A Contrarian View On Commodity "Speculation"

Tyler Durden's picture

In response to the president's moronic witch hunt of oil "traders" which, for a POTUS so set on distinguishing himself from the prior administration, was only missing the phrasing "read my lips, no more speculators" for people to suffer the biggest glitch in the matrix to date, we decided to present this note from Jared Dillian, editor of the Daily Dirtnap published back in January discussing the imminent surge in food prices, which however is just as applicable to the surge in any commodity, and most certainly crude. Dillian's point is so simple we are not at all surprised that it is lost on all sock puppets in Washington. "I say that speculators have a very important role to play in setting commodity prices, and the very idea that we would limit the role that speculators play in commodity prices is an early signal that world food markets are about to get a good deal more unfree, which means we are about to undo all the progress we have made in the last fifty years. This is why speculators are important in setting prices. They make money. That is their job. Making money is an end in itself. But an interesting by-product of a speculator setting prices is that he forces the producers of the commodities to respond, and consequently, adjust production." To be sure, there are always those speculators who in their pursuit of price disequilibria, through the wager of capital, will break the law, just as there are those who will commit criminal acts in every aspect of life. But for the most part, speculators operate within the confines of the law, as poorly drafted as it may be. Yet the core point remains: by pushing the clearing price substantially from the equilibrium due to excess demand (or supply) specs merely precipitate an equal and opposite reaction which promptly corrects this disequilibrium. As Dillian concludes when observing a hypothetical explosion in food prices: "Well, guess what: when prices are ten times higher, the market is
going to be full of farmers, and nobody is going to complain very much
about that."

Blaming speculators for price surges is beyond short sighted, especially when the proximal cause is infinite supplies of Fed produced liquidity which is merely looking for the path of least resistance to the highest possible returns. Yet it does bring up a point - while in most commodities price surges are short lived, when it comes to crude there is almost never any price elasticity to the downside. Meaing that suppliers, of whom the marginal block is a production cartel are either unwilling to, far more likely, unable to provide excess supply. Which is in line with what we have seen out of Saudi Arabia recently: instead of increasing production in March in the aftermath of Libya, Saudi came up with the most ridiculous excuse for demand destruction one could conceive, and lowered output. It is this act, in addition naturally to the excess liquidity provided by Bernanke that should be pursued by the Dynamic Duo of Obama-Holder. But to do so who distrurb the far more sensitive equilibria of the petrodollar bond producer on one hand, and, of course, the Wall Street capital base on the other. Which is why it is always easiest to blame the nameless, faceless "speculator" scapegoat. After all it worked so well for Greece which said it was all CDS traders' fault... At least of course until Greece went banrkrupt for the first time... and then for the second time.

From Jared Dillian's Daily Dirtnap "Food Fight", January 2011:

Jared Dillian

You do not want to mess with food.

You know, we are not so far away from a time where we did not take food for granted. We are not so far away from a time in history when people really went hungry. Nobody goes hungry now, and I am not being exceedingly glib. We have an obesity problem, not a hunger problem. We have solved the problem of growing and delivering enough calories to everyone in the country at incredibly low prices. We have tamed agriculture, something our ancestors had been trying to do for millennia, and we can now feed everyone easily, with room to spare. To the extent that someone goes hungry in a developed country, it has to do with something else, not the production and delivery of food.

We have arrived.

Does everyone realize how incredible this is? Yes, there is still hunger in the world. But it is better. And it seems like the really, really bad famines on the planet these days are man-made (North Korea). Overpopulation? People were worried about being able to feed the planet when we were 4 billion people. Now we’re at 7 billion. To the extent that agriculture and markets are free and freely traded, there is literally no limit to what we can do.

But we go through periods of time in history when things get ugly (remember Kondratieff, he was all about agriculture), and the price of food can get very, very hairy. I am all about the prices of things getting hairy, I have said that it is going to happen to apparel (another commodity that comes out of the ground), but there is a tendency for the prices of things that had previously been dormant for decades to suddenly come alive. Do we care why this happens? Do we need to know? Or can we profit off it without knowing?

