LOOKOUT: Derivatives... 600Trillion

[TOM4CWB]

Dear Charlie;

I was watching 'Market Call'part 2 on BNN,

Nov. 17-08, 1:00pm; and Ross Healy CEO of Strategic Analisis Corp. was talking about the global woes that created the colapse.

His claim is that there are $10 of Derivatives for each Dollar of Global GDP. Further he stated that many of these derivatives supported the creation of the mountain of debt that was issued.

The question was asked 'Is there enough $$$ Liquidity to allow all the unwinding of all these financial instruments?

Or are we going to need... to hit the 'Financial' "Reset" Button?

How do we as the global economy dig out from beneath all this debt?

[TOM4CWB]

"Derivatives are financial contracts, or financial instruments, whose values are derived from the value of something else (known as the underlying). The underlying on which a derivative is based can be an asset (e.g., commodities, equities (stocks), residential mortgages, commercial real estate, loans, bonds), an index (e.g., interest rates, exchange rates, stock market indices, consumer price index (CPI) — see inflation derivatives), or other items (e.g., weather conditions, or other derivatives). Credit derivatives are based on loans, bonds or other forms of credit.

The main types of derivatives are: forwards (which if traded on an exchange are known as futures); options; and swaps.

Derivatives can be used to mitigate the risk of economic loss arising from changes in the value of the underlying. This activity is known as hedging. Alternatively, derivatives can be used by investors to increase the profit arising if the value of the underlying moves in the direction they expect. This activity is known as speculation.

Because the value of a derivative is contingent on the value of the underlying, the notional value of derivatives is recorded off the balance sheet of an institution, although the market value of derivatives is recorded on the balance sheet."
http://en.wikipedia.org/wiki/Derivative_(finance)

I will hang up now... and let you answer the question... : ) GRIN!

[bgmb]

Just a quick comment on the derivatives market.

With all these outside forces effecting our commodity markets. Is there any reason the cash price of grain has to follow the CBOT or WCE.

Does anyone have stats on what percentage of the open interest is pure speculation?
Because at the end of the day if our commodity markets are driven into the ground by the rest of the markets collapsing around us (not because of market fundamentals) why would the cash price follow the futures?

I guess thats why we saw -80-100 dollar canola basis on the way up.

[jensend]

the relationship falling commodities prices would have to falling outside markets would be that if the economy is slowing down traders would take that as an indication demand will be weaker. we have all seen divergences but in general there is and should be a positive correleation between futures and cash.

[TOM4CWB]

Jensend,

OKthen... who has it right.. Aussie growers... or the CWB?

Ships queue to export WA grain

Friday, 14/11/2008

" Western Australian grain growers say they're being pressured to sell grain quickly, so that buyers can fill export orders.
• Logistics company CBH says there's a bottleneck forming near the port of Geraldton, with ships waiting to load grain still sitting in storage.
• The company says growers are warehousing their grain rather than selling it, resulting in buyers not being able to buy enough grain to fill export orders.
• But grain grower Heather Allen, from Northampton, is refusing to sell until prices go up.
• "Why should we nominate it just because they've got ships in there?"she says.
• "I don't believe that it's the farmer's fault. I think the people who are wanting to purchase our grain should pay the price that it's worth."

Here is what is going on south of the 49th...

" U.S. export sales came in at 248,300 MT this week, down 32 percent from the previous week and 40 percent from the prior 4-week average. Top buyers were Nigeria (80,000 MT), Egypt (64,900 MT), Taiwan (54,300 MT) and Mexico (43,700 MT). Sales were at the low end of analyst expectations of 250,000 to 350,000 MT. Additionally, sales of 5,000 MT for delivery in 2009/10 were reported for Mexico.
• U.S. FOB values strengthened this week with HRS prices hitting a six-week high. Nearby HRS 14.0 for delivery from the Gulf hit $330/MT this week, up $7/MT from last week and up $17/MT from the previous five-week average. HRS from the PNW was seen $17/MT higher from last week at $328/MT."

So the CWB is dumping our high quality wheat... while the other major exporters of high quality wheat... are holding the price up?

THe CWB opens the lowest #4 grade... to force those who must have money... to over deliver quality... cause they must hve cash flow... and these folks at 423 Main... work for 'designated area" grain growers?

WHAT A NIGHT MARE!!!

[TOM4CWB]

Jensend...

The CASH price... Just south of the 49th in Montana... is almost $100/t higher than the CWB farmgate cash price in Alberta.

AGAIN... who does the CWB 'single desk' work for?

WHY are WE so STUPID?

Why are we... (through the CWB) CRUSHING the WORLD price!!?

[jensend]

i wasn't even considering the cwb. as you so often rant on about, the cwb is not a free and open market. i've never said otherwise. some markets are and that is what i was referring to. you can turn this into a cwb bitching session if you want but it doesn't interest me. i answered a question; now you can get on with spewing more rhetoric. hint: the cwb is just a small part of the larger problems facing grainfarming in western canada. and i'll bet the cwb prices roughly follow the futures trends (as do other cash prices) if not efficiently. i can't figure out why the wizard marketers don't just sidestep the cwb and get on with life or is it the obsession that gives you purpose? i can't and won't defend the cwb but if my post gives you a springboard to your soapbox go hard.

