Monthly Archives: July 2011

Another two-handed economist post…

Producers of cotton, wheat flour and livestock feed are searching for ways to avoid losing U.S. Census Bureau reports critical to their industries that are slated to be discontinued due to budget cuts.

A coalition of agricultural trade associations met Wednesday with the top economist of the U.S Department of Agriculture to discuss attempts to save the reports. Time is running out to find a solution, as some will be stopped after next month.

source: Morningstar.

I agree that these reports are very important to the markets. I’ve long said that the abundance of USDA and Census information on agricultural production and consumption greatly levels the playing field between the largest traders and other participants in the markets. Because of these reports, and others that NASS is now having to reconsider, there is a huge amount of data available to even the lowliest, brokest, land-grant university-based analyst. Nevertheless, the major players still have more information.

But reading the article brings two thoughts to mind. First, if these reports truly are so important to such major actors in the industry, then how can they not be worth $80,000/year to an industry association as a whole? That is the cost of one secretary in their DC office. Alternatively, if these are so important, why doesn’t the United Soybean Board (who receives the national check-off for soybean sales, $82m in 2010) or a coalition of state wheat associations and/or marketing programs fund these?

More fundamentally, why is agriculture different? While I know that the Energy Information Administration provides copious amounts of data on oil and other energy markets, other commodity markets (base & precious metals) seem to function fine without the large investment in public data generation and dissemination. This is not to say that I’m opposed to these reports, or think that they are a bad idea. Just some questions and observations.

July 2011 Grain Marketing Newsletter

I’m back, and part of being back is the monthly newsletter. I’m in the process of trying to improve the newsletter (along the lines of Dr Tufte, but I don’t think he ever had to write a periodical with a staff of 0). Its not there yet, but I’m working on it. In the meantime, if you have any comments or requests, please let me know, either via email or comment (below).

July 2011 Grain Marketing Newsletter

What I’m reading this morning…

  • Harry Potter and the Order of the Phoenix (over breakfast…I’ve never actually read the series before, but my kids talked me into it and I’m enjoying them thoroughly.)
  • Results from the 2011 Youth National Climbing Championships…my younger son didn’t make it past the first round, but he learned some valuable lessons about how hard he’ll have to work if he wants to swim in the biggest ponds.
  • Debt Ceiling Options at Econbrowser. I’m sickened that there are those suggesting that the President can just ignore the debt ceiling…however, based on this President’s track record of respect for established law (Automaker bankruptcies, War Powers Resolution), it wouldn’t surprise me in the least if that were the course he chose. Don’t misunderstand, it’s Congress that has created this mess, and if the debt ceiling doesn’t get extended, I hope Congress is hoisted on its collective petard. I would just hate to see this Administration take another step toward further strengthening the executive at the expense of our nation’s laws. Related good reads on the debt ceiling: Bartlett, and Tribe.

 

What’s all the fuss?

From the inbox:

The CFTC has just released two new reports looking at volume in various commodity futures and confirming what most have already known, namely that under 10% of daily futures volume in the most popular products comes from Large Trader position changes. The balance or well over 90% in most cases, originates from “daytrading” accounts, or said simply, speculators dominate price formation on the margin for the bulk of products, which also means that longer-term equilibrium levels, those determined by supply and demand, are largely washed out when all the daytrading, and thus short-term pricing, mania is factored in. This also explains why moves such as the recent desperate SPR release by the IEA are generally doomed to failure. The CFTC’s Gary Gensler said that “The data shows that, in many cases, less than 20 percent of average daily trading volume results in traders changing their net long or net short all-futures- combined positions. The balance of trading is due to day trading or trading in calendar spreads.

(original source here)

Some observations:

  1. Does anyone know if such data was collected previously, say, twenty or thirty years ago? I’m just curious how this would compare. Many people seem to think that this number is obviously much too high, but with neither context nor empirical/theoretical justification.
  2. What is the Large Trader database? Simply that, it is the data from the daily submission of Form 102 and Form 40 submissions by firms with ‘large positions,’ based on open interest. The current minimum levels are here. According to the CFTC’s “This Month in Futures” such large traders account for about 94% of OI on CL, 90% on C-, 94% on W-, and 75% on SP.
  3. The ‘Large Trader Volume’ that is quoted in the slides will be biased downwards because it only accounts for changes from at a weekly frequency, but it is comparing it to all volume.
  4. Why is spread trading so wrong? Last I checked, it was an integral part of physical hedging. But maybe things have changed in the past 12 months…
To be clear, I am not saying that HFT is all that and a slice of bread, but I’m always disappointed at the breathless reporting of statistics such as these with absolutely no context attached, much less the mis-matched nature of the numbers being compared (weekly position changes vs. daily volume without accounting for spreads.) Yet it is exactly these sorts of breathlessly reported numbers that will be cited, repeated ad nauseum, further undermining the public’s faith in the commodity markets, and (most importantly to me) mean that I’ll spend the next 10 years explaining to farmers why these numbers can’t be used to justify beliefs that the markets are all rigged or unrelated to the physical markets.