The commodity markets were designed for commodity producers and commodity end line consumers to limit the volatility and risk in their business models. Producers are only willing to keep producing when they can sell their production at a profit and end line commodity processors are only willing to buy them if they can realize a profit upon selling the goods they’ve finished. The creation of commodity trading floors provided a singular location for these transactions to be recorded along standardized times and qualities. Unfortunately, commodity producers only want to sell at high prices and commodity consumers only want to buy at low prices. This created the market makers, floor traders and speculator categories that have come into the markets to provide liquidity by providing bids and offers in between the producers and end users. This week, we focus on the creation of the commodity indexes and Exchange Traded Funds created by the banking sector and what effect the current period of low volatility and declining prices is having on the very banks that created them.
The agricultural commodities produced and traded domestically have all fallen precipitously through this summer’s growing season. Maximum planted acreage and ideal growing conditions have combined to drive many of the agricultural commodities to multi-year lows. In fact some of the technical readings these markets have been registering are just as shocking as the growth in many commercial traders’ positions. Since no individual market really stands out, we’re going to discuss the current state of these markets while attempting to get a hold on what it means going forward.