[bgmb]

And just to clarify I wasn't saying there was going to be a negative correlation between cash and futures. Just not a perfect positive one.

ie. maybe basis will go to 20 over?? or higher??

who knows just a thought.

[charliep]

bgmb

The commitment of traders reports issued for the different futures markets in the Us provide some indication of the level of commercial business (i.e. hedging) versus speculation/fund activity.

http://www.commitmentoftraders.com/reports.htm

the following is a graph for soybeans to show how the numbers bounce around.

http://www.wallstreetcourier.com/technician/traders-commitments/traders-commitments-soybeans.htm

[jensend]

you're right bgmb, the basis could go to twenty over if someone is in urgent need of product but the basis is also there for a reason (handling, transport, carrying, etc.) so i wouldn't expect it to go opposite for any length of time or for any significant part of a crop. if normal relationships are no longer holding it means the markets are broken and not working so information is hard to come by. the cash market will be giving more accurate information.

[charliep]

On the basis, will note the cost of carry (read interest) is higher with higher prices. Similarly, most companies (open market and CWB) have put higher margins in their basis to reflect risk around volatility. A final factor has been the development of hedge funds and others who pushed the futures markets for their own reasons not related to actual business - thus the disconnect cash and futures over certain times.

Will note I have purposefully (likely because I don't know) the questions on derivatives. Futures at least are somewhat open and visible.

[TOM4CWB]

Charlie et al;

The PNW Portland/Seattle basis is $2/bu OVER the futures... and has been in a steady climb for months.

Why is bringing the facts forward on the CWB a rant?

"Customs officials are carrying out further inquiries into allegations of under valuation..."

Another CWB give away?


http://www.sundaytimes.lk/081116/News/sundaytimesnews_05.html

"Customs seize Prima wheat and vessel

An alleged false customs declaration by the shipping agent of Prima flour company may lead to the forfeiture of Rs. 3.2 billion worth of wheat and the seizure of the vessel that carried the cargo to Trincomalee.

According to a customs inquiry, the government would have suffered a loss of more than Rs. 200 million, if the cargo had been cleared. The vessel and the wheat for Prima Ceylon Ltd, the biggest flour producer in Sri Lanka, were seized by the Customs at the Trincomalee harbour pending investigations.
Documents to clear the consignment shipped by the Canadian Wheat Board to Prima had been submitted before the shipment arrived at the Trincomalee harbour, though the usual practice was that the documents should be handed over after the shipment arrived. The documents were produced two days before the budget in which a cess was imposed on wheat imports.


The controversial cargo at Trincomalee harbour
The ship MV Boreal was carrying 72,000 metric tonnes of wheat, of which some 9,000 metric tonnes were due to be unloaded in a port in Singapore, a port which the ship had passed by on the way to Colombo.

Customs officials said they found that the documents were not in order and ordered the seizure of the entire consignment valued at Rs. 3.2 billion and the ship.

After the detection of the 9,000 mt on the vessel was made, Prima Ltd has issued a certificate that the consignment was being supplied “free of charge’ by Prima Ltd in Singapore to Prima Ceylon Ltd in keeping with an Agreement for Transshipment Services.

Initially, Customs officials attempting to visit the ship for inspection were not permitted by Prima officials in Trincomalee, compelling the officials to obtain a directive from the Government Agent Major General (Retired) Ranjith Silva who provided army and police escort to carry out the inspection. The shipment has been placed under the custody of the Government Agent as the investigations proceed. Major General Silva contacted by The Sunday Times yesterday declined to comment on the matter.

Customs officials are carrying out further inquiries into allegations of under valuation, violation of the import control act and violations of banking regulations. Under customs regulations, the entire consignment could be forfeited and the vessel confiscated for the offence.

Prima Ceylon Ltd General Manager Jay Ong declined to comment. The Sunday Times learns that while the investigations were pending Customs Director General S.A.C.S.W. Jayathilake ordered that the wheat should be unloaded into separate silos and not transferred to any other silos.

However, customs officials said that investigations would be difficult if the wheat was unloaded into silos."

[TOM4CWB]

Charlie,

Futures are Derivatives of actual trade in our grains... and the trade of them clearly are transparent for everyone but the CWB.

Contracts that do not have underlying futures... have big problems right now... with no risk management possible... sellers are at a massive disadvantage when prices plummet.

We can see that Vancouver cash canola is lower than in the spring of the year for instance... and lower right now than in Australia (because of the drought).

So how do we maintain an 'orderly market' when world trade is a shambles... because we cannot even get governments to honour their own laws and enforce contracts duly executed and that are legitimate?

It is easy to steal from a pool... because to the lack of transparency if the thieves are not even exposed!

I hear EDC is even backing out of export insurance (car parts reported yesterday)...

Are we just going to let the whole system collapse around our feet?

Jensend,

It is interesting how 'defensive' you become about discussions that involve the CWB... WHY?

The CWB is the biggest player on the block... why is it offensive to discuss what they do?

[jensend]

don't confuse defensive with amazement that you can link everything to the cwb. i'm sure you can show the cwb is the cause of aids, juvenile delinquency, drug dependence and probably the misery of psoriasis. have a good day!

[TOM4CWB]

jensend;

Very interesting how YOU are the one that refuses to defend your position with a logical argument!