"...praised its delicate aroma and relative lack of insect damaged kernels..."
It's quite the amazing tale of large-scale market play with some highly amusing imagery peppered around ;)
Speaking of insect damage (which is really tangential to the article's core subject, for anyone looking at the comments first), it reminds me of the ruckus a while back about the amount of crap (sometimes litteraly) in supermarket spices, of which the best article I can quickly find is NPR's: http://www.npr.org/blogs/thesalt/2013/10/31/242155387/a-spic...
Agreed. Matt Levine is always entertaining and frequently informative (especially the footnotes). I get the sense that he reads lots of courthouse docs.
I am absolutely baffled by the story. What Kraft did doesn't seem morally wrong, doesn't raise red flags from my limited legal sense, and doesn't make intuitive sense from a market forces point of view. They found an arbitrage opportunity, made the futures market more efficient, produced cheaper oreo's and got in trouble with the law. Baffling.
Back when I was a kid, with some friends we played a game where we'd try and come up with nonsensical phrases like "but have you taken into account the quality of venezuelan poultry when predicting Marseille's weather??". If no-one could come up with a plausible chain of logic linking the things together they'd get a point.
In retrospect, this (and your comment), reminds me of Pinky's responses to Brain's "are you pondering what I'm pondering?"
That sounds like an awesome game. You may like the blog macro-man, which is full of similar connect-the-dots stuff [I'm a reader, and have no connection to the author(s)], you may also not like it, but here's a link: http://macro-man.blogspot.com/
I actually don't see why this is a problem. The author's metaphor at the end about Kraft "going across the aisle" seems perfectly plausible. Anyone in a position to buy a product will do their best to negotiate the price down.
Agreed, and I also don't see why it fooled anybody. Wouldn't it be common knowledge in the industry that the CBOT-traded wheat was unsuitable for use by Kraft in their products?
The contract specifies a maximum, but you can mix it with other stuff to make it acceptable. Or it could have been Kraft doing a true hedge. It is really hard to discern precisely why another market participant, even a very large one, is doing something.
It mentions in the end in the footnotes you can mix together high vomitoxin and low vomitoxin wheat to produce the needed amount.
I'm kidding. My dog is gluten-free. Also if you buy
the high-vomitoxin wheat you can blend it with
low-vomitoxin wheat until you get the perfect amount
of vomitoxin. Appetizing, no?
CBOT says wheat is deliverable if it contains up to 4ppm. That doesn't necessarily imply that all CBOT wheat == 4ppm vomitoxin. The answer though, would be to blend it with more expensive wheat, or to clean it with sorting machines, which they do anyway.
"This raises an important question, which is, who was using that wheat that the FDA considers unfit for human consumption? I worry that my dog is eating a lot of vomitoxin."
From Wikipedia:
Vomitoxin is not a known carcinogen as with aflatoxin. Large amounts of grain with vomitoxin would have to be consumed to pose a health risk to humans.
Companion animals: Dogs and cats are restricted to 5 ppm and of grains and grain byproducts and the grains are not to exceed 40% percent of the diet.
Simple answer, buy the more expensive dog food. I spend roughly $50/50lb per bag of 0-grain feed that I give my dog. This lasts 2-3 months for a 40-50 lb dog.
Completely OT, but holy $#!+ that's cheap! I pay $2.50 a lb (GBP45 for a 12kg bag) for dog food that is only 20% meat / meat derivatives, and includes grain. It's far from the most expensive but it's the best I have found at that price.
Reminds me of Milo Minderbinder and the Maltese eggs from "Catch 22" [1]
"But Yossarian still didn't understand either how Milo could buy eggs in Malta for seven cents apiece and sell them at a profit in Pianosa for five cents."
... later ...
"Milo chortled proudly. "I don't buy eggs from Malta," he confessed... "I buy them in Sicily at one cent apiece and transfer them to Malta secretly at four and a half cents apiece in order to get the price of eggs up to seven cents when people come to Malta looking for them."
"Then you do make a profit for yourself," Yossarian declared.
"Of course I do. But it all goes to the syndicate. And everybody has a share. Don't you understand? It's exactly what happens with those plum tomatoes I sell to Colonel Cathcart."
