Physical Delivery Needed in Agriculture & Energy Markets

EconMatters's picture

By EconMatters

“Risk On” Mode

It is pretty obvious that there is a lot of liquidity in the system, with the Fed`s loose monetary policy, extremely low interest rates, and traders  in all out “Risk On” mode with regard to their two favorite funding currency crosses in the EUR/USD and USD/JPY. Traders are banging every asset class except for the Metals into the close, pushing asset classes up overnight with the futures contracts on a regular basis, and it is definitely a “Risk On” environment in the markets.


You can even hear it in the language of the markets, the tired old expressions of commodities like oil being an “Asset Class” and equities who can barely meet earnings as ripe for “Multiple Expansion” which is just a fancy term for, we know that based upon any fundamental analysis company A should not be trading at these levels, but if Wall Street has extra juice it can push up this dead in the water stock anyway!




The Retail Bag holder

And some poor retail sucker comes in and buys Company A on “Multiple Expansion” rhetoric out of Wall Street and this stock drops like a rock because it was pushed up on unsustainable air in the first place. This age old practice being justified in the end because the retail trader is just “dumb money”.

Maybe if the professionals were not selling all this “Multiple Expansion” hocus pocus bullshit, then companies would rise to levels where the fundamentals would justify the stock prices and no more beyond these levels. So right now it is so bullish on Wall Street that basically shit doesn`t stink!

I have yet to witness a “Good” Bubble

This is a negative practice for many reasons, one such is that creating bubbles by use of artificial gimmicks always means that at some point they burst because they were based on non-fundamental valuation reasons in the first place.


The real problem with this practice is that you are inevitably going to have a bunch of losers and losses on the downside of the asset bubble once the artificial juice is taken away!




Losses are always going to hurt the country, hiring, retirees’ pensions, 401ks, etc. So Bernanke and his crew are setting the stage for future negative financial impacts as a certainty down the line, it is the proverbial pay now or pay later equation. The problem is magnified and a net losing strategy due to the fact that if you pay later, it inevitably costs far more than if you pay now!


Why Wall Street Needs Oil to participate in a rally

Ergo, this is the atmosphere we are in right now. But I have a real problem with paying more for Gasoline just because Crude Oil is now once again an “Asset Class” and traders on Wall Street are banging S&P futures every night and every market close, and they have to buy Oil and bang it to the close as well because all “Risk On” assets must trade together. Some kind of law of trader thermo-dynamics! Uh, ok, whatever you say?

The reason that all “Risk On” assets must trade together, for instance, take oil which actually should be trading on bearish fundamentals right now, but traders on Wall Street refuse to short it because the S&P 500 is made up of a lot of oil companies, and if oil goes down it makes it hard to push up or bang equities into the close.


Isn`t this really a case of Price Gouging?

Therefore, all “Risk On” categories must trade together as “Asset Classes”. This shit should be illegal, and is as blatant as it comes to pure manipulation of markets, and if this kind of practice went on in other industries like the electricity markets people would be outraged. Bernanke said to bang equities into the close, so electricity prices must be banged to the close as well. Uh, didn`t somebody from Enron go to jail for this practice in California?


There are no fundamental reasons for oil to all the sudden move $10 in a month after having the same fundamentals, market dynamics, geo-political landscape for the past 6 months. The only reason is that there is a bunch or extra juice in the system right now, and it is “Risk On” mode in markets, and because we need the oil components in the S&P 500 for the run-up, oil has to go up as well as part of the correlated “Asset Class Ramp Up”, i.e., bang it to the close every day!


Market Reform

Well, this is plain bullshit, and markets need some major reform. If you’re going to have correlated “Risk On” markets which obviate the need for fundamentals, then you need reform to markets. There is no reason for people who use food and energy on a daily basis to pay much more for these products than the fair market price set by the supply and demand fundamentals in the marketplace.


And I will include currency as part of the fundamentals, i.e., if the Dollar index is trading at 70, then yes certain commodities will be somewhat negatively affected as a currency variable among other market variables.