We can profit off it without knowing. But I will tell you why this happens, and it gets back to Kondratieff, K-waves happen over time because of long-term cycles in social psychology, and over periods of time, people will develop some very illiberal ideas about how food should be produced, managed, bought, sold, and distributed, ideas that, in the best case scenario, cause prices to rise, and in the worst case, severe shortages and even famines.

There is ideology in this, I admit. I remember sitting back in seventh grade social studies class and us having this in-depth discussion about how senseless it was to have a planned economy, who is omniscient enough to decide who gets what and how much to pay for it? Senseless. And this was the mid-eighties, and we knew back then that the Soviet Union and Eastern Europe was having a tough time, or at least we had a hunch, and we knew that our system provided more for more people than theirs did. That was twenty-five years ago.

But time will go by and people will start to question the very ideas which they held to be absolute truths, they see food prices starting to rise, and they say, hey, this isn’t a game, people shouldn’t be making money off of food, food is a necessity, people need food, and we shouldn’t let this vast unregulated casino going around deciding how much people who are already strapped for cash are going to be paying for bread. And it is always true in capitalism that any time you are talking about things that people need (like food and health care), those have the potential to be the least free, and the things that people really don’t need at all (like iPods), those are the goods with the really free markets. Right?

This is the age-old question in political economy (what exactly is political economy?), which is: should markets be trusted with something as precious and as sensitive as food? To which I ask, rhetorically: should government be trusted with something as precious and as sensitive as food? But we are getting ahead of ourselves.

The problem that we will be faced with imminently is the idea that speculators are making money being long certain commodities, the prices of which have doubled or so, and people are starting to get pissed. Why should somebody be turning into Richie Rich when I have to pay twice as much for a cup of coffee? Et cetera. And listen: people I respect a great deal disagree with me on this, and reasonable people can disagree on this issue, but I say that speculators have a very important role to play in setting commodity prices, and the very idea that we would limit the role that speculators play in commodity prices is an early signal that world food markets are about to get a good deal more unfree, which means we are about to undo all the progress we have made in the last fifty years.

This is why speculators are important in setting prices. They make money. That is their job. Making money is an end in itself. But an interesting by-product of a speculator setting prices is that he forces the producers of the commodities to respond, and consequently, adjust production. Let me explain.

So let’s say that a speculator thinks the price of grain is going to go up this year, and the reason he thinks that is because he is some expert on weather, he can forecast the weather better than anyone else, and this is a very lucrative skill to have. So prices right now are low, and by buying grain forward, he is causing prices to go up. Other speculators with their weather geeks are also buying grain forward in advance of nasty weather, and in doing so, they are all driving the price up.

In response, the farmers are going to plant and grow a lot more grain, because the price is higher! They are responding to price, which is a market signal. The higher the price, the bigger their eyes get, and the more they plant. And by planting more grain, they will be able to avert the weather crisis that is coming and will be able to feed everyone in the world at a reasonable price.

It’s so easy a caveman can do it.

But the idea that a speculator would make money off of someone else’s misfortune is a pretty repugnant idea for people, especially when they look around and see that the market is full of speculators. Well, guess what: when prices are ten times higher, the market is going to be full of farmers, and nobody is going to complain very much about that.

But in not allowing speculators to profit from near-term price increases, we are setting ourselves up for big-time failure, because prices are not being allowed to rise to the levels that would induce people to quit their jobs as newsletter writers and strike out to get rich as farmers. Oh, prices will get there eventually, but by limiting the role that speculators play, they will get there at the worst possible time, when people are not ready for it, and there is not going to be enough food to go around.

Most if not all of the preceding applies to oil as well.

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bonddude's picture

"Mr. Valentine has set the price." - from Trading Places- 1983

SparkyvonBellagio's picture

Though I love the movie, and even if you're 18 and trading you should know every line from trading places. No need to give up the quotes origin. We know.

