A Proper Beginning

The purpose of this blog is to communicate with collaborators and contacts in Brazil, and share thoughts with anybody who cares to read about crop research, agriculture, and  economics.

Today I read a Bloomberg Businessweek investigative expose entitled Amber Waves of Pain.  It is a fascinating read about commodity ETFs (exchange traded funds), their tremendous growth, and the case for some re-regulation.  In short, ETFs are a tool used by investors as a hedge.  These funds track commodities using futures contracts, but the price of the ETF does not always follow the price of the commodity it tracks.  ETFs have recently held some very large positions, which I think is cause for alarm.  In one example cited in the article, a single ETF held a very large chunk of all natural gas futures available on the open market.

So why begin this blog by hi-lighting commodities trading tools?  It's not to make a case for or against them, but to ask a simple question: If a farmer makes on average 10-15 cents per bushel of wheat by holding it in on-farm storage (a significant sum), and purchases a futures contract in order to make that arrangement work, what are all the financial middlemen making off of the same bushel?

That question may seem naive, in modern finance these instruments offer security for farmers the same way they do for Wall Street high rollers.  But if poorly understood, complex financial instruments helped create then burst the housing bubble, why would commodities markets be immune from the same fate?  More importantly, at this stage we should ask the fundamental question: Do farmers really need to keep playing this game?

Some Idaho and Washington direct seed wheat farmers have taken off in a different  direction, producing the highest quality wheat sustainably.  Buyers know from whose farm the grain was produced.  The U.S. Dry Pea and Lentil Council has shifted their production and marketing strategy to competing on quality because they cannot compete on price with third world countries.  I believe these groups are at least five years ahead of a major trend in U.S. commodities farming.  Idaho farmers could certainly use better management options that do not include the Wall Street casino.