The largest financial bailout in United States history, which some traders are starting to call the ‘Securitized Housing Investment Trust’ (hint: think acronym), is causing an existential crisis amongst those who hold to purest free market ideology. Senator Jim Bunning, Republican of Kentucky, echoed this sentiment when he said, “The free market for all intents and purposes is dead in America.” These ideologues doth protest too much, methinks.

Since the 1929 crash, the last time the nation faced an economic train-wreck of this magnitude, the U.S. Government has effectively been in the insurance business and it has generally served us well. The vast majority of laws and regulations are designed to mitigate risk. Drunk driving laws minimize the number of car wrecks, and the short uptick rule (until recently eliminated) prevented unfettered short-selling from forcing solvent companies into insolvency.

Commodity pricing theory mainly focuses on the transference of a “risk premia” from risk-adverse hedgers to speculators. This insurance-like context was first proposed by Keynes (1930) in his theory of normal backwardation. Essentially, Keynes believed that hedgers have to pay speculators a risk premium to convince them to accept their risk.  

Dr. Richard Spurgin (2000) explained it in the following way. There are four types of participants in futures markets: short hedgers, long hedgers, speculators and arbitrageurs. Short hedgers are commercial producers and long hedgers are commercial consumers. 

This is part three of a three part series (see part I here and part II here).

The mysterious case of the commodity conundrum is sure to elicit passionate debate on either side of the equation—is the commodity boom due to speculation or fundamentals? By the time you read this, a battle in this dispute will have taken place on April 22, 2008 with the CFTC roundtable on agricultural markets.

This is part two of a three part series (see part I here).

The mysterious case of the commodity conundrum is sure to elicit passionate debate on either side of the equation—is the commodity boom due to speculation or fundamentals? By the time you read this, a battle in this dispute will have taken place on April 22, 2008 with the CFTC roundtable on agricultural markets.

"The theories which I have expressed there, and which appear to you to be so chimerical, are really extremely practical—so practical that I depend upon them for my bread and cheese." — Sherlock Holmes, A Study in Scarlet (1888)

The mysterious case of the commodity conundrum is sure to elicit passionate debate on either side of the equation—is the commodity boom due to speculation or fundamentals? By the time you read this, a battle in this dispute will have taken place on April 22, 2008 with the CFTC roundtable on agricultural markets.