"Buy," Yossarian corrected him. "You don't sell plum tomatoes to Colonel Cathcart and Colonel Korn. You buy plum tomatoes from them."
"No, sell," Milo corrected Yossarian. "I distribute my plum tomatoes in markets all over Pianosa under an assumed name so that Colonel Cathcart and Colonel Korn can buy them up from me under their assumed names at four cents apiece and sell them back to me the next day at five cents apiece. They make a profit of one cent apiece, I make a profit of three and a half cents apiece, and everybody comes out ahead."
General population easily dismisses food processed and prepared by large corporations. Vomitoxin, feces, infestation, insect damaged kernels. All bad. People want natural unprocessed food...
I was born and raised in Eastern Europe. Thanks to complete failure of socialism, there was no large functioning food industry. We had natural food back then, chicken raised by Grandma, wheat she sow herself, fresh eggs every day. And now the surprise: eggs were dirty, wheat was damaged by insects, meat was processed with dirty hands. Yup, all natural and all with vomitoxin levels exceeding any today's standards likely. Salmonella poisoning was pretty common. Hey, but it's all good because... no one checked the levels of x, no one tested for salmonella, etc.
The modern food that guarantees some standard is not so bad! At least we know what it has and we can work on reducing it.
But that is a false dichotomy. There are lots of farms in the US that grow their products naturally and without processing. They don't have increased risk of diseases (probably just the opposite since they aren't keeping their animals packed inside enclosed spaces and pumping them full of antibiotics), and the food tastes amazing.
I'm not talking about the word "all natural" as it is used in labeling food. Yes, you're absolutely right: that one means nothing.
I'm using "naturally" to describe conditions that are as close as possible to the animal's natural lifestyle. Chickens that roam outdoors in open spaces, cows that are fed their natural diet (as opposed to processed foods), things like that.
>>Sure, the poultry raised there is healthier, but the risk of Salmonella in eggs is probably the same, or even higher.
Not really. Those farms are under the same regulations as factory farms. There isn't a reason why the risk of salmonella should be higher.
I was raised in communist Europe too (and still live there, fortunately communism died:)). The food was bad, but for different reasons than now. Now food is very cheap compared to the food during communism, even in absolute terms, and people got more wealthy as well. And food is cheap mainly because there's a price/quality trade-off that just wasn't there. You can get great food now, and it's not much more expansive than food during communism was, but nobody buys it, because you can also buy stuff that seems OK and costs 70% less.
Back then there was "a butter", or "a pig meat" and you bought it. No point in having 2 different butters, right? Same with most of the stuff. If particular factory happened to make a good butter - you eat good butter, if you could buy it at all - that is.
And then there was secondary market - more important than the shops. People made stuff for themselves and family/friends, or for barter. And that food was good, because people did it for themselves mostly. Yes the Salmonella scare, etc - you cook your eggs and there's no problem. The salmonella scandals mostly happened with ice creams, and very few people did icecreams by itself. The cold cuts were a lot better than most of the stuff people buy today (99% meat, not 50% meat like the cheap wędliny of today). And no insane amount of various sugars in everything. Yes there was the problem of no vet control over the meat, but the only reason you could possibly want such control was a parasite, that was very rare anyway (and small farmers with 2 pigs and a cow each wasn't a good einvironment for the parasites to spread). Of course if you had vet friend you took the meat to him/her and gave him a few cold cuts for checking the meat for you. It was a whole secondary (hidden) economy.
Also now food is cheap so you can eat meat and sweets every day. And modern processed food is carefuly designed so you can eat it non-stop and want more. Natural food usually has some secondary tastes that make you stop after a while. The end result is - people eat much less healthy now, despite having more money, and better food available.
Of course widespread alcoholism and lack of modern drugs during communism nullified all the statistic benefits of better diet, except that there was no obesity.
Note that this story isn't really about vomitoxin, or about the permissible amounts of unpleasant stuff, at least not directly.
While that was the lead in, the actual story was about Kraft leveraging the markets, including products they can't use, to get a better price on the stuff they can use.
And FWIW, while the human limit for vomitoxin is 1ppm, it's 5ppm for pet food, and 10ppm for livestock feed.