But let the actual market determine the extent of how much a role a devalued currency will play in the value equation, by having a participant actually take physical delivery and either use the commodity or store it. But to say the true effects of prices due to a devalued currency are X, when no legitimate ‘means test’ has been applied is more hocus pocus wall street gibberish!


Furthermore, the only way to determine true market valuations from the “Bang the Close” mentality on Wall Street is to have actual Physical Market Principles as a means test for these Economic Necessity Commodities which actually have a consumer demand component unlike many paper assets in the market.


Physical Delivery: Necessary Market Reform

The only real market principles are based upon who is using the product, i.e., who needs the commodity to actually take or provide physical delivery. I know what a novel idea, actually using futures contracts the way they were originally intended. But this is something that modern societies must enforce through necessary market reforms. You would find out real quick what the true market price is for many of these necessary commodities by making players take or provide physical delivery.




I would even allow traders with positions under 20 contracts to not take or provide physical delivery as these traders are too small to move the market, and their trading would actually help insure better overall liquidity in the market, so that to even out other market participants, thus enabling a fairer entry price for participants needing to lock in supply.


But any cumulative position that reaches 20 contracts must take or provide physical delivery. This would cut out all the market shenanigans that we see where participants use any reason to move the market one way or the other without any real consequences for themselves.


Real Market Consequences of Trading

If you think that supply is really in jeopardy by some bullshit Nigerian pipeline leak go ahead and put your money where your mouth is and take delivery of a whole bunch more barrels in your back yard, a barge, or build some more space at Cushing in 30 days!


Bubbles in general are bad for markets, Essential Commodity bubbles are Immoral

I think it is appalling behavior on behalf of the Federal Reserve to create asset bubbles in both the bond and equity markets with artificial loose monetary practices that will only burst with negative consequences when the reason we are in this mess in the first place is because of previous asset bubbles!


But I will be damned if I should pay more for gas or wheat beyond the fundamentals of supply and demand principles in the market, and so should everyone else who is a rational person  in this country.


Cost/Benefit Analysis: Reform equals more wins for society

Besides Wall Street traders and exchanges who would suffer from smaller bonuses and lower exchange volume, (not society`s responsibility - provide an actual service that people need, or add true value to the world) who wouldn`t be for this policy change?


This is a no-brainer, and would be a net positive for job creation, GDP gains, and make for a better world from both an efficiency standpoint, and overall improved quality of life.


Back in Time

This notion of requiring physical delivery for futures markets like agriculture and energy products to avoid the Hedge Fund and Big Bank malfeasance of asset pumping, correlated markets, and banging into the close is a market reform that needs to be made to catch up to the era of modern markets.


It is ironic that the original purpose of futures markets is where we need to go to catch up to the modern era of QE Infinity, High Speed Trading, Electronic Markets, and Worldwide Exchanges.


Would Goldman Sachs really buy Oil at $140 if they had to own it?

Ergo, the next time Barclay’s believes that Brent should be 120 for their price target, let them buy a whole bunch of Brent contracts, and take delivery at a storage facility near them. Moreover, the next time Goldman Sachs says that oil is going to 200 dollars a barrel, ok, thanks for the info Goldman Sachs, now put your storage facilities to good use because the CME and NYMEX have a whole bunch of oil to deliver to your facilities.


But what you cannot do is say that oil should be price X, make it go there through paper means with no lasting consequences and then book a profit. Then say price should be Y, and short it right back to where it was originally before the paper pump, and then book another paper profit. Again without any physical change in the market fundamentals, or having to actually live with a stockpile of oil priced at $140 dollars that was bought and stored as a legitimate real world market consequence of participation.


No more Paper Shenanigans

It is so much easier to participate in a market, to move a market that you can make, without any consequences because you do not have to actually consume or provide the product that you are wagering on.


These market reforms would cut out the paper shenanigans of market manipulation that have become rampant in the oil, agriculture, and other commodity markets like Cotton over the last decade of modern electronic markets.


This market reform of requiring physical delivery would bring back true market dynamics of pure supply and demand principles, and take out the paper pumping nonsense which is so reflective of many markets today and leads to markets deviating severely from the fundamentals and being wholly mispriced. 


