What Can Onions Teach Us About Oil Speculators?
Onions have no futures market, yet their price volatility makes the swings in oil prices look tame.
The bulbous root is the only commodity for which futures trading is banned. Back in 1958, onion growers convinced themselves that futures traders were responsible for falling onion prices, so they lobbied an up-and-coming Michigan Congressman named Gerald Ford to push through a law banning all futures trading in onions. The law still stands.
And yet even with no traders to blame, the volatility in onion prices makes the swings in oil and corn look tame, reinforcing academics' belief that futures trading diminishes extreme price swings."
MP: The chart above shows the monthly percent changes in spot prices for crude oil and onions between January 2000 and March 2012. During that period, onion prices have been about 7 times more volatile than oil prices, based on the differences in: a) mean monthly price changes (7.7% for onions vs. 1.3% for oil), and b) the standard deviations of monthly price changes (59.4% for onions vs. 8.6% for oil).
Update: The chart below compares the monthly percent changes in spot prices for onions and corn over the same period as onions and oil prices above, as an exercise in comparing the volatility of the prices of two agricultural commodities. One might argue that a comparison of oil and onion prices might not be valid if there are differences in agricultural commodity prices and energy prices. The fact that the volatility of onion prices is so much greater than the volatility of corn prices lends further statistical support to the notion that markets with futures trading like corn have lower price volatility than markets without futures contracts like onions.
62 Comments:
The question: Does an unrigged market have greater price swings than a rigged market?
If so, is that good or bad?
What if prices are rigged on a high, but less volatile level?
Somebody please confiscate Bunny's crack pipe or move him away from his computer.
Ben,
Will you please define what "rigged", "market", and "rigged market" mean and give examples of what you think are examples of each of the three terms?
Obviously Professor Perry is not a regular grocery shopper - of least of onions.
how much does the average person spend on onions in a week?
if the price doubles or triples what impact does it have on their grocery budget?
there are LOTs of other commodities sold in the produce, dairy and meat departments, right?
Milk would be interesting to compare to onions in terms of speculation and subsidies, eh?
Ken-
Please read
http://research.stlouisfed.org/wp/2011/2011-027.pdf
In any event, surely transparency is a positive virtue, in and of itself. Let;s make the NYMEX and Brent transparent. Who is buying? No more cloaking of identities.
Stock trades can be traced. Not commodity trades.
Did you know it is legal to put out false information about a commodity, get it published in the mainstream or specialty media, and take a position in that commodity? That is illegal in the stock market.
So, transparency and higher margin requirements are probably a good thing.
Thank you for putting up the second comparison chart. It's a pretty amazing comparison, no?
Benjiman, if you like onions then you better stock up soon. This U.S. Dept of Ag report was released this April 17,2012:
" Downy mildew, an airborne fungal disease which damages onion tops by preventing bulbs from sizing properly, is working its way through the industry and most
all growers are affected. It is expected that yields and the size profile will be affected."
Do you think it would be wise to stock up now, based on this info affecting all U.S. onion growers?
For the sake of discussion, Ben, why do trades need to be transparent? What about the privacy of the buyer and the seller?
That's right, Larry. You were almost there before you took off for left field.
Because onions have a low dollar value, you wont' feel the price fluctuations as much.
Now, apply those same price fluctuations to oil - which is an input incidentally, not a consumer product, btw.
Not only will gas prices become much more volatile, but gas prices will be permanently elevated above the level they otherwise would be.
Refiners and producers have very high fixed costs. The inability to hedge commodity price risk increases the risks for them and risk is basically a cost. For producers, this means that less oil will become economic to produce as they too will require a larger profit margin to account for the added risk. Refiners will need a higher profit margin to be able to cover the costs a spike in the input.
So, the price of the gasoline you buy will be more volatile and permanently higher.
I'm a futures trader and though I'm not old enough to have traded onions, my recollection was that onion futures were extremely volatile relative to other commodities.