Can someone help me--who isn't familiar with future trading--understand this article by providing a "layman" explanation? I read this twice and from what I can gather, Kraft bought futures for a different type of grain and as a result, the price for the other type of grain/wheat is reduced? Thanks in advance! (wish I learned a bit more economics)
Some poor bastard worked very hard on that little bit of javascript that intercepts internal anchor links so they don't ugly up the address bar with #footnote ... or exist in history, which is why I'm back here commenting on an article I was trying to read.
The premise of the article, at least at the start, that CBOT contracts are not useful to Kraft because Vomitoxin limits are too high is misleading. The author appears to be ignorant of this fact, but as a farmer I can assure him, and everyone else, that the vast majority of Wheat delivered is far below the Vomi limits attached to contracts in general, and that also does not mean that those contracts are not useful for hedging and/or accepting delivery of wheat with low tolerance of vomi.
The guy doesn't even bother to find out what a basis is.. at least it is good to know he's not a regular on the commodities beat.
Oh I loved reading that. The first time I had heard of vomitoxin was when my wife asked General Mills for the nutritional content of her 50 lb bags of flour, they sent her an assay that included less than 1 part per million of vomitoxin and we just had to look it up.
That said, I would be disappointed if the CFTC won the argument here. It really does seem like Kraft was well within their rights to order as much wheat as they wanted. And by taking delivery they also took all the risk that the market would respond in a way that helped rather than hindered them. My biggest impression was that the traders were pissed off that a food company had pulled one over on them and they hadn't been able to cash in on the change in the spreads. But that isn't really Kraft's fault as far as I am concerned.
36 comments
[ 2.5 ms ] story [ 77.4 ms ] threadIt's quite the amazing tale of large-scale market play with some highly amusing imagery peppered around ;)
Speaking of insect damage (which is really tangential to the article's core subject, for anyone looking at the comments first), it reminds me of the ruckus a while back about the amount of crap (sometimes litteraly) in supermarket spices, of which the best article I can quickly find is NPR's: http://www.npr.org/blogs/thesalt/2013/10/31/242155387/a-spic...
I am absolutely baffled by the story. What Kraft did doesn't seem morally wrong, doesn't raise red flags from my limited legal sense, and doesn't make intuitive sense from a market forces point of view. They found an arbitrage opportunity, made the futures market more efficient, produced cheaper oreo's and got in trouble with the law. Baffling.
In retrospect, this (and your comment), reminds me of Pinky's responses to Brain's "are you pondering what I'm pondering?"
Edit: Here, sorting machines https://encrypted.google.com/search?tbm=isch&q=optical%20sor...
From Wikipedia:
Vomitoxin is not a known carcinogen as with aflatoxin. Large amounts of grain with vomitoxin would have to be consumed to pose a health risk to humans.
Companion animals: Dogs and cats are restricted to 5 ppm and of grains and grain byproducts and the grains are not to exceed 40% percent of the diet.
"But Yossarian still didn't understand either how Milo could buy eggs in Malta for seven cents apiece and sell them at a profit in Pianosa for five cents."
... later ...
"Milo chortled proudly. "I don't buy eggs from Malta," he confessed... "I buy them in Sicily at one cent apiece and transfer them to Malta secretly at four and a half cents apiece in order to get the price of eggs up to seven cents when people come to Malta looking for them."
"Then you do make a profit for yourself," Yossarian declared.
"Of course I do. But it all goes to the syndicate. And everybody has a share. Don't you understand? It's exactly what happens with those plum tomatoes I sell to Colonel Cathcart."
"Buy," Yossarian corrected him. "You don't sell plum tomatoes to Colonel Cathcart and Colonel Korn. You buy plum tomatoes from them."
"No, sell," Milo corrected Yossarian. "I distribute my plum tomatoes in markets all over Pianosa under an assumed name so that Colonel Cathcart and Colonel Korn can buy them up from me under their assumed names at four cents apiece and sell them back to me the next day at five cents apiece. They make a profit of one cent apiece, I make a profit of three and a half cents apiece, and everybody comes out ahead."
