Re: ethanol

Posted by paul on January 24, 2009 at 10:50:35 from (66.60.197.126):

In Reply to: Re: ethanol posted by mike lee on January 23, 2009 at 20:55:28:

The housing bubble - or perhaps even the dotcom bubble of a few years ago - started the current ecconomic issues. People had savings, and were looking to stick them into the best bang for the buck. As the bubbles burst, people took their money & went to other areas. One of the last places that was holding it's value & making money was commodities. Copper, iron, crude, grains. All other segments had tanked, so a lot of folks were piling their money into commodities - which drove the price of them unusually high.

It is a natuaral reaction to an unstable ecconomy, and yes this causes problems.

But that is pretty rare.

The marketplace works well when conditions are closer to normal, and wheat processors buy wheat, and wheat growers sell wheat.

The problem is the wheat buyers don't like to spend money early, and a wheat grower tends to be planning his wheat growing 24 months ahead of the time he can deliver it.

These 2 groups have a very hard time getting together so that enough wheat is grown to cover demand, plus a little extra. Both sides are concerned about their own personal issues, and not concerned about world issues, world weather, etc etc.

Along come the speculators. They sit in an office, and look out long term. They see bad weather here, they see a whole lot of extra acres of wheat planted over there, they ponder what will be happening 2 or 5 years from now.

With all that study, they guess perhaps we will be short of wheat in 23 months, and so they buy some on paper today, figuring it will go up in value.

Both farmers & wheat processors notice this change in price, and they react - wheat processors change how much & when they buy some wheat; farmers decide wheat is a tad more profitable and plant a little more.

Or, if the speculators guess there will be a big oversupply of wheat in 2 years, they start to 'short' the market, selling wheat they don't have. This depressed the price of wheat, and wheat processors are happy they can buy cheap wheat, and farmers get disappointed on what wheat is worth and tend to grow a little less.

In either case, the wheat supply tends to match what the wheat buyers end up needing.

The speculators make or lose a little along the way, depending if they guessed right.

Now, without speculators, there is no early correction to the market. The wheat processors could decide there is a lot of wheat around today, and pay almost nothing for it. Wheat growers will stop growing wheat. The wheat processors don't care, they want cheap wheat today, and don't pay any more for it. The following year they still don't pay much for wheat, but there was a lot left from the year before, so there is just barely enough wheat available, so everyone enjoys really cheap wheat.

But - then - the following year we are critically short of wheat. & farmers still have none planted in the ground, because it is worthless. So even if wheat prices finally skyrocket, there _still_ will be no wheat available for this year or the following one.

People will go hungry. The ecconomy will be deeply disturbed.

Or perhaps the wheat farmers will decide to charge a high price for wheat, even tho there is a lot available, and pretty much the same thing; we get piles of wheat sitting around, too expensive for people to buy - messes up the ecconomy & food supply. One side or the other will manipulate the market with a bad ending.

These trends & manipulations get nipped in the bud, and long range supplies of our basic needs are generally much better met _with_ speculators.

I much prefer a world with speculators, tho I cuss at them probably as much as you do - which is about 50% of the time. Think about it, the other 50% of the time they are helping out your point of view. :) You weren't complaining about speculators back when wheat was $2.40 a bu forever - keeping your bread & pasta at historic lows?????

What happened last year was a real odd thing - the ginat fund markets got involved in placing lumps of money into the coomdities. These were not typical speculators - these were investors. I consider that a whole different thing, and very abnormal brought on by the abnormal ecconomy.

--->Paul

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