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Think the oil market is volatile? Try onions.

It has been suggested that the recent volatility in oil prices is the result of speculation.  But University of Michigan economist Mark Perry suggests that we consider how changes in the price of oil compare to those in the price of onions.  Significantly, onions are the only commodity for which futures trading is prohibited by law.
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Discussions - 3 Comments

Futures trading does diminish huge price swings. Still that doesn't mean you can't have a 35 cent top to bottom swing, or a 26 cent swing like you had wednesday, that doesn't have to be pure supply and demand but it can be uncertainty or confidence about supply and demand. Supply and Demand is shall we say somewhat Meta, or as Keynes would say math infused with animal spirits. Basically on Wednesday you had three things happen in RBOB, 1) there was a new reg (voluntarily)implemented which increased margin requirements, 2) the dollar spiked, 3) fear about flooding on the Miss was discounted. These were 3 material events on the same day.

So I have no real hatred for speculators, I kind of think Mr. UM Economist should become one. I think if he was a speculator, his chart selection would improve...drastically. Which is basically what lead me to respect Keynes.

Look I have a neat model that predicts gas prices at the pump off the Foward contract, and because of the time lag, I can pretend to be a fortune teller. Lets just say his so called variation and standard deviation smells like complete bullshit to me. RBOB has contracts out to May of 2014, current price target 2.5771 +10 cents profit+18.4 fed tax+28 ohio tax x 1.05 = $3.29 at the pump in Ohio in late April of 2014, at current rates... but of course the VIX in foward contracts is super low on a daily basis and averaged over the lenght of the contract. If you look at RBOB June on its scary days it hit 60. Naturally as the contract nears expiration the VIX increases. So it should be clear why I hate his graphs. He is just not a serious speculator.

Also Onions? Are we serious, do serious folks with teaching positions at Michigan write these sorts of things to make my head explode?

"The bottom chart above shows the monthly percentage changes in oil prices and onions prices. Between 2000 and 2011, onion prices have been 7 times more volatile than oil prices, based on the difference in the standard deviations of monthly price changes."

Apparently the answer is yes.

Between 2000 and 2011 onion prices have not been more volatile than oil prices. (actually they might have been globally where Onions are potentially a giffen good, Iraq, India, pakistan).

But since the article gives one the impression that we are talking about US prices, and not markets where Onions are formally traded as Commodities (India, where volatility is high, but still not as high as Oil?)

Look I can't figure out what he did, and I don't have an onion trade journal on hand...but I have NASS USDA info.

So first of all, What is an Onion?
You have summer nonstorage onions.

"But Onion prices Soared 400% between October 2006 and April 2007"

USDA Summer nonstorage onions did not...or to be honest USDA reports yearly values and the price of 2006 summer nonstorage Onions was $18.10/cwt while the 2007 summer nonstorage Onions was $17.00/cwt.

Potentially retail consumers like McDonalds might prefer summer nonstorage onions year round and might be willing to pay a really high premium for them because the cost added to an Angus burger is negligible. So when these onions which by contract cannot be stored ( an element which differs from RBOB gasoline FYI) are out of season...from say October to April...400% price jump, plausible. Lets assume he paid for his data, and was an all around idiot.

It gets worse..." only to crash 96% by March 2008 on overproduction and then rebound 300% by this past April." Wow... If someone tells me a commodity has crashed 96%, I immediately tell them to pound salt and serve satan.

Overproduction? (I suppose that is an analytic truism when price declines) but lets use number in 2007 production of summer non-storage onions was 10,999,000 CWT in 2008 production of summer non-storage onions DECLINED to 10,344,000 CWT, the price also fell as expected from $17.00 cwt to $15.50 cwt.

Is he trying to say that Onions fell to .68 cents a cwt, from a basis of $17? Does he understand that a 300% rebound from a basis of .68 cents is $2.72 a CWT?

It is so idiotic that it annoys me, also technically by year averages the price of oil increased in 2008 vs. 2007, from average of $64.2 in 2007 to 91.48 in 2008, but we know the drop in 2008 was from 126 average in July to 32.94 in December 2008...that is a 74% drop....I am actually guessing that if someone had locked in a contract for summer non-storage onions, the price rose as usual to reflect the difficulties of meeting contract specifications.

Also to be clear, but I am sure McDonalds already knows this, you can find a lawyer and draw up a contract for onions that meet your quality specifications...you will probably pay more for summer nonstorage onions outside of the appropriate window...

There are also other types of onions tracked by the USDA, but I am pretty sure Onion volatility is oversold. Then again I don't doubt that folks pay serious premiums for out of season high quality fresh vegetable contracts. For example, I know that both McDonalds and Papa John's pay large premiums for out of season produce that is homogeneous in quality to in season produce.

Hey there Moser, not all commodities are created equal, and I would kind of like to know what contract Onions he was talking about. If he mixed all Onions together he doesn't know what sort of hassle lawyers would give him!

I am actually not 100% on the idea that Onions could be traded more efficiently via futures, as opposed to output or requirement contracts, it isn't a bright idea to prohibit the experiment, albeit perhaps at some point in the past it was because of transportation and trust issues. The farmers have less protection on the specs, the contracts are rigid, and the middle men(old school speculators) can be scoundrels.

Costa Rica for example wants to prohibit Cocoa trading because its farmers feel ripped off by moisture specs on the Cocoa contracts, and in this case the middle men are often times large American Ag companies.

You guys don't dig down enough. I am seriously troubled by the math sense and feel of these Phd/MBA types. He probably vindicates speculators unintentionally.

If you read that article and didn't get pissed off you failed.

onions make me burp

Onions got meVix(ed) out.

Definition of Vexed: To be annoyed, frustrated or worried.
Definition of Vixed: Same animal spirits as Vexed, but with all the calming influence, having to calculate the implied volatility of a contract using the Black Scholes equation can give.

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