Don't Treat Commodities Like Stocks

Now, prices for futures markets flow in real time on screens as readily as equity prices. Every brokerage offers futures service, and specialty futures brokers will fill orders almost as cheaply as you can trade stocks online. Exchange-traded funds, managed futures and indices provide other vehicles to commodity exposure and are growing by leaps and bounds. The scary part about all of this is that it's just beginning -- managed futures is a mere $250 billion dollars a year so far, a pittance compared to the market cap of even a few mid-cap stocks. Worldwide volumes for derivatives were up nearly 30% in 2007 and are on pace for another record year in 2008.

And futures markets are failing in their primary role because of all this outside interest from participants who have no legitimate interest in price. In the corn market, for example, speculation has caused an unheard-of disconnect between the futures prices and the prompt prices being paid for the cash commodity. The price paid for a bushel of corn, in other words, is no longer converging with the price being traded on the futures markets. Remember, this is the reason futures markets were created -- to assure convergence for participants.

Because convergence is becoming less and less likely, traditional participants have begun to stop using the futures markets. Farmers, who were selling future crop on the forwards markets, can no longer be assured that they will be paid that price when the spot market comes due -- they are now taking a large discount to those hedges on the cash market. On the other side, end-users of corn are unwilling to continue participating because there seems to be no reason to hedge: Prices on the forwards markets are less and less representative of reality. In fact, the basis prices (the relationship in price at the CBOT contract delivery point and other national delivery points) are so unpredictable that grain elevator companies are having difficulties securing loans and letters of credit. Nobody can properly gauge the risks anymore, at least not from what being traded in the futures market.

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At the time of publication, Dicker had no positions in the stocks mentioned, but positions can change at any time.

Dan Dicker has been a floor trader at the New York Mercantile Exchange with more than 20 years' experience. He is a licensed commodities trade adviser. Dan's recognized energy market expertise includes active trading in crude oil, natural gas, unleaded gasoline and heating oil futures contracts; fundamental analysis including supply and demand statistics (DOE, EIA), CFTC trade reportage, volume and open interest; technical analysis including trend analysis, stochastics, Bollinger Bands, Elliot Wave theory, bar and tick charting and Japanese candlesticks; and trading expertise in outright, intermarket and intramarket spreads and cracks. Dan also designed and supervised the introduction of the new Nymex PJM electricity futures contract, launched in April 2003, which cleared more than 600,000 contracts last year alone. Its launch has been the basis of Nymex's resurgence in the clearing of power market contracts over the last three years. Dan Dicker has appeared as an energy analyst since 2002 with all the major financial news networks. He has lent his expertise in hundreds of live radio and television broadcasts as an analyst of the oil markets on CNBC, Bloomberg US and UK and CNNfn. Dan is the author of many energy articles published in Nymex and other trade journals. Dan obtained a bachelor of arts degrees from the State University of New York at Stony Brook in 1982.