The big players used to corner small markets which then led to extreme blowouts. It doesn't happen as much now as there are tighter regulations on max position sizes and the volumes are higher.
Significantly influencing the price of a commodity with liquid markets, such as corn or soybeans is pretty much impossible unless you're acting on behalf of a country or are able to control weather. The existence of liquid markets is beneficial for the producers and consumers as the price volatility is reduced and hedging becomes easier. I like to showcase the effect of information on price with the example of fish price in Kerala before and after the introduction of mobile phones to fishermen[1].
The financial world is evolving very quickly with various participants driven by different goals pulling the rug in opposite directions which theoretically should reduce volatility and spreads. However, when people get greedy - and there's a lot of that in finance - bad things happen, e.g. see the natural gas last week[2].
> The existence of liquid markets is beneficial for the producers and consumers as the price volatility is reduced and hedging becomes easier.
Yeah, that's a nice fairy tale. It isn't true though. It's criminally untrue.
I can't eat volatile grain, nor hedged grain. I just eat grain. At a price I can afford, today and tomorrow, not bankrupting me in the process. When you're hungry you really don't care about all the financial jargon. You care about price.
Traders cannot make a profit if they don't manipulate the price. Simple, if a trader always sold for the same price he bought for he wouldn't make any money. So price goes up, trader has profited from the grain I eat, and has taken a few cents out of my pocket. And I don't even trade. I just live on a dollar day in a shithole somewhere.
If everybody bought just the grain they needed to eat, and every grain producer simply put their product on the market for people to buy, without a "liquid global market" and price index, without traders in the middle wanting to profit from it, my food would be affordable. But because the market bets on a price rise in the future, even though the bad weather hasn't materialized yet, my food is unaffordable.
In financial, when someone profits, someone hurts. And the one that hurts is almost always not even in the game.
> Significantly influencing the price of a commodity [...] is pretty much impossible unless you're acting on behalf of a country or are able to control weather.
No. A market can do that by itself. It's what all those terms bullish and bearish and stuff are for. Markets can drive up commodity prices like a rocket. Bad weather coming? "Let's buy all the grain everybody! Guaranteed profit! Just ignore the starving people over there, they'll go away fast enough." And buy the way, all those think tanks and the pentagon predicting a shortage of every natural resource in the near future, that's not going to influence the price at all, right? Great example of how a country manipulates commodity prices btw.
Financial trade is just people profiting from people who are worse off to begin with. And don't start about how nowadays regulations are much tighter and all that, it's just not true. Everybody always says that in times when stuff is stable, but as soon as something big happens everybody starts the "nobody could have forseen this" dance followed by the too-big-to-fail entities being saved by the govt and the bill footed to the people.
> Yeah, that's a nice fairy tale. It isn't true though. It's criminally untrue.
I can't eat volatile grain, nor hedged grain. I just eat grain. At a price I can afford, today and tomorrow, not bankrupting me in the process.
I think you two are talking about different things. The comment you're responding to is talking about the price discovery and liquidity facilitated through trading. You're (correct me if I'm wrong) talking about how physical commodities are treated as abstractions, which doesn't help e.g. a farmer.
But it does help producers of commodities - they can hedge against (for example) crop failures. And it helps consumers by driving down the price and making the price more predictable. Futures in particular are very helpful for producers.
This is obviously not a perfect process. But I think it's really unfair to call it a fairy tale, or to say that traders are manipulating the price. In an abstract or purely literal sense they are; but in the malicious, legal sense of markets they are not (at least not in the aggregate).
With respect, your last paragraph sounds like an oft-repeated narrative about the financial industry which - though it has kernels of truth - does not charitably reflect the full picture. Finance is not an unmitigated good, but comments like yours which present it as an unmitigated bad are also off the mark.
This is the whole problem in a nutshell. People spinning a fairy tale about "price discovery" or "liquidity" or "abstractions" like it represents something real, and not something specifically so because of how we implemented our financial system, or terminology specifically invented to create that system.
Posing those things as separate, saying "price discovery" and "liquidity" are different from "how physical commodities are treated as abstractions" is just muddying the waters. They're part of the same slang of the system.
The farmer doesn't care if somebody plays Farmville and treats in game abstractions as though they were his real physical produce. Who cares.
But the farmer does care when a lot of people trade in what he produces, and all those traders act like they're playing f-ing Farmville with virtual goods. In reality that trading influences the price the farmer gets paid and the price the consumer has to pay. Big time. Tell me again how it's just an abstraction. The supermarket doesn't accept my abstract money unfortunately.
That farmer worked hard for that grain you know, why do you think it's suddenly morally okay if you tell yourself nice stories about "liquidity" and "abstractions" and "price discovery" while you just want to make a buck on the farmers grain without putting in the labour yourself.