[1] http://en.wikipedia.org/wiki/Catch-22
I was born and raised in Eastern Europe. Thanks to complete failure of socialism, there was no large functioning food industry. We had natural food back then, chicken raised by Grandma, wheat she sow herself, fresh eggs every day. And now the surprise: eggs were dirty, wheat was damaged by insects, meat was processed with dirty hands. Yup, all natural and all with vomitoxin levels exceeding any today's standards likely. Salmonella poisoning was pretty common. Hey, but it's all good because... no one checked the levels of x, no one tested for salmonella, etc.
The modern food that guarantees some standard is not so bad! At least we know what it has and we can work on reducing it.
You're buying into the hype
"Naturally" means nothing.
Sure, the poultry raised there is healthier, but the risk of Salmonella in eggs is probably the same, or even higher.
You can also bet they have some rodents going around, insects, fungus, and depending on what you get from there, yes, it's ending up in your food.
Of course I prefer food that wasn't picked/slaughtered as soon as possible (and helped by hormones)
I'm not talking about the word "all natural" as it is used in labeling food. Yes, you're absolutely right: that one means nothing.
I'm using "naturally" to describe conditions that are as close as possible to the animal's natural lifestyle. Chickens that roam outdoors in open spaces, cows that are fed their natural diet (as opposed to processed foods), things like that.
>>Sure, the poultry raised there is healthier, but the risk of Salmonella in eggs is probably the same, or even higher.
Not really. Those farms are under the same regulations as factory farms. There isn't a reason why the risk of salmonella should be higher.
Back then there was "a butter", or "a pig meat" and you bought it. No point in having 2 different butters, right? Same with most of the stuff. If particular factory happened to make a good butter - you eat good butter, if you could buy it at all - that is.
And then there was secondary market - more important than the shops. People made stuff for themselves and family/friends, or for barter. And that food was good, because people did it for themselves mostly. Yes the Salmonella scare, etc - you cook your eggs and there's no problem. The salmonella scandals mostly happened with ice creams, and very few people did icecreams by itself. The cold cuts were a lot better than most of the stuff people buy today (99% meat, not 50% meat like the cheap wędliny of today). And no insane amount of various sugars in everything. Yes there was the problem of no vet control over the meat, but the only reason you could possibly want such control was a parasite, that was very rare anyway (and small farmers with 2 pigs and a cow each wasn't a good einvironment for the parasites to spread). Of course if you had vet friend you took the meat to him/her and gave him a few cold cuts for checking the meat for you. It was a whole secondary (hidden) economy.
Also now food is cheap so you can eat meat and sweets every day. And modern processed food is carefuly designed so you can eat it non-stop and want more. Natural food usually has some secondary tastes that make you stop after a while. The end result is - people eat much less healthy now, despite having more money, and better food available.
Of course widespread alcoholism and lack of modern drugs during communism nullified all the statistic benefits of better diet, except that there was no obesity.
While that was the lead in, the actual story was about Kraft leveraging the markets, including products they can't use, to get a better price on the stuff they can use.
And FWIW, while the human limit for vomitoxin is 1ppm, it's 5ppm for pet food, and 10ppm for livestock feed.
You need to understand normal hedging of futures then this makes a lot more sense.
Commodity Standards and Grades: http://www.usda.gov/wps/portal/usda/usdahome?navid=COMMODITY...
U.S. Standards for Grain: http://www.gipsa.usda.gov/fgis/usstandards.aspx
Wheat (PDF): http://www.gipsa.usda.gov/fgis/standards/810wheat.pdf
Aflatoxin: http://www.gipsa.usda.gov/fgis/publication/broch/b-aflatox.p...
Vomitoxin: http://ars.usda.gov/Main/docs.htm?docid=9765
The guy doesn't even bother to find out what a basis is.. at least it is good to know he's not a regular on the commodities beat.
That said, I would be disappointed if the CFTC won the argument here. It really does seem like Kraft was well within their rights to order as much wheat as they wanted. And by taking delivery they also took all the risk that the market would respond in a way that helped rather than hindered them. My biggest impression was that the traders were pissed off that a food company had pulled one over on them and they hadn't been able to cash in on the change in the spreads. But that isn't really Kraft's fault as far as I am concerned.