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Politics : Politics for Pros- moderated -- Ignore unavailable to you. Want to Upgrade?

To: Murrey Walker who wrote (413240)	2/26/2011 10:53:59 AM
From: Katelew	3 Recommendations Read Replies (2) \| Respond to of 793912

The packers (and farmers for that matter) buy future contracts to the extent that they protect their price fluctuations as much as possible, and to this end, they differ from the pure investment strategies used by the street to generate income on those transactions. Exactly. There are two classes of commodity traders with different rules for each set by the CFTC. I may be behind on any rules changes, but as far as I know, there's no limit to the number of positions a trader who has a vested interest can hold. There are supposed to be position limits on the number of contracts that sheer speculators can hold but it's the evasion of these position limits that has watchers like me troubled. I don't particularly care if speculators spike the price of gold, or even oil, up. It may take several months, but eventually commoditiy prices do revert to the mean of a trendline that reflects actual supply and demand. It's with food commodities that I have a problem. It becomes a moral issue when people in third world countries die from starvation because they cannot afford food prices that make short term spikes out of reach. If the price increase is more gradual, more actually reflective of supply and demand, they at least have a chance to adapt. The public doesn't fully understand how the price of a commodity is established. The public tends to think concrete reasons are behind every move and doesn't realize the role of momentum trading. This is also being exacerbated by the growing popularity of commodity ETFs. These ETFs don't own the physical commodities themselves, they own future's contracts, so they are part of the speculator group. The small investor will pile into these ETFs if they think there's a fundamental reason for doing so. For ex., those who believe the Fed. Reserve is printing money and creating inflation. They will then buy shares in the commodity ETF which forces the ETF to buy more contracts, which then pushes the price higher. The higher prices then attract more ETF buyers which makes the ETF have to buy even more contracts. Voila, you have a momentum trade underway. You also have a self-fullfilling prophecy mechanism. The ETF buyers who were afraid of inflation have just created inflation, i.e. higher prices for basic commodities. by and large, food processors are in the business of filling the food pipeline and keeping price fluctuation to a minimum. They are, and they are also actually pitted against the speculative traders. Some argue that these two groups are countervailing forces and create price equilibrium, but I don't see it that way. In the real world, the food processor types just have to follow along and pay whatever price is at hand.