Bacon, like you'd have in a bacon, lettuce, and tomato sandwich.


Whiskey, all you want!




SilverRhino's picture

You know? This kind of shit happens to me EVERY WEEK!!

SheepDog-One's picture

Yes Mr Valentine has set the price.

tomster0126's picture

Count me in for some J.D. and coke...we do need speculators, and they play such an interesting role in this equation.  All i know is that I'm prepared for gas prices never to fall again; i've accepted that as our reality.



bonddude's picture

Yeah thanks. Spelling corrections in ...3...2...1...

spelledwrong's picture

Cause I'm a karate man! And a karate man bruises on the inside! They don't show their weakness. But you don't know that because you're a big Barry White looking motherfucker!

SheepDog-One's picture

Drop a quart technique, hit ya and a quart of blood just drop outta you.

BrobamaReds's picture

I personally know traders at Sempra Energy in CT that made (and continue to make) a killing on the california blackouts while Enron was the only firm looked at.  These sempra guys have it made:  they are not a bank, no one from the mainstream knows who they are and they practically run the speculation game for all commodities and cry if they don't earn $25MM in a year.  One friend of mine has made $20MM+ per year for 10 years+ makes Derek Jeter look like a joke...will make even more now that he runs an area and he can still fly commercial because no one know who the fuck he is!   He was long when oil ran to $147, made a killing on corn and copper, blah blah blah. This guy still lives in a small greenwich condo and drives an older A6....for 10 years.....totally under the radar, just killin it, 100MM+ liquid...farmers?  he could give two shits, lol.....good luck america.

Ray1968's picture

Dammit. Your friend is living MY dream.

M-Fer. I'm jealous. I bet the SOB has gold bars stashed under his apartment floorboards as well.

tgatliff's picture

Yes I agree this is a problem... But you dont solve it by limiting activities of traders.  You do it by raising the cost of money.   (aka Raise Interest Rates ASAHP)   Yes, this will make all of the banks collapse, and yes this is a good thing because it is inevitable.

glenlloyd's picture

half of what you've written is unreadable.

flattrader's picture

I though it was just me.  Poorly written.  Poorly reasoned.

I guess this Tyler isn't aware that the speculative Vampire Squid drove people to hunger and killed them just a few years ago.


They don't care if you die.

And it's happening again.

Twindrives's picture

Kenyan national Barry Soetoro has his head in a dark spot, as usual.

SheepDog-One's picture

'When prices are 10X higher, it wont be a problem because everyone will be farmers'? 

Wow pie in the sky economics...first of all does everyone already own 50 acres to farm? And can the avg american even keep a fern alive, much less grow a corn or wheat crop? I suppose when beef shoots up to $40 a pound, suddenly everyone will just become a cattle rancher as well? Silly economics.

AnAnonymous's picture

That is the story of the US nineteenth century: the 50 acres were provided generously by the Indian sponsors.

It has to be this way all day long if you believe US citizens.

Higher prices will bring more farmers and they will not be limited by arable land availability. No, no, because there will be generous sponsors to support the US exceptional project.

Tail Dogging The Wag's picture

"Investors need to diversify, they need to own some real estate, they need to own some farmland, they need to own some equities, some cash, and some precious metals..."   Marc Faber —Investment analyst

Got real estate and farmland outside your home country yet?


Misean's picture

You mean prices transmit information to the rest of humanity imparting an incentive to engage in activities most highly prized by their fellows?!?! Wow!

The next thing someone will say is that this is why centrally planned ebubblemies CAN'T work...

Doña K's picture

Maybe, Obummer should take the 5 minute university.


Old but basic. Min. 1.47 on economics

Ricky Bobby's picture


Long Marxism, short classical liberalism.