We would have to compare the volatility of onion prices before and after onion futures trading stopped to really have evidence that speculation helped reduce volatility.
This is a really stupid article.
Take a look closely at the chart: The upward spikes in onion prices almost always occur early in the year, sometimes right around the turn of the year (basically, winter and early spring). Then around May-Oct they crash. Obviously a seasonal thing, with the price going down when the harvests start coming in during the summer. You can't compare a highly seasonal agricultural product (grown in fairly limited areas I might add) to a commodity (oil) produced all around the world, at all seasons.
Furthermore, unlike even corn, onions cannot easily be stored for long periods of time. They don't freeze easily like meat, you can't put them in grain silos like corn and wheat, and you can't put them in big tanks like oil. It's a perishable good. I'm sure if you looked at prices of watermelons, green peppers or similar produce you'd find a similar pattern.
Actually, Jon, commodities trading is plenty transparent.
The traders on the floor have badges and each time they write up a ticket, their badge number goes on it. The badge number is a unique number that ID's that trader and his firm.
Of course, the trader could be executing an order for a customer, but that trade is already traceable because while the trader on the other side of the trade doesn't know which of the customers of the firm he just traded with, the executing brokerage firm does because it has to attribute the trade to that customer.
For electronic trading, broker dealers have an electronic ID. When my firm executes a trade, our MPID is displayed.
In other words, there is as much transparency in the commodities market as there is in equities and options.
Bunny thinks that when Sarah Jones, 82 years old, customer of Ameritrade in Peoria buys 100 shares of IBM for her retirement portfolio that the SEC records that she did so. Not true for privacy reasons. Her trade shows up as "Ameritrade". When Ameritrade executes a trade for itself as a broker dealer, then they show up as "Ameritrade".
Bunny wants more transparency so that mobs with pitchforks can more easily find their victims.
Bret,
It makes sense that perishable commodities would be more volatile and I think you'll also agree that it's well worth mentioning that each commodity has its own peculiarities and its own volatility.
My understanding is that onions became more volatile after futures were eliminated (I seem to recall seeing such a graph years ago) and if you think about the risk spreading effects of derivatives, then reality supports theory.
Methinks,
I understand all the transparency in trading. I'm just wondering why there needs to be that. As far as I am concerned, that trade is no different than you buying cereal at the grocery store. The only ones who should be concerned is you and the clerk.
In fact, now that I look at the chart even closer, the price spike almost always occurs in the 2nd quarter of each year. Lemme guess: Harvest time is in the late-spring to summer, so by the next late-winter to spring you've got a relative shortage of the things. Then when the harvest starts hitting the market the price crashes.
Here is when Vidalia onions are harvested:
The onions are harvested from late April through mid-June and are usually available in grocery stores through mid-July. A new storage process, however, is extending the time they can be sold. Vidalia now has huge controlled-atmosphere (CA) tanks into which the onions can be stored for up to six months.
So, the onions are harvested in late April-June (Q2), they mostly hit your grocery store in Q3, but can be stored up to 6 months. That would make the ones harvested in June good through about December. Then afterwards ... duh! The price is going to go up, sometimes late in Q4 but mostly in Q1 and much of Q2, until the harvest comes in again starting in late Q2 and Q3. During Q1 little doubt they have to rely on imports from Chile and elsewhere in the southern hemisphere, which are probably more expensive.
Unknown is right:
Onions are displaying classic free-market gyrations in response to huge swings in seasonal supply and perishability.
Are we to believe onion farmers do not know what is in their interests? They are mistaken to ban speculation?
Most farmers in the USA are deeply versed in getting the federal government o arrange what is best for them. They are the most subsidized, regulated, mollycoddled, enfeebled, pink "business" on the planet.
They also get federally subsidized water, roads, telephone services, trains, power and postal service.
If farmers think speculators are ripping them off, you can bet it will get stopped.
