Tomato Futures, Part Deux
In my fictional parallel universe...
...the phone rings.
"Hey, what's up, man?"
"Thanks for returning my call," I reply. "Off-season OK for you?"
"Yeah, whatever. I been decompressing for a month now, and I still ain't back to normal."
"Salamanders still in your brain, huh?"
"You got that right. We were defending something that didn't need to be defended in the first place," he says.
"No lie. But listen. Forget the FDA, the CDC, all of them. I got an idea."
"Oh, @#$&."
"Wait a minute. This is good. You ready?"
"Yeah, whatever."
"OK." (I breathe, a pregnant pause for effect.) "I wanna buy futures on your fall crop."
"You wanna buy what?!"
"Futures. In November. Five loads, two weeks before Thanksgiving. Let's talk price."
He pauses, I can hear the virtual gears straining to turn in his head over the crackling phone line.
"So you want to do a contract--a set price, Act of God clause, the whole nine yards."
"No, no, you don't understand. It's futures. I buy 'em, you sell 'em. Any time between now & November, which is expiration, I have the option to sell 'em back to you, at whatever the market will bear. And buddy boy, I plan to make a profit. I think you skated by on hurricane season last year. This year you won't be so lucky."
"I think you're completely out of your mind. You been getting into the Patron again?"
"Nope, sober as a judge. But this is the coming thing. When all the young MBA-types come into the business, they're gonna be doing this. Why shouldn't we have a leg up on 'em?"
"Lemme tell you something, " he says. "When those 'MBA-types', as you say, come into the business, it'll be time for me to get out, and run away very fast. The contract deal is bad enough--they're made to be broken. This cockamamie thing...would have people shooting each other."
"OK, OK. I just thought you were more forward-thinking than I guess you are."
"I'll remember that come fall."
"Hey, just kidding. Just wanted to activate your mind a little. And see if you're gonna make it up here for a night or two before you have to go back down south."
"Maybe. Call you next week. Seeya."
Later,
Jay
Labels: FDA, futures, Jay Martini
posted by Ovaltine @ 1:41 PM
3 Comments:
Jay,
This came from a San Jose State University Web site:
Onion prices are quite volatile because of the limited storability of onions. Onion futures trading developed in the 1950's and came under the regulation of the Commodity Exchange Administration (CEA) in 1955.
On August 1, 1955 the futures contract for Golden Globe onions opened at $2.40 for a 50 lb bag. Soon the price was up to $2.75, whereas normally onions traded at about $1 per 50 lb bag. This high price signal drew in an avalance of onions to Chicago. As the onions started arriving the price dropped each day by its 50 cent limit. But it did not drop fast enough to cut off the flow. By the end of the contract period in March the price dropped to 10 cents per 50 lb bag and closed at 15 cents. This was about the price of the bag that held the onions so onions were virtually worthless. They were dumped into Lake Michigan.
Those who were hurt by wide fluctuations in onion prices tended to blame those fluctuations on futures trading. The National Onion Association called for a ban on futures trading in onions. In 1958 a law was enacted in Congress to ban futures trading in onions. It was challenged as unconstitutional but the courts upheld it.
When economists have compared the volatility of onion prices during the period of futures trading with the volatility during the period before futures trading they found that the volatility was higher before futures trading. But when futures trading in onions was banned the volatility did not go up again. So economic theory is generally but not perfectly supported by the experience of the onion market.
I dunno, 50 years down the line I don't know if you can compare onions to tomatoes, so to speak.
There probably is not a lot of basis of economic theory, as you say, for the feasibility of futures or options in fresh produce. But I alluded to contracts in my blog, and to an extent, aren't they a form of futures? In essence, they are 'I agree to buy a certain product at a certain price at a certain time'.
Whether it's used for speculation, a hedge, or just a guarantee to have a steady supply of product, it's at its root an agreement to buy something that the seller doesn't have yet.
Of course, the big difference between your stock produce contract and futures is the liquidity. Because of the inherent perishability, you can't very well set up a contract for six months out, then a month before it starts, the buyer says he wants to sell it because the market is up, which in theory means the contract would have a higher value. In that case, not only do you not even have the physical product yet, but you wouldn't have a seller to match up the trade with the buyer.
Fun stuff to think about, how productive this train of thought is debatable...ha!
J
We designed merchandising displays in our stores with online video to encourage our customer to buy on line.
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