Gumby wrote:
Why do you suppose those bubbles happens? Could it be....
...Speculation??
Maybe. But speculation is hugely different now as you don't address the issue of a futures market with speculators being forced to deliver or go broke vs the old market where if you wanted to speculate you bought and stored.
The only way speculation can drive prices is if you take product off the market, or are able to supply product to the market. Futures won't do it.
Buying/selling futures is only as significant as the money backing it and strictly limited in time by the duration of the contract.
Whereas if you are taking delivery you are even more limited by your financial backing (less leverage) and by the need for storage. However, you have the advantage in that you determine your own time frame (as long as you can store the goods) rather than the futures market, etc. However storage doesn't work quite as well with ag commodities. (older product is often discounted). Never the less, people have managed to do it.
"Buying anything that is a collectible, has no cash flow, and is based only on a future sale to a greater fool, if you will—even if that purchaser is not a fool—is speculating. The "investment" might work—owing to a limited supply of Monets, for example—but a commodity doesn’t have the same characteristics as a security, characteristics that allow for analysis. Other than a recent sale or appreciation due to inflation, analyzing the current or future worth of a commodity is nearly impossible.
The line I draw in the sand is that if an asset has cash flow or the likelihood of cash flow in the near term and is not purely dependent on what a future buyer might pay, then it’s an investment. If an asset’s value is totally dependent on the amount a future buyer might pay, then its purchase is speculation. The hardest commodity-like asset to categorize is land, an asset that is valuable to a future buyer because it will deliver cash flow, not because it will be sold to a future speculator."
— Seth Klamon, founder of hedge fund Baupost
Same could be and has been said for nearly all stocks on the market.
"Why should commodities provide investors with a real risk premium? Shouldn’t prices actually decline in real terms over time? A bushel of wheat, a lump of iron-ore or an ingot of silver today is identical to a bushel of wheat, lump of iron-ore or ingot of silver produced one thousand years ago. The only difference is that they’re generally cheaper to produce because over time, human innovation has lowered the cost of production. When you buy commodities, you’re selling human ingenuity.
Spoken like someone with no idea. First of all he conflates ag and natural resource commodities. They are very different. Natural resource commodities have gotten a LOT more rare and more inaccessible, hence more expensive. That is how you can and should expect natural resource commodities to maintain value over time (but not necessarily year to year). And if they are consumed by industry (e.g. oil) it is possible that increasing scarcity might even drive increased value over time. But that does sound like the classical speculation, doesn't it.
Ag commodities now require huge inputs of oil, but in return those inputs have increased productivity 1000-fold or more. (Look how many 'farmers' now feed the U.S. vs 100years or 200years ago.)
Ag commodities, if you take delivery, are definitely in the category of a risk premium. Ask my farmer relatives or anybody who deals in ag commodities (NOT JUST FUTURES!) if they took a risk -- weather, disease, etc. are very real and have a huge impact on ag commodities.
"Historically, most bull markets have ended up where they started.
Why bet against human ingenuity by buying physical commodities when you can bet on it by investing in the enterprises whose task is to remove the bottlenecks and lower commodity prices?"
— Dylan Grice, Societe Generale
That part does make sense. Of course they end up back where they start, that is the entire raison de etre behind the multiple thousands of years of history of commodity money. But if you want to eat I'd still advise you to choose commodities, not paper entries representing shares of enterprises who produce commodities.
...Not to mention that Commodities haven't exactly performed that well over the past 130 years (in real terms):
Conflating ag and natural resources again... Ag commodities since the dawn of mechanized farming have been a very poor long-term investment. And so have the enterprises that produce those commodities. Better would have been to invest in chemical companies before they were involved with ag. Will the same trend continue in the future? Beats me.
(An uncle was going thru the old farm records a few years ago, and found out that prices received were essentially same dollar amounts when he retired in the late 1990's and early 2000's as they had been for my grandfather in the 1950's for wheat, potatoes, peas, dairy, hay, barley, oats... Everything he checked. Increased efficiency in production was the only way it worked. My uncle sold his equipment and is now renting out the farm. He gets paid even if the crops fail, and gets paid more if they do well in the market.)