Jon,
I get overly explainy sometimes because other people may NOT know these things. Why the heck would most people?
I don't think it's anybody's business what you buy for your portfolio. Customer privacy should be maintained and customers also include hedge funds, btw.
When a dealer comes to the floor, he or she is trading with other dealers and they each have to know who took which side of the trade so that the trades are properly recorded and matched.
Anyone seen the prices of shallots lately...? RE-diculous!
Anyone seen the prices of shallots lately...? RE-diculous!
McClatchy Newspapers documented in a series of reports last year how the futures markets – where contracts for future delivery of commodities ranging from oil to coffee to cotton are traded – have been overrun by financial speculators. Historically, end users of these products, who are hedging against price shifts, made up 70 percent of trading activity in these commodities. Speculators traditionally played an important but secondary role in what economists call “price discovery,” the market finding the rational price for a product based on supply-and-demand fundamentals.
In recent years, the ratio flipped, with oil speculators who have no intent of taking delivery of oil now making up 70 percent or more of trading activity. Critics such as Michael Greenberger, the former head of the trading division of the Commodity Futures Trading Commission – which regulates the futures markets – contend that this flood of financial-sector speculation has pushed up the price of oil and is divorced from underlying market fundamentals of supply and demand.
“People, including the administration and others, are coming to realize that money moves these markets, and money sloshing around in the crude oil market, or any other market, is going to move the price,” said Michael Masters, a hedge fund manager whose repeated testimony before Congress highlighted the “financialization” of oil markets.
Researchers at the Federal Reserve Bank of St. Louis determined in a March 13 report that speculation was the second-largest contributor to rising oil prices, accounting for about 15 percent of the rise. Former Fed Chairman Alan Greenspan has said speculation is driving up oil prices, and Saudi Oil Minister Ali al-Naimi last month complained that current oil prices are “unjustifiable” given that there are not global supply shortages, a view he repeated last week.
--30--
BTW, Carpe Diem hero Rex Tillerson said recently that oil should not be above $70 and he can't understand the price.
The financial guys have seized the market.
Look for a bust. or perhaps a long, long stagnation, ala 1990s.
Unkown,
Oil is subject to demand spikes, they just aren't as regular. Oil is also subject to seasonal demand changes.
Each commodity has its own peculiarity, that's true. The point you make (intended or not) is that onions are not a comparable commodity as perishable and non-perishable commodities are quite different.
Fair enough. Every commodities market has its own peculiarities.
Bret makes a good point - pre and post futures ban in onions is more relevant. David Sacks published a paper in 2005 called "Populists vs. Theorists: Futures markets and the volatility of price" that suggests that even when adjusting for changes in the onion market, price volatility increased post ban. I'm sorry, I'm having trouble posting the link, but it is available on the internet.
And here's another article:
http://www.smartmoney.com/invest/options/save-our-speculators/
Ben,
Please read
http://research.stlouisfed.org/wp/2011/2011-027.pdf
The phrase "rigged market" nor even the word "rigged" appears anywhere in that document. So I ask again: please define "rigged", "market", and "rigged market". Additionally, from reading the abstract and skimming little of the document, this looks like nothing, but confirmation bias. The scope is limited to looking at secondary markets as a reason for increased oil prices, but not a whole lot about secondary markets driving down prices, as the surely do.
In any event, surely transparency is a positive virtue
So you're against the privacy of votes, right? If not, why not? If not, why is it not a positive virtue in private markets, but not political markets?
Did you know it is legal to put out false information about a commodity
Did you know it's legal to tell a pollster that you voted for Obama, but actually voted for McCain?
Are we to believe onion farmers do not know what is in their interests? They are mistaken to ban speculation?
Absolutely not. Farmers know very well it's in their best interests to keep prices high, which is not in the best interest of consumers. Speculators drive prices down also. By focusing only on the seller side and completely ignoring the buyer side, you fail to understand how market transactions work.
