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Senior Contributor

Re: Well, Well, Well, Lookee Here

The study may be correct if it looked exclusively at commodity prices rather than cash prices. I would tend to believe if this was based on cash price their hypothesis would show there is an effect.
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Honored Advisor

The deception is the big picture which has no focus

This is stiring thought ---- will detail it later.

But generally ------ Who on earth had a "commonly accepted notion that ending stocks are a primary determinant of agricultural commodity prices"?

Generally written to give respectability to usda projections.

 

"Running out of stocks" is and always was a local issue.  Basis is the reflection of ending stocks.

 

Great efforts are made to show how overall price levels, as well as price volatility, are largely driven not by the fundamentals, but by the quantity of money spent in commodity markets, which in turn are dictated by commercial operators and (mainly) investors accessing additional spending power from the central bank.

 

That should be a very troubling statement ------ 

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Advisor

Re: The deception is the big picture which has no focus

In 2006 the corn market gapped through resistance in the heart of harvest. I posted that this being extraordinarily anamalous behavior, you'd be well advised to listen to the market.

 

There were plenty of arguments to the extent that stocks were not yet tight -some people thought they were going to get another round of LDP double dips.

 

I think what occurred is clear in retrospect- that a) the AUS wheat board had totally misplayed that market and wheat had taken off in the lead as they had to buy themselves out b) the huge slope of the very ambitious US ethanol program was dead ahead c) financial deregulation and a US policy of weakening the dollar brought a huge amount of money in and d) some of the rest of the world started to panic- people are funny about starving.

 

Stocks were still pretty plentiful at that point but the market was looking beyond and a lot of other factors joined in.

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Senior Advisor

Re: The deception is the big picture which has no focus

I guess I disagree that running out of stocks is a local issue. Not true for wheat! It's a global commodity with many inmporters and producers but a defined group of large exporters. While local prices may have variations the global price is the standard when there's tension in the market. 2007/8 was the perfect example. Again, I see futures as the lagging indicator. Insecurity among foreign buyers and increasing risks of social and political instability surfaced and drove the price - finally resulting in a very late but large leap in futures prices adding to the volatility.

 

Meanwhile there are studies indicating index funds create little pressure on prices one way or another. Almost neutral.

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Advisor

Re: The deception is the big picture which has no focus

I've seen the studies and generally don't agree.

 

I think index buying was a significant part of the '06-'08 run along with parallel money flows outside those funds.

 

I also predicted, and think it has been the case, that the money in funds is a general drag when it is flat to declining. 

 

May be positive to certain downtrodden commodites at times via rebalancing.

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Senior Advisor

Re: The deception is the big picture which has no focus

In terms of wheat there really can't be much argument that the 2006-8 rebound in wheat was due specifically to physical fundementals. And that funds were NOT a driver because the action happened AFTER the production numbers were in. In addition it was mainly confined to wheat though it briefly carried the other grains.

 

If funds were the primary cause then one could throw fundementals out the window, which would be ludicrous because the supply issues and carry out were plain to see.

 

Then there's the idea of the effect of index funds, which aren't churned daily, having found a bet to offset theirs.

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Honored Advisor

Re: The deception is the big picture which has no focus

Mike the whole premise of the press release is affected by the definition of "stocks" ----- Stocks are the bushels of a commodity, uncommitted and available for purchase.  Unfornutately this press release is probably talking about usda's "possible guesses" based on possible production, which pribably does not correlate with commodity prices.  Because there is not much faith in them.

 

The second paragraph talks in a circle --makes the following quote --“Stocks do not influence overall price levels,” according to Kel Kelly, GROWMARK economic and market research manager, and author of the report.  Then proceeds to make the statement that there is a relationship between prices and stocks by presenting an example.

This paragraph is written to promote basic principles of free market trade are false, low numbers do not raise price.  The wheat seed dealers in the southern high plains aren't buying this.

 

fear of running out of stocks is likely based more on perceptions than on reality, as there is not much evidence that the marketplace takes strong action to compensate for missing supply in years of low production.

1973 Russian wheat buy diminishes supply and the following higher prices stimulate production

2010 Russian wheat drought   both could be exampled.  But Growmark needs to be in a grain deficit area late in season when next months supply needs a train ride.  Basis goes up enough to get the grain on a train and delivered. -- price rises by local low ending stocks.  Same out west Pal.  Your getting a bonus when the port needs to fill an order because there is not enough grain available locally.---- through basis.   But nationally or on a world basis I do not think the price effect always holds true, because even at a 0 ending stocks, there will be grain but not always available to the demand that needs it, by distance or inventory not for sale.

 

Great efforts are made to show how overall price levels, as well as price volatility, are largely driven not by the fundamentals, but by the quantity of money spent in commodity markets, which in turn are dictated by commercial operators and (mainly) investors accessing additional spending power from the central bank.

Does anyone believe that money flowing from the fed buys into the futures markets on one side of the trade.  Fed money might be tied to volume but I would think there are as many buy positions as there are sell positions pushing the trend down as much as up.  But I have seen the market volatile on thin trade as well as heavy trade.  higher and lower. Riding a trend not pushing the market one way.

 

 

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Senior Advisor

Re: The deception is the big picture which has no focus

With the limited delivery option the speculative market is mostly a casino action. The real market is the cash buyer that pays what the competition requires. The basis between futures and cash is merely a relationship between the two. Sales involve a willing buyer and a willing seller and that is the real market.

 

The speculative market is trading dreams and promises and the vast majority of it is settled well before delivery occurs.

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