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Veteran Advisor

Speculators Are Necessary

Speculators add liquidity to commodity markets.  This is obvious because producers, processors, exporters and speculators all buy and sell commodities.  Remove the speculators and you remove a buyer/seller and thus the market is less liquid.  The trade may be thin.  Oats is an example of a thin markets.  Whatever Quaker does is what happens.

 

Liquidity is essential because otherwise we producers who wished to hedge futures might not always have a willing buyer.  Sure, ADM would buy but maybe at their price, take it or leave it.  The speculator sees a chance to make some money and bids up, thus causing Cargill to bid up, too, if they want the product.

 

There have been attempts by speculators to corner a market, maybe most famously by the Hunt Brothers in silver in the '70s and '80s.  There is a need for regulation of speculators to prevent this, and that seems to have been done.

 

Packers owning livestock is a case where their ability to put some of their inventory on the chain serves to dampen price swings to the producer's disadvantage.  Without speculators to help add liquidity there is no reason why the big grain buyers shouldn't overtly or covertly collude to manipulate demand to the detriment of us producers.

 

Let the speculators stay, just keep an eye on them.

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4 Replies
Veteran Advisor

Re: Speculators Are Necessary

Back in the day the Oats pit had 5 traders including the orders Broker and three of them were part of a family. Smiley Happy Talk about cornering the market. Smiley Happy
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Honored Advisor

Re: Speculators Are Necessary

Speculators?   Yep.   Keep your friends close..........and your enemies closer.     Smiley Wink

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Honored Advisor

Re: Speculators Are Necessary

at 30% of the volume, speculation greases the wheels.  At 90% of the volume they derail the train and distort the market.... taking away the influence of actual commodity production or purchase. At excessive levels of speculation the market monitors the reacts to speculative opinion much quicker than actual crop or demand news.  The normal amount of skepticism of an actual producer or actual end user,(skepticism followed by communication with production sources and actual buyers prior to strong position changes, ie contracting), becomes a non factor to the market.  So the price follows the rumor.... not the commodity for the short term, and the short term can turn into years....

 

I think the Hunt brothers would have gone unnoticed in the new global format.  Who is the regulatorial agency over the international computer trade?  And what court will they be ajudicated in.  If the CNCGC Hong Kong Trading firm decides to pay the fine handed to them by the CFTC for late filing of forms required because of their 100+cotton futures positions does it make me feel better about the oversight of our commodities markets?

It is not that the Commodity Futures Trading Commission is not doing anything.  They are covered up with international and local issues, like failures to register, ponzy schemes, fake trading schemes, and the occasional failure to "observe" fines to folks handling other peoples money.  Add fines for "spoofing" the market (fake marketing).........They got their hands full with the petty crime.  Here is an interesting read to get the feel for the difficulty this agency faces... And keep in mind they only enforce the US regulations.

 

http://www.cftc.gov/LawRegulation/Enforcement/EnforcementActions/index.htm

 

I think it is better than the latest CSI episode.

 

 

 

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Honored Advisor

Re: Speculators Are Necessary

In the current format -- international and computer oriented trade we are working with, I think there is a real need for those who sell commodities to have in posession at least 20% volume of sold and for the buyers of have on restricted deposit 20% of the committed purchase price of futures contracts over a 30 day period.  

All entities, funds, international , etc etc  

 

Just my opinion.  

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