Are we to believe onion farmers do not know what is in their interests? They are mistaken to ban speculation?
Oil producers know what's in their best interest as well. I bet you understand very well, though, that what's in their best interest is not in your best interest, don't you? Why do you think Middle East dictators and Putin provide funding to environmental groups in the US? Because they know what is in their best interest and could give a shit about the rest of us.
Benjiman,
have you bought your onions yet in anticipation of a price a hike?
we Ms. Methinks....(see I remembered) .. methinks we are comparing apples and oranges.
or onions and oil...
note the next time you get onions the country's of origin... then the additional fact that you don't need onions to drive your car to work, etc.
any thoughts on the "rigged" milk and sugar commodity markets or for that matter the "rigged" electricity markets.
Not sure what the point here is.
things that people must have and are not discretionary - like driving you vehicle or heating hour home is not the same as coffee going to $13 a can... or onions "tripling" in price but if electricity doubles in price, bad stuff will happen so the govt.. yes the big, bad nasty govt... actually DOES meddle with the price of electricity and those poor speculators can't easily drive the price up.. so easily although the Enron guys figure out how.
we do not buy T-bone steak..so we don't care what price it is and if pork is too high we buy chicken and if chicken is too high we buy marked down meat...etc...
we still eat... well....
so what say you Ms. Methinks?
;-)
I say the bartender needs to cut you off, Larry.
For as long as we fail to treat speculators the way they deserve—with a bullet in the head—we will not get anywhere at all. - V.I. Lenin
In a non-stop diarrhea of dementia fit the pseudo benny claims the following: "BTW, Carpe Diem hero Rex Tillerson said recently that oil should not be above $70 and he can't understand the price"...
Well if one remembers Tillerson and others was making comments to the clueless Democrat Senators on the Finance committe in May of last year...
Context is everything pseudo benny...
Bunny, this is how well farmers know what's best for them
"With respect to the level of prices, a number of studies affirm the role of futures markets in narrowing the margin between the wholesale prices paid to farmers and the retail prices paid by consumers (cf. Bowen, 1913; British Association, 1900; Larson, 1926; Report of the Commissioner, 1909; Rothstein, 1960; and Working, 1931). What is more, the various detractors of futures markets were rarely consistent in their stories: in the 1890s, the annual meeting of the National Association of Farmers passed a resolution ‘‘condemning future [sic] trading in wheat on the grounds that [it] lowered the price of wheat. . .Three weeks after this meeting, 500 members of the National Association of American Millers. . .passed a res- olution condemning future [sic] trading on the grounds that it raised the price of wheat.’’"
From David Jacks's "Populists vs. Theorists: Futures Markets and the Volatility of Prices"
A lot of this discussion is revolving around whether the onion-oil comparison is fair. That's legit, but what about the other chart in this post?
Corn-onion is a much more applicable comparison and we still see the same relationship (lots of volatility) in onions and not as much in corn. The seasonality argument doesn't hold (corn has similar seasonality), so what else is there?
but the lack of volatility in corn, wheat, sugar, etc is NOT the result of the free market or allowing speculation in futures markets.
It's because of govt price controls, right?
we're comparing apples and onions.
the price we pay for products with sugar in them are stable .. not because of the free market but because of govt policies to restrict the sugar market.
right?
Larry,
Sugar is not subsidized and subsidy does not reduce volatility. Crops are still subject to failure resulting from adverse weather conditions, for example. Market price is still determined by supply and demand, though I realize that you don't "believe" in supply and demand and think that prices come from government.
Nothing about the onion ring corner in 1955-56 leading to the 1957 congressional hearings and subsequent 1958 ban on futures.
"but the lack of volatility in corn, wheat, sugar, etc is NOT the result of the free market or allowing speculation in futures markets"...
What does one consider volitile in the food commodities racket?
Ms. Methinks:
" I realize that you don't "believe" in supply and demand and think that prices come from government. "
I DO BELIEVE in supply and demand and I also believe that we should recognize when it is not "pure" and is influenced by other factors, including government.
