Financialization Killed the Commodity Star

The first music video ever shown by MTV back in 1981 was of course, Video killed the Radio Star, and it was a microcosm of how everything in respect to consumer demands and technology changes or replaces the old with the new over time in nearly every industry.

The commodity market is the same way, and it has progressed from a time when cowboys and ranchers would wrangle their herds to the two great cattle markets in Chicago and Kansas City, and where prices were determined by individual negotiations or by auctions.

The buying and selling of commodities has even changed in scope over just the past 30 years, where images of pit traders (like in the movie Trading Places) would mirror the 19th century 'Stock Markets', only on a much wider scale, and were later to be replaced today by electronic futures markets where anyone with a brokerage account and a couple dollars can speculate on their prices even if they have no skin (commodities to buy or sell) in the game.

Yet perhaps the greatest change to commodity markets came in 1999 when Wall Street bribed Congress into passing the Graham-Leach-Bliley Financial Services Modernization Act, and opened the door to where every market could be fully manipulated, and 'weaponized' through instruments known as derivatives.

Fast forwarding to 2016 and we are perhaps seeing the final days of legitimate trading in the commodity futures markets, as Wall Street manipulation, along with central bank policies, have created an environment where the actual sellers of commodities no longer even want to participate in the markets.

While that is indeed the quoted lament of a living, breathing market participant, it does not refer to what takes place in the stock or - increasingly more often - the bond or FX market. Instead, what Blake Alberts, cited by the WSJ, is furious about are the wild swings in the cattle futures market, which as a result of its recent unprecedented moves, has been dubbed “the meat casino” by traders.

In response, the WSJ writes, the world’s largest futures exchange has refused to list new contracts, leaving ranchers with fewer tools to hedge the $10.9 billion market. The reason is one painfully familiar to traders across all other product segments: a lack of collateral, only in the case of physical cattle it is much worse.

According to the CME Group trading of physical cattle has become so scant that the futures market can’t get the signals it needs to set prices.
While we have long expected market-moving disconnects between a rapidly shrinking collateral base, and an exponentially growing universe of derivatives referencing this shrinking pool of underlying securities, we did not anticipate this would take place in this relatively quiet market.

According to the WSJ, the decision to delay new contract listings is the culmination of alarms raised by the exchange and industry groups this year that problems in the physical marketplace have affected futures—a highly unusual meltdown in a market that has attracted more speculators.

— Zerohedge

The cattle markets aren't the only ones seeing sellers leave the game to sell directly to manufacturers and wholesalers.  Earlier this year several silver producers discussed keeping their mined metals out of the commodity markets due to the incredible amount of shorting and other manipulations which have kept the price from appropriately moving upward.

Keith Neumeyer of First Majestic Silver was one of the first mining CEOs to do this and I applaud his actions. In the latest quarter, First Majestic held back 35% of their production, rather than selling it at deeply discounted paper prices.

Now, Mr. Neumeyer has taken things a step further by suggesting that silver miners should form a semi-cartel and hold back sales of their production in order to break the backs of the paper manipulators. He encourages all miners to hold back silver, pick a month, get together and hold back silver for 30 days, putting out a news release collectively. The goal is to call the bluff of the paper markets, which trade over the entire year of global production in a day. First Majestic itself is a small fish, but imagine the impact if a few of the top producers joined in the effort and physical supplies tightened.

— Gold Stock Bull

Sadly however, this game has a potential cost, and one that Wall Street never seems to analyze in their never-ending pursuit for every last nickel and dime.  By cutting off commodity companies and farming interests from participating in a legitimate market, they opened the door for someone else to buy these properties and resources on the cheap, and over the past decade the entity that has prospered the most from commodity financialization is China.

The American farmer is revered in our culture. He—the mythical American farmer is invariably a man—is in many ways a professional embodiment of values, such as individualism and hard work, that are considered part of the national identity. With their backbreaking work, farmers settled the growing West through the 1862 Homestead Act. It’s not a stretch to say that farmers, riding the wave of manifest destiny, built the United States. Today, they continue to feed it.

But the days when anyone could pick up a pitchfork and become a farmer are long gone. Farmland can cost an average of $4,000 per acre in the United States, and most farms have roughly 1,100 acres. Some of the biggest crops, such as corn and alfalfa, aren’t even grown to feed people. Thanks to globalization, food grown in the Midwest might end up feeding someone half a world away.

In an effort to cut out the middleman, foreign buyers are trying to circumvent the American farmer. Instead of buying food from farmers who work their own land, some foreign buyers want to own and operate these American farms themselves—as well as the livestock barns and slaughterhouses. Between the 2013 purchase of pork processor Smithfield by a Chinese holding company and ChemChina’s pending $43 billion offer for the agrichemical company Syngenta, the world’s most populous country is making a major play to buy the proverbial American farm—and U.S. politicians are lending a helping hand.


Wall Street is infamous for continuously killing the golden gooses for a quick buck at the expense of long-term reasonable returns and a stable market system.  And besides the destruction that financialization has caused to all manners of retirement funds, pensions, the bond markets, and of course housing, it appears now that their locust-like behavior has also destroyed the commodity markets, and has opened the door for foreigners to come in and gladly fill the gap created from their greed and corruption.