What are Futures and Commodities? (IRT Riots in the Middle East)

[ha98ed14]

I watched a clip on MSNBC that said that the riots in the Middle East are largely due to the major increases in the price of food, particularly grain. They linked Wall Street to the increasing prices through the buying and selling of futures and commodities on the price of grain.

What are futures & commodities and how do you sell them? They said it was like gambling, betting on the price of grain, or something like that. (FWIW, I have a working knowledge of the tertiary mortgage market and the bond market as it related to my job preDD.) Does anyone understand how this works?

Here is the clip I watched, altho I only made it half way through. I'm talking about the part before they interview the guest. If it is true, it seems immoral that rich people get to keep getting richer while more people around the world are going hungrier than they were the year before.

[o_mom]

Commodities are things that are generally bought and sold based on price. Grain, being one where you would be buying an amount of a certain grain, without respect to who is selling, just whoever has the lowest price. The prices on commodities tend to fluctuate with supply and demand.

Futures are basically a contract to buy a commodity at a set price sometime in the future. For instance, you might say that you will buy 100 bushels of wheat at $50/bushel on Sept 1st and I agree to sell it to you. On Sept 1st, you may find that wheat is in demand and selling at $70/bushel and so you buy from me at $50 - if you are an end user (bread company), then you are avoiding that cost increase, but if you are just a speculator, you buy at $50 and then sell at $70 making a profit. OTOH, you might get to that date and there was a bumper harvest which floods the market and you can only get $30/bushel and lose money or in the case of the bread company, you are not making as much profit as you might have. From the sellers side, they may be a farmer or a grain mill and if they get to Sept 1st and it was a bad year, so they do not have enough wheat to fill the contract, they would have to buy it on the open market and sell it to you at a loss.

Companies will use futures to help buffer price changes. For instance, many gas companies will buy futures contracts to lock in a long term rate. They risk the price going lower and they have over paid, but they also prevent a huge increase if prices spike. Food companies as well - buy wheat futures so that you keep the price of bread constant.

There are also options on futures which are basically the option to buy at that price, but you are not obligated, so if the price shifts unfavorably, you can get out of it.

Very simple explanation - not guarenteed to be error free. I'm not sure what has happened in Egypt WRT to this.

[wellyes]

It's not the price of grain, necessarily, so much as the poverty that makes the price unattainable.

Here's an very informative source on Egypt: http://motherjones.com/mojo/2011/01/...gypt-explained
And a much angrier but more succinct one: http://canonical.org/~kragen/egypt-massacre-sotu.html

[kijip]

This is one of the better explanations for what futures are generally IMO. It is a complicated subject, most futures are not for commodities these days.
http://www.investopedia.com/university/futures/

Like the US has strategic stockpiles of oil, Eygpt has strategic stockpiles of grain for bread. Egypt is one of the largest markets for bread in the world, people there tend to be very very poor and bread is the main thing they eat. Prices of bread have risen 20-30 percent in Eygpt in recent months. Hunger is a trigger for anger, and people outside of a small social elite have a lot to be angry about. The political repression in Egypt is nothing new but combine that with widespread hunger and people reach a breaking point. It is not only poor people who have issues with the government and this has kind of united the anger of a lot of different constituencies. Interesting example of social change being brought about by severe economic crisis. Some people think that had the stockpiles been released more heavily to keep the price of bread down, that this might have been avoided. When they started scrambling to address the price increase with additional subsidy and volume, it was seen as too little, too late, the pot was already boiling over.

The Twitter feeds referenced in mother jones are great and very helpful. Never thought I would be saying twitter and helpful in the same sentence, lol.