A short note on this FT Alphaville article on a 1921 (US) Federal Trade Commission report on the grain trade. I think it is a must read follow up to my post on Comex stocks. This is the money quote:
"Private elevator companies with houses that are “regular” under exchange rules are often in position to influence the course of the futures market through their control of a large quantity of deliverable grain. A large elevator, or a group of elevators, may make heavy deliveries on the first day of a delivery month with a view to such manipulation. By this manoeuvre, long buyers of futures who do not wish to bother with the cash grain will be impelled to sell hastily, thus depressing the current-delivery future price relatively to the price for the next delivery of futures.
The elevators will then by able to transfer their open hedges to the next delivery on the basis of a profitable spread between the two options, buying in the current option and selling the next option. They may also be able to buy back the cash grain at a sufficiently depressed price to give them a larger carrying charge. Similarly, if the elevators withhold delivery on a large block of open future sales until the end of the delivery month, smaller traders may become apprehensive and start selling for fear of a reaction when delivery is made. A large elevator company is usually on the alert for opportunities to make profits by spreading between options, and is sometimes in position to make such opportunities. The elevators with large stocks of grain hedged and storage available for additional supplies have advantages over speculators not so equipped; and if such elevators operate together they may sometimes control the local situation."
The elevators will then by able to transfer their open hedges to the next delivery on the basis of a profitable spread between the two options, buying in the current option and selling the next option. They may also be able to buy back the cash grain at a sufficiently depressed price to give them a larger carrying charge. Similarly, if the elevators withhold delivery on a large block of open future sales until the end of the delivery month, smaller traders may become apprehensive and start selling for fear of a reaction when delivery is made. A large elevator company is usually on the alert for opportunities to make profits by spreading between options, and is sometimes in position to make such opportunities. The elevators with large stocks of grain hedged and storage available for additional supplies have advantages over speculators not so equipped; and if such elevators operate together they may sometimes control the local situation."
Now grain and gold are different markets (grain doesn't have 60+ years above ground stock) but it is just another caveat on interpretation of visible data sources and ignoring what may be occurring off market or in OTC market.
I agree with this, however many choose to believe that the influence is to the direction of the futures price. However, it is much more relevant to the calendar spread. It also relates heavily to what the cash (or physical) market is trading for.
ReplyDeleteLet's say soybeans in chicago are worth $13 and the futures market is trading $13.25. If the grain elevator delivers soybeans, the long will gladly take them at $13 and resell at $13.25, pocketing the difference (assuming of course, the long has the know how to do this, which most who play the game that late into the process do).
If the same beans are worth $12.75, but futures are trading $13, the short should deliver as he knows the long can not make use of those beans today. As a result, the short is rewarded with storage income until the next expiration. Further, the calendar spread should relax (show carry) until the point that the cash market forces equalize.
This is not the easiest stuff, but it's not rocket science either.
Good post and good reminder to pay attention to what is really important, I just wish the gold and silver markets were more transparent as to real world values.