how agricultural economics saved futures markets: an ......“the task of a leader is to get his...
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College of Agriculture and Life Sciences
How Agricultural Economics Saved Futures Markets: An Untold Saved Futures Markets: An Untold Story of Leadership
Scott H. Irwin
College of Agriculture and Life Sciences
“The task of a leader is to get his people from where they are to where they have not been ”where they are…to where they have not been.
---Henry Kissinger
“Innovation distinguishes between a leader and a follower.”
St J b---Steven Jobs
College of Agriculture and Life Sciences
1. Show how three relatively obscure agricultural economists played a leading role in p y gchanging the perception of futures markets from mere gambling dens to invaluable market institutions
2. Draw parallels to the current d b t b t th l f debate about the role of speculation in commodity markets
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College of Agriculture and Life Sciences May 1st
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Seller or Buyer or 3.00 “Short”“Long”
College of Agriculture and Life Sciences June 1st
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College of Agriculture and Life Sciences June 1st
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College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
Source: Futures Industry Association
College of Agriculture and Life Sciences
Source: Futures Industry Association
College of Agriculture and Life Sciences
Source: Futures Industry Association
College of Agriculture and Life Sciences
The Populist Era: 1885 - 1915
College of Agriculture and Life Sciences
‘‘a den of speculators whose operations [were]
Populist Era Views on Futures Markets*
• ‘‘a den of speculators whose operations [were]... pernicious’’ (Hume, 1888)
• ‘‘an engine of wrong and oppression’’ (Committee g g pp (on Agriculture, 1892)
• capable of introducing ‘‘gradual misery and ruin… ll l ’’(S ith 1893)upon all classes’’(Smith, 1893)
• “wind wheat” and “wind dealing” ‘‘enabled people to sell what they did not possess’’ (Hooker 1901) se at t ey d d ot possess ( oo e 90 )
• moneyed interests ‘‘juggl[ing] quotations’’ and creating and ‘‘tak[ing] advantage of fluctuations’’ (B k 1913)(Buck, 1913)
*as quoted in Jacks (2007)
College of Agriculture and Life Sciences
Source: Santos (2011)
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
Major 19th and 20th Century Episodes of Attacks on Commodity Futures Markets
Episode DateThe Grange lobbies for a bill defining all futures trading as gambling
1874trading as gamblingWashburn bill introduced into U.S. Congress to levy 10% tax on futures trades
1892
Futures trading banned in Germany 1897Futures trading banned in Germany 1897Trading in options on commodity futures banned in U.S.
1936
Bills introduced into U S Congress banning 1955Bills introduced into U.S. Congress banning onion and potato futures trading
1955
Onion futures trading banned in U.S. 1958
College of Agriculture and Life Sciences
Meet Our Three Heroes
College of Agriculture and Life Sciences
Holbrook Working (1895-1985)
Born in Colorado in 1895
PhD from Wisconsin in 1921
Joined faculty of Food R h I tit t t Research Institute at Stanford in 1925
Retired in 1960 Retired in 1960
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
“Th W ki “The Working Curve”Curve
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
F t i t d t b hi hl“Futures prices tend to be highly reliable estimates of what should be expected on the basis of contemporarily available p yinformation concerning present and probable future demand and supply; price changes are mainly appropriate market responses to changes inmarket responses to changes in information on supply and demand prospects.”
College of Agriculture and Life Sciences
F t i t d t b hi hl“Futures prices tend to be highly reliable estimates of what should be expected on the basis of contemporarily available “Random p yinformation concerning present and probable future demand and supply; price changes are mainly appropriate market responses to changes in
Walk”market responses to changes in information on supply and demand prospects.”
College of Agriculture and Life Sciences
Roger W. Gray (1921-1996)
Born in Illinois
PhD from Minnesota in 1953
Joined faculty of Food yResearch Institute at Stanford in 1954
Retired in 1985
College of Agriculture and Life Sciences
The Onion Futures Controversy
College of Agriculture and Life Sciences
The Onion Futures Controversy
“Speculative activity in the futures markets causes such severe and unwarranted fluctuations in the price of cash onions as to require complete prohibition of onion futures trading in order to prohibition of onion futures trading in order to assure the orderly flow of onions in interstate commerce.”
