Dicker: 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.