From the November 01, 2010 issue of Futures Magazine • Subscribe!

A grainy view of specs

imageAfter corn futures went limit up in early October, there was a plethora of stories about why. Commodity prices were out of whack, largely attributed to an impending "global food crisis" highlighted in the most recent U.S. Department of Agriculture’s (USDA) crop report that warned of "dramatically" lower supplies (see "Grains: drought and demand," by Assistant Editor Michael McFarlin).

The reason for lower supplies? Mainly bad weather. The USDA predicted corn stocks would be at their lowest levels since the mid-1990s.

This was a report pretty much stating the obvious: too hot in America’s Midwest, too dry in Russia and Brazil, and too wet in Canada. Literally a "perfect storm" of weather problems to cause a global blight. Of course, there were other factors such as bad government policy, higher global demand and even questionable farming policies.

But in a survey done by the Financial Times with Harris, some respondents felt weather had little to do with higher grain prices; nope, speculators were the cause. That's not to say all countries surveyed blamed the speculator: the United Kingdom and United States saw bad weather, government policies and increased demand as the key causes for the higher commodity prices. But France, Spain and Germany had a different view.

Close to 50% of those polled in France blamed speculators for higher commodity prices. Perhaps on the heels of the Jérôme Kerviel trial, traders — rogue or not — were on the minds of our French friends. And though the survey was done prior to Kerviel’s sentencing, the story was everywhere. To understand the French anger, Kerviel was sentenced to three years in prison and told to repay the €4.9 billion ($6.8 billion) he lost for his employer Société Générale. The French views on speculators were seconded by 36% of Spanish and 35% of German respondents.

This "mob mentality" against "le spec" particularly contrasts with our interview subject this month. Long-time grain trader Neal Kottke has a global and very reasoned point of view on all topics (see "Kottke: A lifetime in grain markets," by Managing Editor Dan Collins). His experience in trading cash, futures and options markets seeds his view: price cures all. His viewpoint is refreshing in that nothing seems to faze him. Dan interviewed him on the day that corn went limit up. He may not be trading real-time anymore, but he runs a firm that does, and sitting for an hour interview during a market’s 13% price rise could ruffle the most stoic trader. Not Kottke.

Nor could he be baited on touchy subjects. Like a true trader, he told Dan, "The long-only feature has been over emphasized and is not dynamic. It comes, it is absorbed by the markets and then it is rolled."

And his attitude about credit default swaps (CDS) going onto futures clearinghouses was pure businessman who has run a clearinghouse (and firm). When Dan asked about the outcry by brokers on the idea of commingling CDS margins with the futures and options product margins, Kottke responded, "I [would want to] understand [the clearinghouse’s] model for margining, pricing and maintaining financial integrity. If I understood that and agreed to it, then I would rather go with the business model that works."

And the beef with speculators on markets: "As usual, scapegoats were sought and speculators always join that list. To that extent, too much success in our industry could be our undoing."

Especially in France.

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