I don't give a hoot that you tell yourself that you're trading in an abstraction of grain to make yourself feel good about your actions. I just see the price of grain go up and my family going hungry, despite the fact that traders keep telling themselves it's all "funny goods that don't really exist"
> But it does help producers of commodities - they can hedge against (for example) crop failures.
I can see how it does, but honestly, that's one of the worst solutions to that problem. I think crop failure is a problem for everyone not just the farmer (we all have to eat, right?), so a solution that involves everyone instead of letting the farmer fend for himself would be preferable, because when the guy needs to fend for himself he'll fall prey to someone offering him a very volatile, hedged, and abstract "solution" to his problems.
A simple granary (sized to community) and enough cash to resow next year is usually enough. No virtual, hedged, liquid or funny stuff needed. It's as old as the hills as well, failing crops have been dealt with by humanity successfully in many civilizations through out history. Without a financial system that requires the farmer to bet on the price of grain next year, I might add.
With respect, your last paragraph sounds like you get tired of the argument, but, respectfully, you don't give me any reason not to believe "finance" in it's current form is one of the most evil thing humanity has ever come up with.
The futures market comes from the fact that some people are trading actual beans by growing, selling, shipping, buying, or cooking them.
They are typically willing to pay for price insurance to reduce their financial risk. (that could close your factory because of the weather, etc)
(If they trade with other countries they are typically also willing to pay for currency insurance)
At that point a secondary market emerges with arbitrages between different market and points in time.
So far this is to the benefit of everyone. Farmers and Buyers get more stable prices.
This secondary market pins into tertiary markets where you can try to outsmart other players, and to the extent that manipulation is possible it will push back into the primary price or more probable the "insurance" cost. This cost is paid by Joe Random.
This is probably not beneficial but unavoidable and acceptable for having access to price insurance.
Note: I am not a finance person, so please correct me if I'm misunderstanding something.
My understanding is that in futures markets, you make money by predicting what the price of something will be at a time in the future.
Let's say you know of a new battery technology that is much more efficient than anything we have today. Let's further say that this type of battery uses a lot of copper. You think that this will massively increase the amount of copper needed.
In this case, you buy a future (enter a contract) saying you will buy 250,000 tons of copper in January 2020 for $3.20 / lb (which is considerably higher than the price of copper today). Someone with a copper mine can take the other side of that contract and expand their operation (buy equipment, hire workers), knowing that in January of 2020 they will be able to sell that copper at a higher price, and expand their operations.
If the price of copper goes up, in 2020 you buy all of that copper from the mine, resell it, and make a ton of money. The owner of the mine makes a modest profit.
If the price of copper goes down, in 2020 _you still have to buy all of that copper from the mine_, and you lose a ton of money. The owner of the mine makes a modest profit.
You will only enter into such a contract if you have (or think you have) information that the person you are making a contract with does not have, thus allowing them to act on that information sooner and without risk. If your information is wrong, you are the person who loses out, not the person you contracted with, so you're taking on all of the risk for some of the possible benefits.
> A simple granary (sized to community) and enough cash to resow next year is usually enough. No virtual, hedged, liquid or funny stuff needed. It's as old as the hills as well, failing crops have been dealt with by humanity successfully in many civilizations through out history. Without a financial system that requires the farmer to bet on the price of grain next year, I might add.
If you know that the crops are likely to fail, you can buy futures in grain. It's the ultimate "put your money where your mouth is". If you buy grain futures, you are saying "There will be a crop failure. Plant more grain. I will cover the downside if I'm wrong." Thus you make the crop failure less impactful by prompting action earlier.
I agree that a simple granary is _usually_ enough. But a simple granary plus a futures market will be enough even more often.
Are you saying the financial system is why we've moved away from subsistence farming, and that this is a bad thing? I'm having a hard time figuring out what, exactly, the world you'd prefer would look like.
This position is further supported by the reality of real estate speculation: in London, in Silicon Valley, you can count the housing units that are owned by extremely wealthy capital holders, and kept empty because the increase in value will exceed any profits taken from filling them (minus the costs of maintaining them).
That's the market actively destroying the fundamental purpose of a good because the dynamics of its value are able to bring more profit than using the good for its existential purpose. If that can happen to housing, it can happen to anything. BurnGpuBurn is absolutely correct here.
Real estate is rather different from the commodities markets, though: It's most definitely not a commodity (if you don't count things like mortgage-backed securities, anyway), and the markets are frighteningly illiquid. There are things like futures and options on real estate, but they operate very differently from your average put on hard white winter wheat.