With regard to storeable commodities like wheat, corn, sugar, etc - the government very much interferes with pure supply and demand and some would so - to the BENEFIT of farmers AND consumers and PREFERRED to some kinds of market forces like speculation.
How about you honestly fess up here as to the realities that are often very different from the pretend theories that you seem to love?
Onions, by the way CAN be stored and as such, managed by the govt as it currently does with other commodities.
you seem to believe that if it's pure market forces without govt influence that it's "better".
is it always?
" What does one consider volitile in the food commodities racket?"
large price swings?
really, Larry?
How do you figure keeping milk prices artificially inflated with price floors helps the consumer of milk?
How about you familiarize yourself with the research on the subject instead of making stuff up Larry World style?
Whether commodity price volatility is dampened or not by the presence of a futures market (where speculators operate) is an empirical question. Empirically, Futures markets have been shown to either NOT increase volatility or, in the overwhelming majority of cases, to DAMPEN volatility.
Now, see, I take research a hell of a lot more seriously than wild assertions emanating from Larry's World.
Oh, I missed the part about government storing onions.
WTF are you yammering about, Lar?
" How do you figure keeping milk prices artificially inflated with price floors helps the consumer of milk? "
where did I say that?
price floors - flatten the highs and lows and mitigate supply interruptions - right?
How about you familiarize yourself with the research on the subject instead of making stuff up Larry World style?
I'm relating to you the realities and you continue to blather about theories.
"Whether commodity price volatility is dampened or not by the presence of a futures market (where speculators operate) is an empirical question. Empirically, Futures markets have been shown to either NOT increase volatility or, in the overwhelming majority of cases, to DAMPEN volatility."
and I'm telling you that it's NOT the ONLY way and that govt policies can effect it also.
"Now, see, I take research a hell of a lot more seriously than wild assertions emanating from Larry's World."
you're living in a pretend world Methinks.
look at the real world for what really exists Methinks.
In your world, if you don't like it .. and it violates your theories, it, by definition, cannot exist.
:-)
" Oh, I missed the part about government storing onions.
WTF are you yammering about, Lar?"
Methinks - do you know how the govt handles corn and wheat surpluses?
do you know how the govt handles milk oversupply?
homework: http://en.wikipedia.org/wiki/Agricultural_policy_of_the_United_States
price floors - flatten the highs and lows and mitigate supply interruptions - right?
No.
I'm relating to you the realities and you continue to blather about theories.
Larry World "realities" do not transfer to real world realities. And it is pretty obvious that Larry doesn't know what the word "empirical" means.
and I'm telling you that it's NOT the ONLY way and that govt policies can effect it also.
Aggressive assertion by a fool on the internet is neither convincing nor science.
Actually, Lar, you can completely get rid of price volatility expressed in dollar terms by just having the government set the prices as it did in the Soviet Union.
Price volatility will not go away, of course, it's just that the price will be expressed in a different currency.
Methinks - what the REALITY of our EXISTING Farm Policy?
do you consider that "real world"?
The ReALity OF oUr ExISTing FArm poLICY, Lar, is that you are forced to pay for farmers to produce crops you don't want to buy.
Your question only underscores your cluelessness, though. I see no evidence that this is a condition you wish to change.
Ciao.
" Your question only underscores your cluelessness, though. I see no evidence that this is a condition you wish to change"
I'm not advocating or opposing it as a policy.
I'm asking you if the policy exists and does affect supply/demand/prices.
are you running away now to hide?
It's a simple question and the only view I've taken is that the policy is real and it has substantial impacts.
There is no hiding from your tsunami of irrelevant idiocy, Larry. I've resigned myself to that.
Look, I'm not here to answer your endless supply of irrelevant and stupid questions. If you have a case, make it and make it clearly. If not, ciao.
it's clear Methinks.
