futures question

C

congoboy

The futures market (f) for commodity A is trading $5.00 for delivery in time t+2 (Af,2). The market for A in location y in time t+2 (Ay,2) is trading at Af,2 - $.50.

With the cost of moving the commodity, including normal profit, from market z to market y being $.25, what is the basis for Az,2 for trade to take place between market z and y for delivery in t+2? (i.e., commodity flow from z to y)

another one

Assume you put the trade on in A month later, when our contract becomes deliverable in t+1, the basis for location r is trading Af,1 - $.10, location y is Af,1 - $.80, and basis for location z is Af,1 - $.70. The cost of moving A from location y to r is $.60.
Futures price for A is still $5.00. What trade, or trades, would you put on to improve your profit?
 
Well, you're essentially implying that demand from the f market is drawing on supplies in y and z, but y is better postioned to ship to f, enough so that the yA market is pricing yz,4 + spread beyond shipping costs. This means the play for local industrial consumers of yA to hedge their costs by buying yA supply further out, and selling the z-y spread (which is y demand for zA, financed by exposure up the curve in the local stuff).

At the same time demand for yA-f financing is driving speculative directional bets on narrowing y-z spreads by producers (its the same play from both sides of the table, which is why the hedge funds spend all their time raising capital and shorting spreads). It also implies that flow from z to f is a long, or the converse situation, that pressure from f demand will ease, undercutting the Ay market, and easing shipping rates everywhere. This would be the play for yA producers, as they are ramping A production to meet needs in y and f. Since they are implicitly long Ay indefinitely up the curve, they will hedge with the spread play, or either side of it, putting them net long close contracts in the zA market for protection.

Of course, those bastards in z would do anything to see y suffer, always being dead last in any WTO roll call has become a big cultural chip on joe-z's shoulder. So I would look for future G7 investigations of z central banking policies, probably as soon as officials in x decide that A-market driven, Alphabet-wide inflation is beginning to worry voters.

But the play now is clearly to short the f-y and f-z spreads...or simply short the A futures market, which is the same thing.
 
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