[lbo-talk] Food Prices Again

Jordan Hayes jmhayes at j-o-r-d-a-n.com
Wed Feb 16 15:13:23 PST 2011



> Shane Mage insists:
>
>> Speculation is a zero-sum game.

Ok, I came up with a better way to explain this to you.

There are two participants in these markets, not one. In addition to speculators, there are hedgers. It's only zero-sum for the subset of speculators. Let's take an example. 100 of your best friends participate in speculation for wheat over the course of a week. On Monday morning, you let them into a Thunderdome, but before they enter you count all the money in their pockets. The bell goes off, and a trading frenzy ensues: opening bid for wheat is $10. The price goes up, the price goes down. On Friday afternoon, the bell rings again, the final price for wheat, amazingly, is $10. Everyone settles up and leaves. Before they leave, you check their pockets again. As you say, it's zero sum. Some losers have given some of their money to the winners.

However: on Tuesday, a wheat farmer shows up to the Thunderdome with actual wheat to sell. And so does a buyer from Nabisco, who is looking for wheat with which to make crackers in his factory. The price in the pit is presently $12. The farmer says: hmm, $12 is pretty good and sells a contract for $12. He puts his wheat with you for Friday clearing and goes home. The Nabisco fellow believes that the price will have to revert and so he waits a few days. On Thursday, he loses patience with the game, but the price is now $14. Unable to wait any longer, he buys a contract and arranges to EFP (exchange for physical) when the market closes on Friday.

Neither the farmer nor Nabisco are zero sum: the farmer has received $12 for his wheat, and Nabisco has paid $14 for their wheat.

It matters that the $14 isn't $12, or even $10.

/jordan



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