Al Gorerhythm's picture

Does Obaminable write his own speeches? If so he has a mop for a brain. It's like the whole political class has been dumbed down, and he's the President!

buzzsaw99's picture

Another apologist piece. :sigh:


Speculators use free leveraged money to drive up prices. Then, just about the time the farmer goes to sell the price drops. Everyone loses except the damn speculators, they get bailed out. The days of trading places where the little guy wipes out the big guy once in awhile are over. Everything is rigged and dollar debauchery always goes to the maggots first.

KinorSensase's picture

agreed.  speculators are parasites that contribute nothing to economic production beyond the illusion of their own grandeur and self-importance. the day speculators trade places with farmers, put their hands in the dirt, and actually produce something....then I'll believe in their good intentions.  otherwise this is complete, ahem, hogwash.

Ricky Bobby's picture

You just made the authors point.

CrashisOptimistic's picture

Maybe speculators are holding the price down and oil scarcity should truly be priced much higher.

Yancey Ward's picture

Indeed.  People always forget there are two sides to this trade.

DonnieD's picture

Maybe there shouldn't be either side of the trade for those who are only involved for gambling purposes. Maybe bankers need to go back to what they started out as instead of inventing an endless array of bullshit securities to gamble on.

A firm pushing prices up or down just because their bank roll and influence is bigger than everyone else's doesn't seem to accomplish anything for society and I somehow doubt that was the original intention of a futures contract of corn for a farmer in Illinois.

We laugh at algo's pushing the price of Netflix into the stratosphere but if you needed that stock to feed your family or put gas in your car we might view it differently. 


Paul E. Math's picture

You have identified the real problem.  There is nothing wrong with speculators and speculation per se.

The problem is when speculators are able to deliberately push prices in one direction or the other. 

This is wrong in the same way that it is wrong when government pushes prices in one direction or the other.  It leads to resource misallocation and either we starve for lack of food or farmers starve for lack of income.

So how about we go about addressing the problem of price manipulation rather than just blaming speculation itself?


Thomas's picture

The proximate cause is unteathered access to capital at no cost. If these guys had to borrow my money I sure as hell would exact a little more interest out of them. They do not, however, need to compensate the savers when there is a central bank to preempt the free market. The rampant speculation is a symptom, not a cause.

nevadan's picture

Exactly right and the root of the problem.

Hexus's picture

The speculators weren't having fed money thrown at them back when oil was at $150. Why do you HAVE to blame the fed all the time? What's wrong with giving the vampires a share of the blame?

AnAnonymous's picture

You define a new kind of speculators, the ones who dont expect that their actions give them grip on the price in one direction or another.

tmosley's picture

lol, it's funny that you think the world is conspiring against you.  Most people don't want to hold things short.  There might be a few large institutions that are short, but such institutions aren't large enough to suppress the gargantuan oil market.

You want peak oil so BAD, don't you?

AnAnonymous's picture

Another apologist piece. :sigh:


Speculators use free leveraged money to drive up prices.


Free leveraged money is catalysis, nothing more. It helps but is not the root.

The author forgot what abundance or mass production is. Curious for a US citizen as abundance was key in their so called exceptional project.

There is no equilibrium, only the pursue of imbalance. The author once again touts the possibility of infinite collection/extraction and all. It is so stupid.

Mass production is dying and the world is reaching an age of levelled production.

US citizens are really confused by their own history, built on theft that has mechanically increased the input to their economy, favouring more activity.


Okay, 90 pc more farmers and so what? Where are the lands to farm? 90pc more farmers would drive the costs of labour down but would not solve the scarcity of land. As arable lands are located in countries like the US whose general environment is extremelly expensive due to decades of wealth accumulation, farmers would not be able to make the living required to support themselves in this kind of environment. It is already what is happening as crops are subsidized to match the imbalance between the general environment and the valuation of the activity.


The article is so stupid. US citizens have better to understand that globalization is nearing its end, that expansionism will never be the same as the good old glorious nineteen century. Lacking land? Just take from the Indians. More land, more farmers, more food. This scheme is ending.

