There seems to be a widespread distrust, though, in the futures market, and much of the blame falls on the speculators and the algorithmic trading systems that creates this volatility. Do you think this is justified, and is it unfair to the hedgers to actually have these speculators in their trading? Well I think there's nothing wrong with being a speculator because they're the ones who really think about where things are going. They're not the same as, Okay, someone who is managing an oil facility and storing oil, is comes in as a hedger. I'm looking at this oil that I've got there and I'm worried I'm gonna sell it in another month, but what's the price gonna do in between? That's a hedger. The speculator has a different mentality. The speculator may be thinking about international politics and thinking about technology changing and thinking that, you know, this oil price isn't gonna hold. That's because the speculator just has an intellectual curiosity about markets and is thinking broadly on a broad plane and he may actually have wisdom to see that there's something wrong with the price. You want that guy in there to allow that expression, that opinion to be expressed in the market. So I think there's nothing wrong with being a speculator. I think it's a noble profession. So why are there prejudice against them? It goes, you know, I think it's largely because people, most people have not had an economics course and they have not read Adam Smith, his 1776 book "The Wealth of Nations" that talked about prices as allocators of scarce resources. They haven't thought about that, and they haven't thought about how one could reduce risks through trades. That's hedging. What do they do? The most natural comparison for the typical person is with gambling because they do that. Surveys have shown that most people gamble at least a little. You've gone to the casino, right? If you want to admit that here. So that's their personal experience, so it looks a lot like gambling. But you have to make a clear distinction between speculation and gambling. Gambling is an entertainment industry. They are trying to get people looking for fun, and they're putting them in an environment that they enjoy. Speculators, they may have a gambling impulse, but on top of that, the speculators that I think of as important are those who think as intellectuals about big-picture drivers of prices, and then they think that this price is wrong today, I can't prove it, but I strongly suspect it's wrong, and I'm just gonna take a position against it, even though I'm not hedging because I don't have any reason. I'm not storing something, I'm not running a business that's vulnerable, I'm just in it because I'm interested in where the market is going. Now some people doubt that speculators do anything good, but I think that they must, because if there weren't speculators, I think the markets would be even crazier than they are because there would be nothing tying them down accurately. Now this is wheat futures. Now, this is number two Soft Red Winter wheat, or number one Soft Red Winter – oh, number one, it's a different grade of quality at a three cent premium. And the pricing is in cents per bushel. The tick size is one-eighth cents per bushel and you're buying a thousand bushels, that's a $1.25 for a contract. Is that all understood? We have of winter wheat and summer wheat. Soft Red Winter, you don't know these things because you don't, you're not a farmer, maybe you know if you're a good cook. Soft Red Winter wheat, they make it into flour and it's called cake flour. It's good for cakes and biscuits and cookies, and also breakfast cereals like to use Soft Red Winter wheat. Not so good for bread and other baked goods. They also sell something called all-purpose flour which I believe is a mix of different kinds of wheat. But Winter, why do they call it Winter wheat? That's because you plant it in the fall and it lies dormant over the winter and it's harvested typically in May depending on your climate. So it's a springtime crop. So if you cared to know about all these wheat facts, but I looked up the futures curve for Soft Red Winter wheat for March 8, 2016. And it shows this contango again, but not everywhere. Now actually, in other years, it's shown more of a variation. But there's a tendency for a lot of commodities that have a crop once a year in a fairly well-defined time for the futures price to go into backwardation at the time of the crop. And you can see it, it's roughly May. So in May of 2016, it's not going into backwardation at all. May of 2017, it's slowing down a little bit. I think the prices are kind of low. A lot of commodities prices are low at this time in the new normal, but you can see it's going down quite a bit in May of 2018. But all that reflects is that they just had a harvest, they just, you know the harvest is coming in then. They're gonna dump it on the spot market and the price is going to fall. Just before the harvest, a lot of people are running out, the warehouses are empty. You know, there might even be a surprise, they might have gotten emptied out faster than we thought and there could be a shortage, that would be reflected in futures prices. The futures market makes the shortages less severe because you can see it coming in the futures curve. So if there were a big drop in May of each year, then you'd think uh oh, there's gonna be a shortage, at least the market is predicting that. I better think about it and I better hold off selling some of my wheat now because I don't want that short. It provides what you call price discovery. So, it doesn't look like there is much fear of a shortage of wheat before the next harvest. Well right now just before the harvest, and I've been watching the squirrels in my yard and I feel some sympathy for them because they're tearing up my whole lawn looking for the last acorn that they buried. They're like, it's really a basic business; squirrels are in the same business, storing acorns over the winter. And depending on the acorn crop last year, the squirrels are either in the okay shape or they're starving. Right? This is the tough time of the year to be a squirrel. So, I don't know, if you look at lawns, they're really tearing up the lawns, and I think that's because they're – maybe it's a bad year for squirrels. So, the futures price for acorns in the squirrel land is really high right now. They need a futures market but they're not smart enough to invent something like that.