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Quinvarius's picture

I think ignoring the massive amount of global money printing, which has thrust paper money into the stratosphere of bubbles, is what is happening here.  But, sometimes gold has a down day, and everyone suddenly assumes the dollar is not massively overvalued. 

sbenard's picture

Now that the Dictator of Debt has been re-elected, he and his cronies need the price of crude oil to continue its rise to the stratosphere. They only suppressed the price of oil during 2012, when the election season was at its peak. Now that he is re-elected, it is time to resume the plan of making energy prices "necessarily skyrocket".

Market Analyst's picture

Notice how all those charts look exactly the same, the same damn trade.

You pay for gas what Goldman Sachs says, and not what the supply levels of the commodity, or the demand fundamentals in the marketplace should dictate, a criminal mafia enterprise at its finest!

LawsofPhysics's picture

Many of us have been saying this for years.  Gee, paper-pushing bullshit and fraud has got the world in trouble, who would have thunk it? Unfortunately, the paper-pushers own your representation.  nothing will change until the supply lines break, history is very clear on this.

Downtoolong's picture

The old argument and practice of paper markets being useful for hedging and risk management has been bastardized to extinction. Whereas paper markets once reflected the physical market behavior and price, they now drive physical market behavior and price.

The real social cost of this faulty system in oil is how abnormally higher prices translate into dollars flowing out of our economy into the pockets of exporting nations, some of whom are our sworn enemies. And as always, for every dollar Wall Street earns by manipulating their flawed futures and derivatives markets, it costs the rest of us thousands. They don’t care how poor we get as long as they get a little richer.

You can also cure the disease with tighter regulations on position limits in the futures and options markets, which of course is precisely the reason Wall Street has fought tooth and nail to prevent the idea from getting off the ground ever since it originated, and why the CFTC will never be given the fangs, claws, or authority to make it happen.


George Orwell's picture

Once again, EconMatters wins the prize for being the most clueless contributor to ZH. First there was the ranting about the rise in oil prices and now there's this bitching about the rise in soft commodities.

Let me ask you something, when the prices rise it's all about evil speculators.  But when the prices fall, is it still evil speculators? Or is that the "fundamentals"?  When WTI rose to $140 in 2008 it's all speculators right?  What about the fall to $45?  Also speculators? Why couldn't the speculators keep the price at $140 since there are so many of them?

The paper market makes for efficient market!  Speculators adds liquidity and makes for a more efficient market. We can talk about position limits depends on the type and size of each commodity market, but to talk about forcing everybody to take physical delivery you're just showing that you're a clueless idiot.

Cotton prices peaked at over $2 a pound in early 2011.  It's now trading around 80 cents a pound.  Where are the fucking speculators?  Why aren't you bitching about the need to do something in the cotton market?  Commodity prices are supposed to be naturally low otherwise it's all the fault of evil speculators?



Market Analyst's picture

Read the article: There are reasons the speculators have been net long commodities for the last 10 years as all assets have become correlated. The problem is that the speculators have been short 3-5 months of the financial crisis, and guess what they were also short the ENTIRE MARKET, again correlation.


Reading comprehension GO: In regards to Cotton, that was the whole point it never should have been manipulated to those high levels in the first place, a paper push up, and it is right back to where it normally trades.

You obviously are biased, talking your book I bet!

George Orwell's picture

You're hopeless.  This is my last comment on any article fron EconMatters.

Cotton prices were "manipulated" up?  Why didn't you say that fundamentals drove the Cotton market up and it's the speculators who manipulated the prices down so that we can all have lower priced cotton?  Speculators can make money long or short you know. If speculators can manipulate prices up they can manipulate prices down also.

The price of copper is down from its all time high also. Why are there no public outcries about why evil speculators drove down the price of copper?  Only when the prices go up then we implicate the evil speculators right? I see. That makes sense.





Market Analyst's picture

You are just proving the point with your arguments that the author is trying to make, markets have become complete jokes.


