For those who don’t know:
https://en.wikipedia.org/wiki/Onion_Futures_Act
(which also banned box office receipt futures)
A fun thing is to go on FRED and make a graph with prices from onions and, say, corn to see the differences in volatility.
For those who don’t know:
https://en.wikipedia.org/wiki/Onion_Futures_Act
(which also banned box office receipt futures)
A fun thing is to go on FRED and make a graph with prices from onions and, say, corn to see the differences in volatility.
I looked up onions, lettuce and tomatoes (because burgers), and the volatility actually looks very similar. Am I missing something or looking at the wrong things?
Tomato: https://fred.stlouisfed.org/series/WPU01130217 Onion: https://fred.stlouisfed.org/series/WPU01130216 Lettuce: https://fred.stlouisfed.org/series/WPU01130215
Lettuce and Tomatoes don't keep well, which adds more seasonal variability and reduces the ability of a futures market to smooth prices.
Compare with potatoes, which keep about as well an onions, and are farmed in the same areas. Look at onions and potatoes over a 5-year time span (because the default all-data time span is silly for this). It doesn't give enough control of the Y axis to make the comparison easy - for potatoes it shows me Y=40-320, for a range of 280; for onions it shows me Y=120-440, for a range of 320. This means that potatoes are more "zoomed in" and it's graph will exaggerate volatility relative to onions, but qualitatively, I'd say the potato graph looks smother just the same. This is exactly what economic theory says a futures market should do to the price.
> Lettuce and Tomatoes don't keep well, which adds more seasonal variability
The more durable a produce is, the easier it is to transport over a large area, which will always smoothen price fluctuations. This alone could explain why lettuce and tomatoes have higher volatility than onions, which have higher volatility than potatoes, which have higher volatility than corn and weat.
At least that's the null hypothesis that the hypothetical effect of futures should be compared to.
I assert that onions and potatoes have roughly the same durability and ease of transport.
I know nothing about logistics of the food supply chain and how they preserve food at scale, but at least at home I'd say that potatoes are close to twice as durable as onions.
None of the products you’ve chosen have a substantial futures market, which is why the person you responded to chose corn to make their point.
The weather affects all crops
But isn’t the point that futures trading reduces volatility from things like weather?
“Absorbs” volatility might be more accurate.
I will resist the urge to inquire about the difference between reducing and absorbing.
I won't. What's the difference here between resisting and absorbing volatility?
Not a financial expert, but i think reduce implies it goes away, and absorb implies it’s still there but someone is taking it up.
Like reducing the amount of water on the floor would be turning off the tap. Absorbing the amount of water on the floor is when you mop it up.
Or to bring it back to the original context... Reducing volatility would be reducing the impact of bad weather on your harvest, absorbing volatility is finding someone to cover your losses. (presumably by giving up some profits on the good years. It's like a financial low pass filter)
That’s exactly what I meant. I was only replying to the question as posed.
Volatility is a natural consequence of weather, blight, etc., etc.
To reduce volatility you would need to actually stabilize the supply of onions.
What futures do is allow traders to shift risk from the future to the present. By pricing that risk, it's possible for people who depend on onions to pay a little more now in exchange for a guarantee about the future.
It's not magically going to make onions less volatile (although high risk prices can spur investment which might) but it can reduce disruptions caused by volatility.
The classic example of this is futures on jet fuel which allow airlines to weather random wars in the middle east, OPEC shenanigans, etc. Ticket prices are higher this way, but the existential threat of being forced to cancel a bunch of flights is gone.
Oh you’re talking supply volatility, where most of us are talking price volatility.
As long as demand remains inelastic, the two are the same.
If there is a supply shortage prices will rise; no amount of futures trading can create resources out of thin air.
The point is making money.
For speculators yes. But for a farmer and the consumer of the goods they would rather lock in a margin for their goods and run their business than risk guessing what the price will be at harvest time or consumption time. It’s called hedging.
many users of derivatives willingly lose money on them because the purpose of these contracts is to transfer risk to those willing to hold it.
Money is the thing at risk.
People are willing to lose a small but predictable amount of money to avoid occasionally and unpredictably losing a massive amount of money. The former is a loss they can plan for and absorb. The latter might kill their business.
Traders are often happy to take the other side of that trade because they can trade against many counterparties, collect a small premium from each one, and try to ensure their counterparties won’t all fail in a correlated way.
Yes, it's not about onions.
The thing you’re missing:
Would you rather have net profits of 20, -10, 15, -5, -10, 25, -5 year over year, or profits of 4, 4, 4, 5, 4, 5, 5?
In what sense is “profits” not referring to money?
Did you reply to the wrong comment? I said nothing of the sort.
Your hung up on money, everyone is trying to explain that the exact same money is better when it is predictable versus erratic.
the exact same money
Yes, it is about the money.
You may have liabilities or income that exist outside of financial markets e.g. if I have 500t of wheat due to be harvested I might want to hedge enough to guarantee I can pay my staff - ive locked in the price of wheat, I might make less money as a result but my risk is lower.
Is insurance risking your money?
Yes of course. I’ve paid for car insurance for 30+ years and have never made a single claim. So far, for me, it’s a bad risk.
I’ll keep paying though.
Futures are a mechanism to transfer risk from one party to another, more or less.
To reduce net risk for both parties, at the expense of also reducing chances of windfalls.
To the farmer, futures mean no risk of having to sell when prices are low. To the buyer, futures mean no risk of having to buy when prices are high.
The farmer also gives up the chance of selling when prices are high, and the buyer gives up the chance of buying when prices are low.
The transfers go both ways, which is the magic.
You’re leaving out the speculators who usually end up assuming the risk of both the producer and buyer.
And the cost of transportation.
Interesting. This would be more sensible if it was time-bound. Since the intention was clearly "stop a bad thing someone is doing right now" and not "make this field illegal forever"
So this is genuine free market activism?
What will the kids think up next?
This has to have been the inspiration for Milo Minderbinder cornering the cotton market in Catch-22, right?
The box office receipts ban is hilarious.
I suppose that prevents Kalshi gambling on box office duds?