Only one thing is known to be able to cope with speculation: mass production. It is not surprised that oil can be manipulated by speculators as oil extraction has reached a plateau. The supply side can barely grow, that is the lever of speculators who are once again able to capture a meaningful enough share to drive up prices.

High prices of oil, more oil extractors, prices down. Who could believe that drivel? Doesnt make sense as the oil extraction is all absorbed by the consumption actors. You can barely extract more oil. So where is the growth in supply needed to compensate the speculators?


It has never been about equilibrium but imbalance. Chasing and creating imbalance to extract as much wealth as it is possible. A gradient story. 

Hexus's picture


But what should we expect from a site run by the very same egomaniacal parasites ZH pretends to critisize. Or maybe we are just blind to the subtlety of the great markets, really it's a good thing when food prices double and children starve, it's the markets way of telling us those children were inferior specimins of humanity.

chunkylover42's picture

yes, by all means let's ban speculators and speculation, which is what you are implying with your comment.  That way, legitimate hedgers like an airline can just hedge with.... other hedgers?  That should work out great, don't you think?

buzzsaw99's picture

I don't have a problem with those who hedge and intend to take delivery. The average WTI contract trades like five hundred times before it is finally taken by the (much) poor(er) end user.

AnAnonymous's picture

yes, by all means let's ban speculators and speculation, which is what you are implying with your comment.  That way, legitimate hedgers like an airline can just hedge with.... other hedgers?  That should work out great, don't you think?


Useless. Only one thing is known to be efficient against speculation: abundancy or mass production.

Levelled production means that speculation can no longer be diluted as it used to.

Banning, non banning, it is irrelevant.

mkkby's picture

Smart farmers look at the futures price at harvest time before they even buy their first seed.  If they can make a profit at that price, they buy the inputs they need and lock in the price. Very little risk if done correctly.  Only sell forward 80% in case the weather doesn't cooperate.  The rest can be gambled on at harvest time.

gordengeko's picture

 "Which is why it is always easiest to blame the nameless, faceless "speculator" scapegoat."

Are we seriously going to let them continue this fucking bullshit???  Did they not say the same god damn thing with terrorists to get the patriot act in place and start molesting 6 year olds for chirst sake?!  I hope to God people start putting two and two together, they are trying to take complete control and it's more than obvious.  Call me a conspiracy theroist whatever the fuck that means, I don't care.  We let them continue and there will be no where else to go and the end game is the reduction of the population.  Use your brain, think, this is all propaganda bullshit to keep you locked in the game.  In your mind!  Has nothing to do with anything that is outside yourself.  Whenever they come out and start making public threats against phantom fake boogiemen to start making new rules taking more "freedoms" away we need to step up the alternative news calling them out with logic, reasoning and information to get the power players to start making some moves.  Cause at the end of the day you can have all the money in the world but if the world is gone up in flames what are you left with and most importantly, what are you going to take with you when you leave this earth?  You can say you actually tried to doing something good with your life or you spent your whole life trying to make a ton of worthless fiat shit paper!

Sock Puppet's picture

Gorden, how is your credit rating doing?

gordengeko's picture

You say it like it matters. Words still get read.lol

Pondmaster's picture

"Are we seriously going to let them continue this f...ing bullshit???"

Until the demise of "American Idol"," Dancing with the Stars" and the NFL  and beer , the answer is YES!!!!!!!!!!! . Dumbed down America will do NOTHING . Absolutely nothing . Thank God there are still those who think for themselves, and haven't eaten the porpaganda. We need a new 60's generation. F... the establishment. But, alas , if groups organize they will be zapped in public gatherings by Gov't produced Raytheon crowd control microwave weapons . Can you alone stand against the corruption?  

gordengeko's picture

Not talking about getting some crayons and some cardboard to do some yelling. The masses will be reduced, nothing to do about that was thinking more along the lines of getting people with a lot of money to take delivery of the silver and crash the party early. Protesting is for sheep unless the majority of the herd gathers which is doubtful.