You cannot trust any markets these days, and you sure do not want essential commodities that people rely on on a regular basis to be trading on liquidity drivers, which is what we have today, when the best pricing mechanism would be the actual supply and demand drivers of a physically based market.

Why are you so scared of a physical market, traders can still speculate all they want, there just has to consequences for speculating against the fundamentals, which there are not today.

This is what you are afraid of, you want to preserve the status quo where A hedge Fund can "Paper Move" a market against the fundamentals, and not have to pay the piper when they are stuck with a losing position that they know is much lower or higher in value. (You see this knowledge prevents them from manipulating the market in the first place becuase they factor in true value before participating - unlike today).

For essential commodities all speculation is bad that is paper based, short or long. Frankly our markets are broken, but no one has to buy bonds or equities to live, but they need food and energy regardless of price - that is unacceptable - ask yourself why you care so much about this issue?

Is it because you have a versted interest in the status quo?

You cannot truly believe that this is the best pricing mechanism as assets are mispriced everyday, a la CROX.

But your argument truly relies on the fact that there isn`t a LONG bias to speculation in a bull market of liquidity,and given Fed policy, you need to protect essential markets from this type of paper based speculation that distorts market prices, and heightens market inefficiencies.

I am fine losing all paper based speculation, long or short in commodities: I don`t want some farmer screwed by a speculative short campaign during a market crash either.


Physical delivery is the best pricing mechanism, and the only people who want it otherwise are biased participants who profit from preserving this status quo pricing mechanism that as we have seen is considerably flawed.

I bet that you object to physical markets because you profit from the current system in some way - hardly an objective person to be discussing this topic and taken seriously.

SlowMoney's picture

You greedy - selfish narcissist ........

are you actually a citizen of this country?...where are you going to move when you and your sort actually destroy this country.....For essential commodities- that the nation needs to function-delivery should be required....why should a trader in London or Prague -  in any way affect a change in the price of oil or food in this country? .... and how about the Arab spring - ignited by rising food and energy prices - that really turned out well-don't you think? your eyes and start to think about what is good for the country and not your wallet.........

DOT's picture

Speculation will always be about countervailing forces.

You stated," .... and how about the Arab spring - ignited by rising food and energy prices".

The prices went up due to Monetary Policy. 

Widowmaker's picture

Market reform... HA AH AHAHAHA!

Fuck the poor.  Everyone is doing it.  The business may be dirty but the fraud-fiat is always clean.  Lew Jew will push a few more keystrokes and call it a market.  No one will see or do a fucking thing, that part is ASS-URRED.

"Money" and markets are totally fucking moot.  

bunnyswanson's picture

The new rich exist because they were able to swindle the wealth out of the possession of of the "new" poor.  It's not over yet.  Be patient and then we'll be able to laugh with you as you join the new poor.  We'll have the dubious honor of listening to you whine about how unfair the system is.

digitlman's picture

I agree:  physical delivery.  This would drop WTI about $50 overnight.

Widowmaker's picture

Racketeering 101.   Never reveal tangible assets.

Setarcos's picture

There are no "markets" now; just computer-generated trades of re-hypothicated derivatives.

OK I exagerate, but not too far off the truth.

Graabein's picture

"I would even allow traders with positions under 20 contracts to not take or provide physical delivery as these traders are too small to move the market"

In this case only the large banks are allowed to manipulate the market? Why not instead allow everyone to take financial positions, but strictly limit the number of financial positions each participants can have. Anything above to be delivered physically. This is all about how to control manipulation and limit the destruction of derivates that day in the future when all hell breaks loose. If liquidity then becomes too low in certain products - fine! I doubt it will to the extent it will be a problem, and some standardisation of what is traded wouldn't kill me.

But hey, I'm no expert, just hate the controlling position certain institutions seem to have in certain markets, which they use to make themselves rich.

Racer's picture

People having to take physical delivery? Why hasn't anyone done that before? Oh you mean to say that is what the markets were for?

No way will that happen, Godman Suckers will kick and scream if there were any hint of it happening. Not being able to offload to the dumb money... they would never tolerate that!