Death comes to us all. Life's but a walking shadow | Is it any wonder that we can't figure out what the price of Wheat should be? And the article's example of the farmer's swap agreement with an ethanol producer? How many farmers do you know, even some of the largest is big enough to do a swap with an ethanol plant? A swap would more likely be between the ethanol producer and some very large elevator or grain dealer. In fact, here all the local corn procurement is handled by a branch of a large grain trading company who buys the corn in the name of the ethanol plant a swap would make sense for them. The ethanol plant pays a fixed price for corn the grain company gets to gamble on the price but has a fixed selling price to work against (which removes half the profit risk) meanwhile the ethanol plant does a similar swap for the price of finished ethanol. (Note, I don't have any actual knowledge of any such arrangements, this is all just unfounded speculation on my part).
But back to the '09 and '14 long position charts, in both cases swap dealers came to hold a very significant long position in corn but why. One possible scenario goes like this, notice how the commercial long position is much smaller than the commercial short position. If the users of corn want to hedge their purchase price without having to participate in the market could they do a swap with the swap dealers for a fixed price while the swap dealers take the variable price risk side? So should we really be looking at the sum of the swap dealer and commercial long position?
I'm sure there is someone reading this who knows exactly how this all works and is quietly laughing at me. |
'09/ 14 corn price comparisons (cont.)
