Can any one with experience working on a trading desk answer this question what is the real role of the commodity exchange?
Can any one who has experience working on a trading desk answer this question what is the real role of the commodity exchange?
I am confused here why would any commodity producer (oil, gas, sugar) would sell his product in the exchange (ICE, Chicago mercantile exchange, new York mercantile exchange) specially that the spot market is way high than the paper market (sugar for example)
Those big commodity trading houses (Cargill, Louis dreyfus, glencore) I thought they are just doing PAPER trading but NO they are doing physical as well. But why selling in the exchange or what is the role of the exchange? For example I called a sugar company asking for 10 metric tons and they quoted the price at 820 while in London it is traded at 570. if that’s the case who is the company that is going to sell a contract of sugar in the market if it is in the Canadian market at 1200 spot and in the American market at 1280. Can not they just sell that directly in the market? In other words, coming the delivery month, there is going to be about 12000 mt standing for delivery. Who is the stupid who sold that in the exchange for 570 while he can sell them in the physical spot market for double the price? The same thing for oil, cotton , cocoa and so on
Answered it for you on the other thread.
One thing I might expound upon about sugar (because you brought up the question couldn't they just buy Canandian sugar?) is that American end users, like Hershey's for example, are forbidden by law from purchasing non-US sugar. Even though sugar is significantly cheaper in Canada and Mexico, American confectioners cannot buy it. They must buy the inflated US sugar.
I'll save you the trouble of searching the other thread and just copy and past my answer here:
Assuming this is a serious question, the answer is two-fold:
First, the exchange guarantees payment. In other words, a producer could enter into a contract with a user on his own and have no recourse against the user (aside from a lengthy legal battle) if the user renegs on the contract. The exchanges eliminate that possibility by guaranteeing payment to the producers (ultimately through the FCM's but that a whole other topic). Short answer: exchanges offer set quality and contract sizes and they guarantee payment to both parties.
Second, sugar is a bad example and it's probably just dumb luck that you chose sugar and didn't know about this. There are actually two kinds of sugar traded. US sugar and World sugar. The US sugar lobby was and is extremely powerful and a long time ago lobbied the government to permanently inflate the price of US sugar so US sugar producers wouldn't go out of business or have to compete with 3rd world sugar producers on price. It's basically bullshit but it is what it is. So getting a quote on US sugar is going to be quite a bit higher than a quote on sugar in London or anywhere else in the world. I'm assuming you cited sugar out of pure coincidence, so now you know. But the rest of the exchange-traded commodities markets are really pretty efficient.
I have more than 3 years experience in the sugar market. Even if you take the 16 cent Tariff, you will still end up with 960 per MT compared to 570 in London.
Second I doubt that there is a law forcing us confectioneries to buy us sugar because the USA is net importer of sugar and that law would be unconstitutional
Nothing that would explain the real market. I can not hedge jet fuel by longing Brent oil contract. No relation and does not make any sense.
You can't make this stuff up:
http://blog.american.com/2012/02/u-s-sugar-policy-cost-american-consume…
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