[lbo-talk] Food Prices Again

Michael Pollak mpollak at panix.com
Thu Feb 17 10:43:03 PST 2011


On Thu, 17 Feb 2011, Doug Henwood wrote:


>> Let's say the price for wheat today is $10 a bushel. The futures price
>> 6 months hence is $14. Arbitrage would mean that farmers or dealers
>> store the wheat and sell it later. In that case inventories go up.
>
> Why sell it later? Sell it now.

I'm talking the physical -- you store and sell it later because the price (minus the storage) is higher.

That's what arbitrage is all about in this case, no? This is what causes the prices to converge -- this kind of storage drives up the spot market today (by taking product off the market) and drives down the future when it becomes clear that more product is becoming available in the future.

But all this arbitraging is done with the physical product. You can't arbitrage between the spot and futures markets without it, can you?

So in this model, the spot market drive the future. The two markets (eventually) converge toward the price set in the spot market by the forces of supply and demand.

Am I missing something? This seems like the classical model and the classical understanding of how it works.

So if someone wants to say the future drives the spot -- that money going into the futures market increases the physical price of food -- there has to be a different causal mechanism than "arbitrage." What is it?

I've got a couple suggestions.

Michael



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