We also all know that oil and other traders have an enormous propensity to hike prices at the least provocation, always presuming that the merest hint of a shortage provides them with an opportunity for excess profit taking.
One of the largest, most liquid, markets in the world provides excess profit opportunities to traders, does it? He’s not even grasping that futures markets are, by definition, zero sum in their allocation of profits and losses.
Sigh.
Saying so, do recall that the majority of the inflation that we saw in the period from late 2021 until early 2023 was not caused by shortages in supply. It was, instead, created by financial speculation.
It’s not even possible for this to be true. Futures prices always collapse to physical as contract date approaches. For speculation in physical markets to be a cause of higher prices there must be a rise in stocks. Was there? Does he even know this?
Another bout of speculation of a similar sort is now possible, no doubt with the likelihood that it will be reinforced by the desire of central bankers to at least maintain interest rates, or even increase them. The likelihood that such speculative price increases might be necessary to address any real shortage of oil is extremely remote, as was proved in 2022. But if they happen, and the need for price increases and their happening are nit related events, then we know that central bankers are as irrational as market traders, and they will find any reason, justified or not to hike interest rates.
Has Ely run out of tin foil hats yet?
futures markets are, by definition, zero sum in their allocation of profits and losses.
He’s not the only one to not understand that. All markets where the commodity being traded is not a consumable are zero sum. Futures are not consumable, that’s the underlying commodity. For you to be going long, someone must be going short. You win, they lose.
Stock markets – the only “real’ money was the capital raised for the company on share issuance.
The housing market – the only “real” money was what the developer paid the builder & landowner. The “value” of your house does not mean you are rich. Value’s actually a meaningless concept in a market. There is only price. To liquidate their asset a seller has to find a buyer & price will be discovered in the transaction. Price being the decision of the buyer. It tells you nothing about the next transaction because both buyer were satisfied in this one.
both buyer ^& seller^ /insert
I’ve always found that an inerrant guide to stupidity is the analyses people offer of prices going up (or, more rarely, down). “It’s greed” says the dimwit.
For speculation in physical markets to be a cause of higher prices there must be a rise in stocks.
Don’t you mean a fall in stocks? Nobody’s going to want be long of something where there’s an increase of supply.
If someone is hoarding physical then the price can rise….
We also all know that economics and other commentators have an enormous propensity to keep prices low at the least provocation, always presuming that the merest hint of a shortage provides them with an opportunity for excess profit declining.
That’s why he simply will not take money for any of his old rope.
Sorry, O/T but interesting in the light of yesterdays assault on our freedom by our betters:
https://www.youtube.com/watch?v=8mtp2-PEH20
I also like the comment “a commercial drug kills 6 people and we get it withdrawn from sale”. Not any more they don’t…….
If someone is hoarding physical then the price can rise….
Good time to short. Like you say, it’s a zero sum game.
“If someone is hoarding physical then the price can rise….”
Has anyone ever managed to successfully corner a large commodity market by hoarding stocks? It didn’t do the Hunt brothers much good did it? So one doubts its a winning investment strategy.
Market theory would say, to divert supply into their hoard, they have to pay above market price. To liquidate the hoard they have to sell back into the market, so increasing supply. Which depresses the price. Whether they come out with a profit is not a given.
@Jim
You’d have to do it in a way that people don’t know that you’ve done it. Otherwise the market just sees it as another source of potential supply & prices accordingly. See the One Eyed Viking & Britain’s gold reserves. Knowing he was a seller knocked the bottom out of the market.
The observation really comes from another direction. Does speculation in financial markets affect real world prices?
No.
All the futures and options stuff is froth. Zero sum.
To gain an actual change in physical prices we must have a supply, or demand, change. Or someone must be hoarding physical. The argument is being used the other way – to show that we must have physical hoarding if it is speculation causing the real goods price change……and, therefore, if there’s a real goods price change and also no hoarding then it’s not speculation driving the price change, but a supply or demand one…..
Commodity traders make money because the commodity user values certainty of price, so is prepared to pay a little over the odds for what is essentially insurance.
The observation really comes from another direction. Does speculation in financial markets affect real world prices?
No.
Not true. In the short term, speculation stabilises real world prices. Because speculation anticipates the real world market .
I think it was Van Patten who considered Murphy’s difficulty with understanding economics to be akin to the position of a caveman faced with an iPad.
“To gain an actual change in physical prices we must have a supply, or demand, change.”
