Sorry Scott,

I did come off a bit high-handed in my last post.  It was a long week.

Anyway, I believe I now see the conflict in the way you and I view the the history of the commodities future exchange.  Your position that one side bets higher and the other lower is the position of the speculators.  It is not, however, the position of the interested parties, the producers, processors and users.  The farmer sells on the future market in order to get price certainty.  The end-user participates for the same reason.  It allows them to set price and production at a known cost.  The sale of the contract gives the farmer literal seed money.  These interested parties are employing hedges, not speculating.

What we are  facing now is the great influx of institutional investors in the commodities future market over the last few years.  They have moved away from the old dot-com investments, followed by the sub prime mortgage investments into commodities.  I recently read that Chinese demand for petroleum has increased in the past five years by 920 million barrels.  In the same period, Index speculators have added 848 million barrels to their inventory.  The problem with the index speculators is they never have any interest in delivery or sale of the contracts.  They merely rollover the contracts as they expire.  In other words, the traditional speculators buy and sell and sometimes take physical possession, providing liquidity.  The indexers have no concern for supply and demand, or price.  The are are not providing liquidity, they are competing for it.  The prices for the farmers are attractive at the current quotes, but they cannot sell into the market at this point as the grain buyers cannot afford to purchase at the prices the index speculators have driven the market to.  A number of witnesses at the House Agriculture Committee hearing pointed out that the futures markets were created to help provide price discovery and risk management.

As I noted before, commodities is not something I am really comfortable in investing in on my own.  I am basing much of what I present on the testimony of Michael Masters before the committee.  You really should read his testimony, it is pretty fascinating.