
first questions was why nobody was hedging anything with futures.

What actually happened is a little more complicated than the article suggests:
the business now attracts people who love that kind of volatility.

------
weiser
The lack of transparency in oil futures trading has been a concern for many,
not just trading in itself.

See <http://levin.senate.gov/newsroom/release.cfm?id=257862>

~~~
incomethax
High oil prices weren't a problem during the stock bubble of 2001, or even the
housing bubble of 2004. The reason that oil prices are skyrocketing, is simply
that traders (mostly hedge funds) are putting all their money into commodities
instead of, stocks, real estate or bonds. All that regulation will accomplish
is forcing the collapse of the commodities bubble, and we'll end up with a
bubble elsewhere.

~~~
gills
If the Fed would actually do it's job and drain the swamp (remove excess
credit from the system), it would help calm the bubbles.

~~~
steveplace
How can they remove excess credit? If they do, it would collapse the financial
industry. That's why they had to bail out BSC.

~~~
gills
It wouldn't collapse [all of] the financial industry. Any banks which may
already be insolvent without FRB loans would have to declare bankruptcy. There
are probably a couple solvent banks out there. Failure seems to be a fair and
natural outcome for businesses that are poorly managed or choose unsustainable
business models.

The FRB can remove the slosh by not rolling over loans to primaries when they
come due, and by putting back the trash securities they took as collateral
through the TAF and TSLF.