There's an argument, not entirely (as far as I can tell) unreasonable, that at least some trading firms - the market makers - are benefitting the small folks in these markets. The argument goes that they do siphon profits out of the market, but it's mostly the profits of other financial firms. What they're ultimately nabbing is profits that come from information asymmetry, and that asymmetry usually benefits hedge funds more than farmers. So hedge funds make less money, yeah, but the impact on farmers is greater price stability, which is a benefit to them.
By extension, the implication is that, when hedge fund managers complain loudly about high frequency trading, it's crocodile tears.
And the irony is these bubble markets invariably collapse, because speculation is not a good foundation for sustainable profit.
The opportunity costs of prioritising the financial industry over other activities are almost incalculably huge. Bubbles aren't the only problem. The industry has cannibalised top talent and kept it from working on useful problems, which has created a huge deficit in future potential.
> If everybody bought just the grain they needed to eat, and every grain producer simply put their product on the market for people to buy, without a "liquid global market" and price index, without traders in the middle wanting to profit from it, my food would be affordable
This is false.
Commodities futures markets exist precisely so the price of bread stays stable and relatively risk-free for a year at a time. The big players are not traders - they are companies that work in grain, use grain, produce grain, etc.
As for markets creating money by driving up prices - this doesn't really happen. You can make money when prices go up or down, and nobody really has the size or the stomach to try and corner a market (which is also illegal). Typically these efforts fail miserably and lose the trader a lot of money.
Countries manipulating prices is a totally different matter, than "markets".
I'd think hard about it before you attack commodities markets as the enemy of food prices, and do a bit of digging as to the actual purpose of those markets.
Go ahead - sell a couple hundred thousand pounds of grain. "Simply" put it on the market... how do you do that reliably? How can you plan as a farmer ? Budget for seed, etc?
I think commodities futures markets exist so that the normal commodities markets don't screw everybody over too much.
You're totally right about there being a few big players in production and so on. That's part of the problem. Because every farmer has had to operate and compete in this insane globally connected commodities market, what we're left with now after decades is a few big players. That's what you get when a German farmer has to compete with the US farmer, the Chinese farmer, and the Russian farmer, all the others and vice versa. Everybody loses and gets bought up by the bigger fish. That's a symptom of this market though, not a cause. And in my eyes, it's not a very good symptom either.
> Go ahead - sell a couple hundred thousand pounds of grain. "Simply" put it on the market... how do you do that reliably? How can you plan as a farmer ? Budget for seed, etc?
Well, I wouldn't know how of course, but that's not the point. Humanity has done the grain thing successfully, on large scales and over long time periods, multiple times in the past. Without a commodities futures market to keep prices stable.
I'm just saying this isn't the only way to do trade, and in a lot of ways, it's a very bad way to do trade.
> Because every farmer has had to operate and compete in this insane globally connected commodities market, what we're left with now after decades is a few big players. That's what you get when a German farmer has to compete with the US farmer, the Chinese farmer, and the Russian farmer, all the others and vice versa.
I must confess to some confusion. I thought you wanted affordable food. Do you think that you'd get affordable food if you were only ever able to purchase from the providers in your immediate vicinity, who won't face price competition from farmers elsewhere who might be more efficient?
“Done the grain thing successfully” seems like an odd statement. I don’t know how successful we were at a secure supply chain for grain before national markets were established, but then again we also didn’t have the technology to enable anything but more local markets until the railroad crossed America.
As for competition internationally and “big fish” - I’d say that some of this is due to economies of scale in agriculture especially as automation reduces labor required per acre - but this is also other asymmetries and market factors. State subsidies is one huge factor that incentivizes owning land that doesn’t even produce. Further, as farmers retire their kids want less and less to do with ag and sell the land to bigger companies (or maybe to a housing developer).
I’m not saying “the market” is perfect but it didn’t necessarily get this way by accident either. It serves an important function across the board for all parties involved - including consumers.
While there is considerable truth to what you say, it's not the whole truth. Food is a bad example, anyway: it's cheaper now than it has ever been.
"If everybody bought just the grain they needed to eat, and every grain producer simply put their product on the market for people to buy, without a "liquid global market" and price index, without traders in the middle wanting to profit from it, my food would be affordable."
Well, yes, but the grain would be in Saskatchewan rotting and you'd be wherever you are starving.
Worldwide trade existed and worked quite well long before our current financial system. I don't get why on would believe that without Wall Street the world would stop to function. Part of the fairy tale I guess.
Traders typically provide two prices - the price they will buy at and the price they will sell at. Their profit comes from the spread between. A good trader does not care if the market moves up or down, they make their money on the spread, a trader typically wants as little inventory as possible.
The people who cause markets to move are not the traders, they are the people who buy from and sell to the traders.
