The Examined Life

An expert committee set up over a year ago to study if futures trading influenced commodity prices will neither recommend a ban nor favour continuing trade in essential commodities, said a member of the panel. (AP)

When I heard this news a couple of days back, I could guess why. The panel is headed by an economist who also happens to head the planning commision. If he claims that Futures trading causes an increase in prices, his fellow economists will laugh at him. If he claims that it does not, he gets into trouble with his political masters.

Sharad Joshi, founder of Shetkari Sanghatana and the member of the panel referred to above, explains that there is more to it in a well argued article.

13 Responses to “The Future of Futures Trading”

# HiAgainon 25 Apr 2008 at 4:13 pm

So tell us why prices almost double over one year. Did they double because suddenly the twin villains, China and India doubled their industrial capacity in one year? Futures speculate the prices in the future. Like all markets, it is efficient only when complete information is available. The oil-rich countries and their allies never share good information about oil supplies and the availability of oil for the future. So basically it is pure speculation. It is a sort of gambling. With the market flooded with dollars and no good “investments”, money is chasing returns anywhere it can. So we have a commodities bubble, leading to riots and starvation in many countries.
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Money that first went into the tech bubble, then the housing bubble, is now creating a commodities bubble with direct effect on poor people all over the world.
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Finally, farmers will not be the ones reaping the benefit of these “Futures markets”. Most of them are illiterate and complete out of touch with any of this. It might help the rich farmers who already corner most of government subsidies. I guess they have some good political representation too.
# Niluon 25 Apr 2008 at 4:51 pm

HiAgain,

You want to end poverty by commenting va?
# HiAgainon 25 Apr 2008 at 5:29 pm

haha….no man. I have a bit of free time these days.
# Ravikiran Raoon 25 Apr 2008 at 5:52 pm

HiAgain, can you explain in a step by step manner how exactly futures trading will lead to an increase in spot prices of a commodity?
# Ritwik Priyaon 27 Apr 2008 at 12:02 pm

Ravi,

Wouldn’t it? By a simple no arbitrage argument? If consumption yield and interest rates remain the same, and future prices rise due to buying/selling flow instead of fundamental valuation reasons? Are you disregarding the incentives a commodities futures traders has to hoard? Are you assuming that the market is fully liquid? Are you unaware of what happened to aluminium prices in 80s and what’s happening with rice now?

Everyone has known for long that land is limited, that Asian consumption is increasing steadily etc. Why will prices shoot up by 200% in a single year? There is a reason why economists and I-bank traders have vastly different views on what should and should not hold in trading. The imperfections that form the basic business model of one are non existent in the other’s models.

In any case, are you by any chance denying the basic premise that futures and forwards markets are more speculative than spot ones?
# Ravikiran Raoon 27 Apr 2008 at 12:22 pm

The key words in my challenge were “step by step”. I am waiting for an explanation.
# Ritwik Priyaon 27 Apr 2008 at 12:29 pm

Ok. Will do that a little later. Challenge accepted, nonetheless. The blog may finally see some activity.
# Ravikiran Raoon 27 Apr 2008 at 12:34 pm

Just want to amend my challenge. Of course future prices will “cause” an increase in spot prices. The question is, explain to me how it does so in a manner it shouldn’t - i.e. it should cause an increase in spot prices that is not justified by the underlying fundamentals of demand and supply.
# Ritwik Priyaon 27 Apr 2008 at 2:53 pm

Vokay, got your point. Challenge stands accepted.
# Gauravon 28 Apr 2008 at 1:11 pm

YAY ! I will be there. I hope it is something like this (warning, awesome video)
# Nitinon 28 Apr 2008 at 1:49 pm

Ravikiran,

Since when has the fact that economists will laugh at an-economist-in-government stopped the latter from doing patently stupid things?

Exhibit A: The Blue Turban
# barbadkatteon 09 May 2008 at 5:20 pm

You guys may want to look at this
http://www.marketoracle.co.uk/Article4526.html

This is a 3 Part series. Answers some of the questions that Ravikiran raises.

and ofcourse it may save Ritwik some time
# HiAgainon 14 Jul 2008 at 12:35 pm

Another good link:
http://www.iimahd.ernet.in/~jrvarma/blog/index.cgi/Y2008/crude-oil-markets.html