commodities trading...help me understand

[jimg]

I know there are a bunch of smart folks here who can help me understand ag commodities trading and how prices are set. Im looking for the laymans version. The reason I ask is the TN Farm Bureau News featured an article titled 'Turbulent futures markets challenge farmers'. In that the author makes some really surprising stmts about who gets what from advertised prices and what forces govern ag commodities. In fact a simple overview would be helpful too.

Heres how I thought it worked. A farmer could 1) lock into a future price (before the crop was planted), 2) hold his produce and sell on the spot market or 3) grow for someone on contract and be paid a set price est. at the beginning of the contract. Each has its own pros/cons and I think I see most of the obvious ones. At any rate my hats off to anyone making money at it. Going back to 1 & 2 if the advertised price was $8.00/BU then thats what the farmer got paid (or so I thought). The article states: 'While sky-high future contract prices cause many Americans to believe farmers are bringing home the proverbial bacon, the reality is that few farmers benefit directly from from the contracts advertised by the commodity exchanges.' Really! So who does benefit directly and how does the farmer indirectly benefit? To me it implies a middle man taking some for himself. How much of the contract price does the farmer get?

Heres the 2nd stmt that left me confused: 'He also said the role of speculative and commodity-index-related trading in ag futures markets , while growing for some time, has reached historic levels and contributes to market uncertainty.' The 'he' is Bob Stallman AFBF president testifying before Congress. What is 'commodity-index-related trading'? Lately, from some of the ag shows I watch, analysts are saying there are no fundamental factors for current market prices. In other words, from their POV, prices aren't reflecting supply/demand. Do I have the right? Seems that speculation is/will causing some pretty significant problems.

 

[EarPlug]

I don't type very fast so I'll just list some links to follow on this subject

Commodity - Wikipedia, the free encyclopedia

Futures exchange - Wikipedia, the free encyclopedia

 

[jimg]

Yes, that helps some but it still really doesnt answer my specific questions...at least I didnt see any recognizable answers there.

 

[js5020]

I read somewhere the at one point there was a "need" in the market for 375 million barrels of oil,,, a few days before delivery would have been required 320 million got canceled,,no one really wanted that oil, they only wanted the profit from the move in price. The problem with most of these instruments is no one ever has any intention of taking delivery,,, and it's not so much the little traders causing the problem it's the big money running things up,,, banks, hedge funds, our own govt, other govts, big corporations,,,, do you really think Chrysler is subsidizing the remainder of their 2.99 offer?

 

[js5020]

Oh just a tid bit of information,, did you know there is a commodity that is illegal to be traded on the market in the US? A law passed around 1958 forbids the trading of onions!!!!!!!! WELL I"M SURE GLAD THEY PASSED THAT ONE!!!!!!!!!!!!!!!! Could you imagine the catastropic events that could occur in this country if someone was able to manipulate that commodity!!!!!!!!!!!! Might even have GLOBAL impications!!!!!

 

[jimg]

I see. So, if I understand correctly, w/ ag commodities as context, some one(s) orders a 'boat load' of wheat, corn or whatever ultimately causing the price to increase and then cancels delivery. At some point theyd sell these paper holdings for more than the original purchase to make a profit. Seems like this scheme doesnt work unless you can get the 'herd' spooked and running (buying your paper holdings in this case). Guess there must be no (substantial) repercussion for not taking delivery?

Meant to also add this to the original post which strikes me as a real non-starter -- '"In some instances farmers are being asked to pre-pay for inputs they will not utilize until the next crop year", Stallman said. "This results in the uncomfortable position of producers locking in future input costs w/o similar opportunities in future crop prices."' Uncomfortable??? Thats an extreme understatment! Who would do such a thing? Perhaps theyre counting on the govt to provide relief in the form of price supports if things go wrong?

 

[mjarrels]

Some folks do take the item... I've heard that is one of the things that make Southwest Airlines so proffitable... They are not paying current fuel prices because they bought and held fuel at 80 dollars a barrel.

mark

 

[js5020]

Yes you got it,,, and with the decline of the dollar which we have to throw in there cause it plays big time with everything,,, you have the "herd" spooked. Far as I know there is little to stop the situation as things are,, oh yes there are daily limits which have been imposed to stop a quick run on things, but as I see them it just means when limit up/down is hit everyone takes the rest of the day off and we do it again tomorrow. I don't trade commodities or futures so I don't know all the ins and outs but it does seem a little like currencies, which I do trade everyday. So here is what I was doing today for an example to the above,, I was selling the Austrailian dollar and buying the Japanese yen,,, do I want either of these,,, heck no what am I gonna do with them? I just know and my charts are telling me to sell,,, why is it going down,, hmmm not sure,, but bigger money than me says sell so we sell,, around 1 pm things look like the interest to sell have deminished so we cash in,, nice profit for the day! Currently there looks to be an interest to buy, so we buy some, why? cause the little candle thingys are green and going up,, why? hmmm once again not sure, they just are. I'm kinda making jest here as I described the days trading but it kinda describes it well in my mind, you see as a speculator I really don't care if we go up or down, by how little or how much just as long as I get mine. Sorry if that upsets some, didn't write it to upset, it's just the way it is and how money is made.

Inputs,, they are kinda playing the same game, except watch who you are doing business with,,, there are all kinds of "lock in your price" now opportunities/scams/schemes. These are not regulated in any way and I have heard of some taking the money and not delivering the product! Seems everyone is trying in some form to hedge there exposure in some form be it the producer or end user, we are certainly in uncertain times.

 

[Egon]

The basics are probably not to hard to understand. Transfer my money to your account and maybe?????

 

[js5020]

Nice one Egon!!! But even in fun I will tell you I do not trade OPM ( other peoples money ) I couldn't put anyone elses at risk I'd fell real bad if I would lose even a small part of it. Basically it really isn't all that difficult to trade for yourself, but it does take alot of time and effort to learn, and this is a stumbling block to many, as most who do get involved want to be a gajillonare in two weeks, and usually end up broke.