> Traders cannot make a profit if they don't manipulate the price.
Traders aren't the only reason prices move.
Clearly a wide spread crop failure would also increase grain prices.
You can still make money as a trader if you do a better job at predicting such events than others.
A frictionless market with a lot of liquidity should (in theory) result in rapid, accurate and transparent price discovery, which in turn should result in more optimal asset allocation, which in turn should result in people being able to get what they want at a lower price.
In practice, many markets are far from frictionless, and far from liquid, and pricing far from transparent, which is where most (all?) of our problems come from.
The best (and most ironic) example comes from the financial services industry itself: Although markets are the daily bread of the industry, it is ironic that the market for financial services is opaque and noncompetitive. How else could such profits be sustained? How else could the two and twenty compensation convention survive, if it weren't for the fact that the industry acts as an unofficial cartel?
When we complain about financial services, we often forget that the rhetoric of many free-market neoliberals is pure hypocrisy: what they practice is 180 degrees apart from what they preach.
> Traders cannot make a profit if they don't manipulate the price.
Is that supposed to be obvious? It seems very not-obvious to me: e.g., if a trader has no ability at all to manipulate the price, but is able to predict future prices better than anyone else can, then they can make a shedload of money by doing it. (The market will respond to their trades, which I suppose is a kind of manipulation, but that reduces their ability to profit.)
Maybe it's true in practice that no one can actually make money by predicting future price movements better than other people do, and that the only way to succeed is market manipulation. If so, it would be nice to see some evidence.
(There are other options besides "win by manipulating markets" and "win by being good at predicting on account of being extra-smart": for instance, "win by being good at predicting by means of illegal insider trading". That has ethical problems of its own, but they're very different problems from those of market manipulation.)
If the market bets on future grain price increases and makes grain more expensive before the bad weather materializes then sure, that's bad for people trying to buy grain. (Though presumably it's good for farmers.) But that same process of prediction, at least if it works -- which presumably it does, somewhat, else no one would be trying to do it -- also means that once the bad weather does materialize the prices will be lower than they otherwise would have been, because the market can predict that the weather won't always be bad just as well as it can predict that the weather will be bad one day. So, at least when the market is doing what it's meant to, the highest grain prices get reduced and the lowest ones get increased. It's not obvious that that's bad for those not-even-in-the-game people.
(The market will make mistakes, sometimes big ones. In that case, grain may get super-expensive and people will suffer or even die. That's very bad. But it's not specifically a finance problem. Grain can get super-expensive because of mistakes made by farmers or meteorologists, too.)
> Financial trade is just people profiting from people who are worse off to begin with.
There's truth in that. But -- ignoring actual market manipulation, which I appreciate you regard as a major activity of the finance industry -- when someone makes a profit out of your being worse off, they make you better off in the process. Suppose some guy on Wall Street figures out that X is going to get more expensive. You own X but haven't figured it out because you don't have Wall Street's insider knowledge or supercomputers or whatever. So you sell X to Wall Street Guy, and X gets more expensive, and Wall Street Guy makes a profit that you missed out on. Sad. But Wall Street Guy didn't force you to make that trade! Presumably you sold X because you didn't want it any more, or you needed the money. Without Wall Street Guy in the picture, you'd have sold it anyway, and got (very slightly) less for it. So, sure, Wall Street Guy is better off, and you're sad that you missed out -- but you were always going to miss out, and you are a tiny bit better off because Wall Street Guy was there bidding against other people to buy X from you.
I dunno; maybe in practice Wall Street Guy has to do a load of much shadier stuff than merely predicting how the price of X is going to change, and maybe that ends up hurting you. Maybe in practice Wall Street Guy's attempts to react quickly to new information destabilizes things more than his ability to react quickly stabilizes them. But these seem like complicated questions whose answers need a deep examination of the world's financial systems, rather than pointing to a few specific cases where bad things happened and claiming that "traders can't make a profit if they don't manipulate the price".
Significantly influencing the price of a commodity with liquid markets, such as corn or soybeans is pretty much impossible unless you're acting on behalf of a country or are able to control weather. The existence of liquid markets is beneficial for the producers and consumers as the price volatility is reduced and hedging becomes easier. I like to showcase the effect of information on price with the example of fish price in Kerala before and after the introduction of mobile phones to fishermen[1].
The financial world is evolving very quickly with various participants driven by different goals pulling the rug in opposite directions which theoretically should reduce volatility and spreads. However, when people get greedy - and there's a lot of that in finance - bad things happen, e.g. see the natural gas last week[2].
[1]: https://www.researchgate.net/figure/Changes-in-fish-price-vo...
[2]: https://www.ft.com/content/b7c525f6-ec44-11e8-89c8-d36339d83...