No, not true. The demand for fertiliser in the UK is pretty constant, its a fixed area, with limited amounts that can be put on the crops. And farmers need to use it in order to get a decent yield. And as for supply the factories that produce it have to work 24/7, its not a process you can turn on and off all the time. So why does the fertiliser price fluctuate wildly? And not even in conjunction with the natural gas price which is the main cost constituent?
The answer lies in the price of grain, and the nature of the fertiliser supply business – there’s very few players on the supply side, and they know how much margin farmers will have based on the grain price. So grain price goes up, miraculously the fertiliser price rises also, to capture as much of it as possible. Grain price falls, fertiliser prices drops back again. Happens like clockwork. Nothing to do with supply or demand, and everything to do with fixed markets, that the CMA studiously ignore.
We have started by assuming that we’re in a cmopetitive market – which the global grain/commodity markets really very probably are.
Anecdote, I stopped buying a litre of tomato feed every year when the price jumped, switched to growing beans. Anecdata. Vertical farms are closing in the USA. There must be a price point in farming, when you just say stuff this, take a cheque to plant trees, get a show herd, or something, but basically quit production. Farmland owners who stay in the game use the same quantity of NH , just less land under farmering
BF
Hope you are well – It was the analogy I used and I stand by it. He embodies the famous quote from the 1980s movie, ‘Beverley Hills Cop’ – ‘You guys don’t know nuthin about nuthin’
His ignorance is without apparent beginning. His evil without end.
Essentially, Jim, that’s how markets are supposed to work. Fertiliser producers want to get the maximum for their product. And presumably farmers are buying what is produced at the price asked. If farmers don’t like the price, don’t buy it & the producers will have to reduce price to sell it. You’re the ones with the money, so you set the price. Look at it as you’re competing with other farmers for fertiliser & the highest bid gets it.
You obviously like markets because you want to take advantage of the higher market price in grain. Just not when it applies to you.
S’pose you could go the socialist route. Fixed prices & allocations for fertiliser, fixed quotas & prices for grain. Never worked when it’s been tried, has it?
I’ve said it before but net zero means a brilliant chemist who finds a way to run the Haber process using half the energy cannot develop that process here in the UK.
Since 2023 when Teesside closed down, fertilisers count zero to CO2 emissions as the base ingredient is imported. Develop a process here, even export the stuff and you’ve got a judicial review on your arse, ‘cos emissions will have gone up in the UK, although down in the world overall.
Theresa May, Ed Miliband, Ed Davey, 14 years of notional conservatives believing in Britain, feck you all, and feck off back to horse poo on cobbled streets, I love innovation in energy and am bloody furious that it’s basically banned here.
@Bongo
Well you could use “free electricity”. Those bloody windmills. I imagine the Haber process could cope with a measure of intermittancy, bearing in mind they’d get a day or two’s notice. Then the UK becomes a net exporter of fertiliser.
THE HORROR!
Now that’s interesting. Electrolysis of water to supply hydrogen for the Haber process would produce oxygen as a waste product. Oxygen has about twice the infrared absorbing capability of nitrogen. So dumping the O² in the atmosphere gives you Gerbil Worming without the necessity of that mucky CO².
What’s not to like?!?!
Saying so, do recall that the majority of the inflation that we saw in the period from late 2021 until early 2023 was not caused by shortages in supply. It was, instead, created by financial speculation.
Only if you count the politicians’ “money printer go brrrrrrr” as speculation.
On the subject of hoarding, what today is considered a normal weekly shopping trip would quite recently have been considered hoarding, and in 19th century Japan would have got you and your family chucked in a hole and buried. Hell, I’ve got 15 – FIFTEEN! – cans of food in my cupboard.
“You’re the ones with the money, so you set the price. Look at it as you’re competing with other farmers for fertiliser & the highest bid gets it.
You obviously like markets because you want to take advantage of the higher market price in grain. Just not when it applies to you.”
We get given the grain price (its internationally set). And get given the fertiliser price, the manufacturers collude to set that. We take all the prices, inputs and outputs, we have control over no pricing whatsoever.
” Fixed prices & allocations for fertiliser, fixed quotas & prices for grain. Never worked when it’s been tried, has it?”
Actually it has, and did work pretty well, from 1939 through to the 1980s. There were fixed prices for agricultural outputs during the war, and then in the post war period, and into the EEC until about 1992. All of which created a consistent growth in production. Too much in the end, as the butter mountains etc showed. But better to have too much food than not enough.