Dicker: Don't Treat Commodities Like Stocks

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Bubble? Manipulation? These words are being bandied about by the financial press but have absolutely no meaning in the context of the commodity markets right now.

In trying to understand the quick rise (and falls!) in the prices of commodities such as oil, corn and wheat, many of this country's most respected economic journalists have used the typical models of other markets. That's just wrong, because the futures markets do not operate like any other market out there.

Let's discuss just what makes the commodity markets unique and why you cannot try to understand their prices solely using traditional economic theory. Then, we'll hopefully be in a better position to try and predict where they're going.

First, the futures markets were never intended to be used the way they are now being used. Futures markets were intended to be price-discovery instruments for the hedging of products for legitimate buyers and sellers. Farmers needing to know what their income would be for crops not yet harvested could hedge in the futures market and know precisely what they would be paid. Similarly for end-users -- Nabisco could plan exactly what it would cost to buy wheat for its Ritz crackers for the next several months. Market makers like me were in business trying to match buyers and sellers, adding liquidity.

But now, everything has changed. All manner of investors are flocking to the commodity markets to get exposure to the hottest market out there. Speculation is driving price to a degree where it swamps the "correct" price discovery of legitimate buyers and sellers.

When I was trading on the floor of the New York Mercantile Exchange for most of my career, you needed to have quite a lot of preparation if you wanted to be involved in the futures markets. You needed a relationship with a dedicated futures broker and you needed a special account, most of the time only granted if you could pass thresholds of knowledge about the nature of futures trading. You needed to be on the phones constantly, getting quotes and having orders filled by hand; it was difficult and risky to be off the floor and know precisely what was going on in the pits.