In international commodities there are traditionally established practices for negotiation. Buyer-entity negotiates with Seller-entity to exchange funds for goods. The buyer is considered the short position, because they have to arrive with cash (or cash substitute). The seller is considered the long position because they have to take that cash and turn it into X amount of product in T amount of time.
Traditionally these contracts have been negotiated in good faith that both parties want the negotiated contract to succeed. Sometimes there are factors that cause a disruption in the straightforward unfolding of the deal. A common example is storms. If a grower has unexpected weather conditions, the likelihood is that they will not be able to create X amount of product in T amount of time.
The result is that the economic value of the product goes up because even though the demand has not changed, the supply has diminished. Ordinarily, with good working relationships, these surprises can be smoothed over because the buyer wants the product and is willing to negotiate a new price. So they work together to find a compromise, mitigate future surprises, and try to keep the equity in balance.
If the buyer were to determine that the new market value of the product is higher than they can afford, and therefore they want out of the deal, multiple problems arise. For one, the product has already been created, by the sweat of the seller, and is very likely perishable. If the seller cannot find a new buyer, they may face loss of the product all together. If the buyer withdraws funding, every expense that went into creation of that product goes into the red for the seller, raising the price of the next round of product - even if there are no more storms/surprises, etc.
So usually the only reasonable choice for the seller is to sell the product for less than the market value in order to complete the transaction and avoid further loss. You can imagine that if this were to happen many times in a row it would become unsustainable for the seller.
Fortunately, historically, this has not been too-huge of a problem because of long-standing commitments to the success of the transactions by both sides. The problem that concerns today's markets is that a new influence on the success of these transactions has come into play.
In the modern world, weather prediction has become very high-tech, to the point where storms can be predicted far in advance in some cases. Additionally, surprise market-disrupting storms seem to be increasing. Although surprise storms cannot be perfectly accounted for at the outset, storm predictions are taken into consideration during negotiations to try to create an equitable bargain. Unfortunately, sometimes the information is used with a different intention.
Sometimes a deal is made, and then bet against (known as arbitrage), in hopes that lack of ability for the long position to meet the terms of the contracr will create a windfall for the short position bet. A case can be made that these bets are a tool of last resort in situations where there is predicted to be a disadvantage when T comes around - therefore an attempt to offset unavoidable loss. Some just like to bet on 'odds'. Although not in itself entirely 'bad' it has created a trend, one that encourages lack of success in certain markets.
Additionally, and potentially the worst part of all this, is when the "shorts"/"puts" (or whatever they are called) appear that they will be off the mark. If someone bets that the supplier will fall short, and it turns out they may not - in other words they may be successful after all through some rally of faith and endurance -- what recourse does the "short-putter" have to ensure a return on their wager?
At that point, if the deal succeeds, the wager loses. Sometimes there are millions of dollars to be made on these bets. What's a little arson, a little sabotage, a little intimidation or bribery when millions of dollars are at stake? To some, it's a small moral price to pay for the benefit of having won the big bet.
What has been shown in the last ten years or so is that the more these kinds of wagers occur, the more the deals fail. The more the deals fail, the more the prices of commodities go up, the more the supplier stays in poverty, and the more the buyer does not get the product they actually need at the price they can afford. The more inflationary food prices become a factor in the markets. And along the spiral of imbalance goes.
Just some food for thought from an observer. Chew on that.
UPDATE:
Since this diary was drafted, I discovered this website: http://www.indexarb.com/... Notice how matter of factly, mental, and calculating the description about a process that has devastated certain industries (in addition to commodities, there are others, like green tech, etc.) along with people's lives that are wasted in failed negotiations due to the manipulative speculations of outsiders. This ultimately drives up the price of food (etc.) which rewards the industry incumbents handsomely. It shocked me to see that this is so "la-ti-da, nothing to see here, folks" on the website.
I showed the above page to my contact in this field who said "In my business, arbitrage is illegal." Illegal in this sense generally means that if someone is found to participate (or suspected to participate) in the activity on any level (there are more levels that just the websites) that person (and likely their associates) is banned for life from participation in 'the business'. But, it can also mean an actual crime if those found to be involved in arbitrage are under legal contract not to do so. I asked, "why is it illegal?" He said essentially, because they are making money for nothing, ruining good-faith deals so they can make a buck out of thin air.
Alrighty-then.