ICE AGE COMMODITIES… LIFE BELOW ZERO!
Looking at a thermometer for pricing…
When I first started in commodities, I was taught the story (and lesson) of Chicago Onion Futures by my boss back in the mid 1980’s. The story was a version of the ‘pump and dump’ idea. Prices driven higher by unscrupulous speculation…only to crash the market afterwards. Yet that wasn’t the point. Many markets suffered such behaviour…one can argue some may still do. No…it was the resultant effects, notably how onion farmers drove into Chicago in trucks loaded full with sacks of onions…and emptied them into the Chicago river, clogging it! Why? Because the bags the onions came in were worth more than the contents. It was how Onion Futures in the U.S. became the ONLY banned commodity under Federal law…ever! It taught how supposed controllers of a commodity can sometimes turn the world against them.
The loss of Onion Futures was a body blow to the Exchange upon which it was traded. Up to 20% of the total volume at the time was made up from this one commodity. However, it survived, developed new contracts and prospered. It was one of those lessons I just remember from early on in my career…thinking it an oddity that will never have relevance in the modern world.
We’re now roughly midway through 2020…and what is happening? We seem to be on the other side of the looking glass (see my earlier articles Welcome to 2020…the Year of the Metonic Panic [Spring 2020] and Just What…is Going On? [October2019]). Coronavirus/ COVID-19 is rightly the story of the year if not the decade. Yet there have also been some other ‘Panic’ moments in financial & commodity markets. They’ve also not just been moments but gone on for many days…weeks in some cases. The rout of the stock markets in the early months of this year left a bitter taste. However, there have been others…the drop below zero in NYMEX WTI Crude Oil Futures we saw in April. I’d like to observe two, maybe three points on this event.
I’m not going to deal with the events. There are many, better than me who have done so ably in depth plus I do not have the space and time here to concentrate on one aspect. Additionally, in the case of WTI Futures, the whole series is subject to both domestic and international regulatory agencies scrutiny which I am sure (after many years) will bring light to the subject.
10 | ADMISI - The Ghost In The Machine | Q2 Edition
WHEN THE CONTAINERS ARE WORTH MORE THAN THE CONTENTS…
Instead, I’d like to look at some aspects not immediately obvious. First…does anyone remember the anecdotal story of the California Gold Rush of the late 1840’s. It’s a well told story that whilst some did get very rich prospecting for Gold, most did not. Those who became (allegedly) very wealthy were those who sold the prospectors the shovels and pickaxes. Now step forward to today and if we then look at recent data from the FIA1
we can see global futures &
options volume for Q1 2020 had a record increase of 43.2% over Q1 2019. Equity Index Futures & Options had a rise of 61.9%, Energy had the highest growth in Commodities at 52.8% and interestingly Agriculture had a higher 68.9% rise, though from a lower base. The result was the revenue and net income of various international exchanges & clearing houses grew commensurately. It’s worth pointing out that some of the brokers in these exchanges didn’t fare so well, especially in the energy sector.
1 16 April 2020
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