Tuesday, February 16, 2010

Why I Love Commodities

Sorry about the dearth of posts lately, but I've been out of town. Speaking of...
I just got back from a trip to beautiful Whitefish Montana. If you're a skier and/or outdoor enthusiast, I can't recommend the city highly enough. On the train ride out there, I ended up having dinner with a couple of Montanans who own and work a farm on the eastern edge of the state. We got to talking and I asked them what they raise, to which the response came from the husband:
"Durum wheat, peas, and chickpeas." On hearing the word wheat, my interest was piqued, so I asked:
"I'm curious, do you ever use futures contracts to hedge your crops?"
To which he jumped into a very long, very interesting discussion about the commodities markets. The short answer to my question was no, because there is no durum wheat futures contract, he doesn't really have the option to hedge in the commodities markets, however, he can often lock prices in advance with individually agreed upon "forward" agreements with grain purchasers, though he admitted that this is not as useful as a true futures contract because there is less liquidity in the market.
"If you can't deliver your full crop," he said "you'd better have the cash". Following this conversation, the man's wife asked me:
"How do you know so much about wheat?" I explained that I was a commodities investor and sometime analyst, to which she said, "Wow, because you sound exactly like our son."
"What does your son do?"
"He's a wheat farmer."
The commodities markets have always fascinated me because, in some sense, it is one of the last, pure markets in the country. When you put a bid in for a commodity like wheat, you're not betting on earnings reports or interest rates, CEO scandals, cash flow statement readjustments, corporate lawsuits, etc. etc. You are simply betting on the price of a bushel of wheat. It is one of the few places in the world of business where the Montana Farmer and Wall Street Analyst are not just peers, but equal experts, and it is a market that is open to EVERYONE. If that doesn't stir your inner capitalist, I don't know what would.

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