[lbo-talk] Food Prices Again

Jordan Hayes jmhayes at j-o-r-d-a-n.com
Thu Feb 17 10:16:43 PST 2011


Doug writes:


> I don't understand your confusion. If the futures price
> rises, of course the spot price is going to rise. It means
> there's someone willing to pay higher prices, at least for now,
> for the underlying commodity.

The key term thre is "at least for now" -- imagine walking into your local grocery store and saying to the owner: $3 for a half gallon of milk!?! Are you crazy? Milk is worth $3/quart! To prove it to him, you whip out a bank roll and start to buy milk from him at a rate of one quart every few minutes; each time you do, he raises the price to reflect your demand. Dollar signs go off in his eyes, and he finally changes his sign: milk is now $10/qt! A few people come in the store during all this who need milk now. Holy crap, they cry: $10/qt!?! I'll go somewhere else! And some do, even though they like this store and they got a good parking spot. But some people are in a hurry, and are stuck. Ok, here's my $10, they say, but you're a jerk they say to the owner. Then they storm out of the store.

Finally you're done buying milk: You bought a total of 10 quarts at an average price of about $5.50/qt for a total of $55. One guy came in late after all the milk was gone, so you sold him two of your quarts for an astounding $16 ("Hey, that's $2 less than this guy is charging!"). You unloaded 7 more to other people for an average of $6 each or $42 total. You took your 'free' remaining quart home for breakfast cereal (which you also got 'free' with your $3 net profit) in the morning, leaving the store feeling smug.

For the rest of the afternoon, the owener felt pretty good: he was going to make a killing! He called the stockboy in early to restock the shelves, but he found that no one bought milk for the rest of the day.

Tomorrow, the sign goes back to the "market" price of $3/half gallon.

/jordan



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