---U.S. Senate Report No. 1631, May 6, 1958
College of Agriculture and Life Sciences
The Onion Futures ActAugust 28 1958August 28, 1958
College of Agriculture and Life Sciences
The Onion Futures ActAugust 28 1958August 28, 1958
College of Agriculture and Life Sciences
The Onion Futures ActAugust 28 1958August 28, 1958
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
Thomas A. Hieronymus(1919 2001)(1919-2001)
Born in Illinois Born in Illinois
PhD from Illinois in 1949
Joined faculty of University of Joined faculty of University of Illinois in 1949
Retired in 1981 Retired in 1981
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
““For many years the anti-futures trading arguments t d d t il th t tended to prevail so that speculation was treated as a necessary evil that accompanied the desirable accompanied the desirable hedging process. During the last decade the balance appears to have shifted so that appears to have shifted so that a favorable view is more widely held. It is doubtful that the favorable view is yet in the ymajority but it is generally held by students of futures markets and increasingly held by members of Congress and the CFTC.” (pp. 298)
College of Agriculture and Life Sciences
““For many years the anti-futures trading arguments t d d t il th t
3.0
ons
Annual U.S. Futures Trading Volume, 1955-2010
tended to prevail so that speculation was treated as a necessary evil that accompanied the desirable
2.5
Billi
o
accompanied the desirable hedging process. During the last decade the balance appears to have shifted so that 1 5
2.0
appears to have shifted so that a favorable view is more widely held. It is doubtful that the favorable view is yet in the
1.0
1.5
ymajority but it is generally held by students of futures markets and increasingly held by
0.5
members of Congress and the CFTC.” (pp. 298)
0.01955 1965 1975 1985 1995 2005
College of Agriculture and Life Sciences
Investment in Commodity Index Funds, 2000-2009
250
300Reuters Jeffries/CRB Commodity Price
Index, January 2000-February 2009500
100
150
200
250
stm
ent (
bil.
$)
300
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an. 1
982
= 10
0)
0
50
100
2000 2002 2004 2006 2008
Inve
s
S B l100
200
Inde
x (J
a
Source: BarclaysJan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
College of Agriculture and Life Sciences
Investment in Commodity Index Funds, 2000-2009
250
300Reuters Jeffries/CRB Commodity Price
Index, January 2000-February 2009500
100
150
200
250
stm
ent (
bil.
$)
300
400
an. 1
982
= 10
0)
0
50
100
2000 2002 2004 2006 2008
Inve
s
S B l100
200
Inde
x (J
a
Source: BarclaysJan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08
College of Agriculture and Life Sciences
“Passive speculators are an invasive species that will continue to damage the markets until they are eradicatedcontinue to damage the markets until they are eradicated. The CFTC must address the issue of passive speculation; it will not go away on its own. When passive speculators are li i t d f th k t th t bleliminated from the markets, then most consumable
commodities derivatives markets will no longer be excessively speculative, and their intended functions will be restored.”
Michael W. Masters, Testimony before the Commodity Futures Trading Commission (CFTC) March 25 2010(CFTC), March 25, 2010
College of Agriculture and Life Sciences
“This Report finds that there is significant and persuasive evidence to conclude that these evidence to conclude that these commodity index traders, in the aggregate, were one of the major causes of “unwarranted major causes of unwarranted changes”—here, increases—in the price of wheat futures contracts relative to the price of wheat in the cash market… Accordingly, the Report finds that the activities of commodity index
d i h traders, in the aggregate, constituted “excessive speculation” in the wheat market under the Commodity market under the Commodity Exchange Act.”
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
CBOT Wheat Futures Prices and Index Trader Net Long Positions, January 2004-September 2009
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1400250Index Trader Open Interest (left scale)
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Nearby Contract Price (right scale)
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College of Agriculture and Life Sciences
Relationship between CBOT Wheat Price Changes and Index Trader Net Long Positions, June 2006-
D b 2009December 2009y = ‐0.000005x ‐0.1123
R² = 0.001115%
20%
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rice, W
eek t+1
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ge in
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% Chang
‐12,000 ‐9,000 ‐6,000 ‐3,000 0 3,000 6,000 9,000 12,000
Change in Net Position, Week t
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
College of Agriculture and Life Sciences
The Dodd-Frank ActJuly 21 2010July 21, 2010
College of Agriculture and Life Sciences
The A. Bisporigera Prize(aka ‘The Destroying Angel’) ( y g g )
College of Agriculture and Life Sciences
Th k Y !!Thank You!!