New Futures Contracts!

Last week, a couple of the major commodities exchanges announced the addition of some new futures contracts to help producers and consumers of raw goods hedge their expenses, and simultaneously give commodities traders three more reasons to develop stress-related ulcers.

First, across the pond, the world's foremost metals market, the London Metal Exchange (LME) yesterday opened trading of cobalt and molybdenum futures. In shocking concordance with my previous post about the emerging need for a lithium futures contract, the cobalt contract is designed specifically with battery manufacturers in mind, cobalt being a major input to rechargeable batteries in things like laptops and cellphones. Molybdenum, which I had never heard of before this Wall Street Journal article, is apparently used in the production of stainless steel.

Meanwhile, here in the States, the ever-growing Chicago Mercantile Exchange announced that it will be adding a contract for distiller's dried grain (DDG), a by-product of corn ethanol production. This is interesting because, with the addition of the contract, which will begin trading in April, ethanol producers can now effectively hedge every step of their production. For example, before the harvest you might buy a corn contract so as to protect yourself from unexpected price swings at your local grain elevator. Then, once you've got your corn and begin distilling ethanol, you can sell both a DDG and ethanol contract to lock in prices for your two resultant byproducts. Further, you can buy or sell oil, gas, or natural gas contracts to take advantage of spread deviations between the fuels. This is also interesting because the DDG contract may become a major hedge-staple for corporations that produce ethanol for non-fuel purposes... you know, like Jack Daniel's. The government, and now the private markets, are conspiring to make ethanol a real and viable energy source with plenty of economic safegaurds.

A bizarre reaction to these announcements is concern that opening these contracts to the public will increase volatility in the prices of the commodities and could potentially drive them too far one way or the other. Yes, that is true, prices will become more volatile... but only for the traders. The hedgers (people producing and consuming ethanol) actually need volatility to protect themselves from things like price-fixing and sudden, unexpected swings. Without and open public market, there's no way to plan for and predict what DDG would and will cost. Also, hedgers are not entering and exiting positions over and over to make a quick buck, they are locking prices in, exiting positions, and taking the difference as market protection.

Gold Through the Ages

I've never been on the "CONSTANTLY INVEST IN GOLD ALL OF THE TIME!" bandwagon that seems to exist for some inexplicable reason, nor have I decided whether or not I like the idea of a gold standard, in theory or practice. I like the idea of the Dollar being pegged to something, but I've always been worried that there's nothing stopping everyone from collectively realizing that gold isn't actually useful for anything. I was chatting with a buddy of mine over beers last week, and when I mentioned my trepidation about the intrinsic, actual worth of gold, he said something I found interesting. This friend of mine, I should say in advance, is a big gold standard advocate, so you may have to take this with a grain of salt, but here's, basically, the point that he made (I'm paraphrasing here, I don't typically carry around a tape recorder when I'm having beers with a friend):

• In Ancient Rome, an ounce of gold would buy you the nicest hand woven cloth garment, likely died a beautiful and uncommon color.
• In Viking times, an ounce of gold would buy you a coat of soft, warm, and sturdy furs well made and stitched together with intricate designs and fastened with beautiful artisanal leather work.
• In the Wild West, an ounce of gold would buy you a Wyatt Earp type three piece suit with a frilly shirt imported from France and a perfectly steamed fur-felt cowboy hat.
• Today, an ounce of gold will buy you a beautiful, custom tailored Armani suit with a silk neck tie.

The more things change...

Time for a Lithium Futures Contract

Until practical physics and/or electrical engineers devise a better battery, lithium-ion is the power-source of choice for the ever-growing electrification of our automobiles. The batteries are going to become more efficient, more compact, with larger capacity and a longer life, and within ten years they're going to be integrated into the engines of every car that rolls off the assembly line. And all the auto industry needs to accomplish this is firm resolve, technical knowhow, and 700 million tons of lithium.

The Wall Street Journal today reports that Toyota Motor Corporation secured access to a long-term lithium source in Argentina, outbidding potential Chinese buyers.

As lithium increasingly becomes an input into our transportation and energy industries, demand for the metal is going to skyrocket, as will the number of mining operations seeking to acquire and sell it, making the price about as volatile as the element.* If the auto/battery/lithium mining industrial complex is going to maintain any semblance of sanity there will need to be a hedge for producers and consumers of lithium. This is the same thing that happened with palladium, a metal used almost exclusively in the production of catalytic converters, when wild price swings pre-futures contract made establishing budgets and allocating funds close to impossible for automotive manufacturers. A listed futures contract will afford automakers a relative stability when it comes to protecting themselves. I'd put the over/under at about four years before a contract is listed on either the LME or the COMEX (or both). Any takers out there?

*As an unfortunate side effect, look for these sorts of chemical/financial volatility puns to be used in 100% of news stories related to lithium price movements.