THe US Farm policy that directly intervenes in supply and demand for certain products - appears to reduce/eliminate speculation.
I am not advocating it. I'm stating it as a fact and I'm asking you if you agree that it seems to work ...
people might pay higher overall prices but in exchange, they do not get price spikes and shortages.
that's my case. It's not irrelevant and it is on point.
You didn't make a case, Pumpkin.
You made an assertion supported neither theoretically no empirically.
Corn-onion is a much more applicable comparison and we still see the same relationship (lots of volatility) in onions and not as much in corn. The seasonality argument doesn't hold (corn has similar seasonality), so what else is there?
Because corn can be stored for long periods of time, whereas onions, at best, can be stored for 6 months and only using specialized warehouses.
"large price swings?"...
Well larry g, therein lies your problem...
A wild price swing could mean as little as two or three cents on a bushel of corn for instance...
That's the problem about food commodities, there are so many external factors that come into play besides national conditions...
Here's an example that benefited Missouri rice growers a couple of years ago...
It 'looked' like the rice harvest in Zhejiang Province would be down some 7% or so...
Since the typical rice harvest in Missouri is a couple of weeks ahead of what's the norm in Zhejiang Province Missouri farmers pretty much had a banner year...
Well the rice harvest in Zhejiang Province didn't turn out quite as bad as initially predicted so the Chinese farmers got a bit of a hosing...
The actual amount per bushel pricel only varied by about three and half cents though...
That was just one province vs a few counties in southern Missouri...
Because corn can be stored for long periods of time, whereas onions, at best, can be stored for 6 months and only using specialized warehouses.
I agree. A study of a market in a commodity in the presence and absence of a futures market is much more compelling. Such research exists. I refer to one paper on this or the previous thread and the citations in it are useful resources as well.
re: "big" swings.
agree but the govt program for some commodities explicitly seeks to mute/mitigate "big" swings.
some things, like dairy are converted into longer storing products like cheese.
the goals of the govt programs are comprehensive. For instance, farmers are also able to purchase crop insurance to protect against catastrophic failures.
I'm NOT trying to make a case for the govt to do this. All I am saying is that the govt DOES DO IT and they do have a considerable impact AND that commodities that they intervene in seem to not have as many speculators.
The govt can actually act as a counter-balance to speculation.
again, I'm not advocating it.. just pointing it out as a reality.
Oh... and most of those farmers are the "small businessman" "job creators" that the GOP blathers on about... cutting taxes on... at the same time they are showering them with subsidies, eh?
some things, like dairy are converted into longer storing products like cheese.
Then it's no longer a milk market, Lar. You can't make cheese and call it storing milk. They're two different things. If you don't believe me, try converting cheese into milk. Don't forget to let us know how that experiment went.
there is no experiment Methinks.
there is the reality.
Do you know where many schools get their cheese?
I'm not asserting things that are not true.
I'm merely pointing them out as the reality.
There is a substantial govt program to directly influence supply and demand of certain commodities by buying the surplus and either storing it or converting it to other products.
Milk to Cheese is one of those programs.
here you go: http://en.wikipedia.org/wiki/Government_cheese
got milk?
Do you know where many schools get their cheese?
From the moon?
yup.
Ya, Mark J. Perry, has another moron onboard. It's called Mrs. Methinks. Do you notice that when Mrs. Methinks is around, morganovich, isn't?
Perry is such an effing goof that he thought that some onion grower from the upper peninsula in Michigan whispered in the ear of a future President.
It's called a 1956 corner (well actually it was a short squeeze) you dum sims.
wear you trying to pay me a compliment by associating me with Morganovich? If you were, dear, mission accomplished.
naw... he was admiring you...
;-)
That should be "were", shouldn't it, Larry?
Pass the cheese!
yup.. I caught it but hell for me to point it out would be the kettle, black, et all as I regularly screw up words even when I'm not imbibing!
cheese that is....
;-0
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