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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.

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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.

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.

In the energy markets, we have $4-a-gallon gasoline at the pumps, yet we have domestic refineries that are quickly going broke. Does that make sense? Refinery margins, represented by crack spreads between the price of the crude barrel and the price of a refined gallon of gas, are down to untenable levels for domestic refiners. As speculation enters the energy market, it is overwhelmingly coming into crude oil and not into refined products -- summertime cracks for gasoline, normally somewhere between $20 and $40 the last few years, have now recently recovered to $9 after being briefly negative for a moment less than two months ago. That's right; there was a moment where the price of a gallon of refined gas was actually selling for LESS than the crude oil that went into it.

To be even more convincing, if this hasn't been enough to convince you about the speculative action in the market, we've seen heating oil cracks, normally seasonal for the winter (obviously), trade recently at a $30 premium. It is very clear that speculators, wanting to take advantage of reducing refining margins, got caught badly in a traders' short-squeeze in heating oil, pushing those margins totally outside of fundamental price reality.

I am constantly amazed that fundamental/speculative arguments still rage on

CNBC

and elsewhere. Sure, there are real, fundamentals price pressures that are bullish -- but those serve more to inspire people to look to get long, not to arrive at a correct price from fundamental supply and demand factors.

Ask a trader, he'll tell you right away - there's no doubt about it. The

Apple

(AAPL) - Get Report

iPhone is great and everyone wants one -- why isn't APPL stock up this year? Aren't legitimate bullish reasons enough to drive the stock higher? Of course not.

Next time, we'll discuss the difference between how stocks and commodity futures are valued and the other major reason commodities refuse to show any limits anymore.

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.