The Future of Futures Trading

 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 thoughts on “The Future of Futures Trading”

  1. 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.

  5. 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?

  8. 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.

  11. 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

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