I am active in the futures markets for customers of mine. I read the industry blogs, do technical analysis and all the fun things. But it still amazes me how many people - including the New York Mercantile Exchange (NYMEX) - like to still believe these are the good old local markets where farmers look to reduce their production risks.
Then, every once in a while, a gem pops up that clarifies it a little better. In this case, it was the discussion about raising the daily trading limits on the Chicago Board of Trade (CBOT), where much of the world's food prices for grains, meat and oils are set.
More below:
Any way, one of the blogs sponsored by a big market brokers asked members to respond about the concept of raising limits on daily trading. Currently, if the price of corn moves by a certain amount, trading is halted to let the market cool down. After reopening, if it goes further in that direction it halts again. After the third circuit breaker, they shut it down for the day.
Farmers on the blog asked why the limits needed to be raised. The increase of limits would create greater exposure on the farmer's part to big daily margin calls (which are due overnight by wire - needing to put a couple hundred thousand overnight can be a bit of a strain) and make their costs higher.
Here was the response from DTN:
Thanks to all who've commented here. I asked DTN Senior Analyst Darin Newsom to throw his two cents into the mix, and he said, "These are all excellent comments, though they have differing views. As Mr. XXXX stated, commodities aren't "about price discovery anymore." They are investment markets (Mr. XXXXXX), leaving the job of valuing the actual commodity to the cash market via basis. It is highly likely that daily price limits will be raised as it would better reflect a certain percentage of the value of the futures contracts (from the questionnaire, I don't recall the percent) and keep trade in the futures market moving. Keep in mind that the futures exchanges like high volume and limits that shut off trade restrict volume. This will indeed make it more difficult for elevator managers and local merchandisers, meaning that the recent change in policy by The Andersons [to limit HTAs to the current crop year] may be just the tip of the iceberg. But the demise of the exchanges as a risk management platform will also hasten into being new hybrid cash contracts and cash related indexes (e.g. DTN Regional Indexes) that will take the place of exchange traded futures. Finally, Mr. Rutherford also has it right when he says "it was never about the farmer." As DTN's man on the floor Gary Wilhelmi likes to say, large traders aren't concerned about whether or not farmers are making money. They are in it for themselves. That's what makes trade in commodities a one-person game, or in other words, a man-versus-nature game."
By the way, what the little throw away line in there "meaning that the recent change in policy by The Andersons [to limit HTAs to the current crop year]" was a recognition that one of the largest grain buyers will no longer buy on a fixed price any grain further than one year out, i.e., farmers, the risk of buying your product further out than that is too big, you're on your own.
Just wanted to let you know, if you like the world oil market, you'll love the world food market. The US will no longer set it own food prices. Oh, and by the way, this really makes food prices directly tied to the US dollar. So, you have to love Ben Bernanke saving the investor, the cost will be paid at your dinner table.