COMMODITY SPECULATORS
In an article in the Economist of November 13th , 2010, there was an effort to collect the arguments for those who “invest” in the futures of commodities. The main arguments were that investors bring in the market liquidity and price information. There is also an argument based on a study by OECE, claiming that there is no evidence of a higher degree of volatility of the prices of traded commodities versus the non - traded ones.
A few days later in an article in FT (FT 23.11.2010 – Javier Blas – “regulators extend commodities push”) the author argues that regulators are taking a closer look to the physical commodities market, because the latter is not regulated and has no mechanism of recording the actual prices.
So, in a miraculous way, the markets can speculate on the future price, without knowing the real current price. This alone puts a lot of doubt to the value of the futures prices. Commodity traders rarely, if ever, trade in current prices, therefore the price information they can bring to the market has to do with the future. Although many actual traders (physical) use the financial products to limit their exposure to future price fluctuations, they also use the quoted futures prices to form the actual prices they ask from their actual customers. So we have the definition of a self- fulfilling prophecy.
On the other hand, since the physical market prices are not recorded or monitored anywhere, no one can really claim that he knows how much is paid today by real buyers to real sellers. The supporters of the commodities traders argue also that since traders don’t get physical delivery of the commodities, they are not influencing spot prices. I find it rather hard to accept this argument from somebody who brings into the market “price information”. It appears to me as if we are asking a blind person to evaluate the price of a movie ticket. If trading is not about actual buying and selling, then there is also little value to the liquidity it brings to the market. The farmer who is short of liquidity and needs to sell his crop to get some, is probably totally unaffected by whatever activity in the futures market of his products. So eventually the two benefits that futures trading brings in the market are no benefits to the players of the physical markets. They might be of great benefit to other investors, but that is beside the point.
The OECD study claims that there is no significant difference in the volatility between the trade commodities prices and the non - traded ones. Since the non- trade ones have no futures market, it is right to assume that the comparison was made on the actual spot prices. As it was mentioned above, there is no way to know the actual paid price of a commodity at any given time. We may know the prices of a few deals, we may know a range of prices, but since there is no official mechanism of price monitoring, it very hard for anyone to claim that this was the price then. One must also take into account that in terms of cultivated commodities there is a vast range of quality grades which makes it even more difficult to evaluate the actual average price.
The non-traded commodities are in most cases either complementary to or sharing the same fundamentals with the traded ones. If for example wheat is rising because of increase in demand from third countries, one is allowed to assume that other food commodities that are not traded will enjoy the same increase in demand and therefore should also rise in price. So the volatility of the prices of non - traded commodities will most likely tend to follow the one of traded ones, verifying the OECD conclusion.
I fully sympathize with the vast numbers of people who work in the City or in other financial centers buying and selling daily millions of tons of products they probably have never seen in their lives. But it is hard for me to digest the fact that the excess liquidity (or shortage in money), or the need to hedge the risk taken by buying Greek state bonds, should affect the price of a loaf of bread or a kilo of chicken.