Many producers utilize the futures market. As Al said, it’s useful in that the producer can use it to ensure itself a supply of some product it has to have in its processes, and it can protect itself against price uncertainty.
It works on the other side as well. If a farmer, for example, believes he is likely to produce “X” bushels of corn, he might sell into the futures market to “lock in” a price with which he feels comfortable.
The producer or user might “win” or “lose” in doing this, but it’s a calculated risk, presumably based on a knowledge of just how far things are likely to swing and the degree to which he can absorb those swings in the economics of his business.
Entirely different are those who produce nothing, yet buy and sell and do nothing more. That’s a “knowledgeable” form of gambling that is neither good nor bad if one can afford taking the risk. That’s “speculation”. It’s a bit like card playing by a player who really understands his game. Luck is involved,but it’s not entirely luck.
Another variant of an entirely different sort, is the “speculator” who isn’t really a speculator, but a “manipulator”; one who has sufficient economic power, either alone or in combination with others, to buy or sell in such quantities that his activity itself can make the prices go up or down. Such manipulators can, and do, buy to create an artificially high price, then suddenly “dump” what they have bought, and sometimes more than they have bought, in order to artificially depress the price of the commodity and/or to make the fall happen faster than it other would have. It also can work in reverse; depress, buy, elevate then sell.
But supply and demand aren’t really quite effective in preventing manipulation, because ultimate users can’t just stop their processes. A poultry producer can’t just “do without grain” because the price is, in its judgment “too high”, because it has a lot of poultry “in the pipeline” that have to be fed regardless of the price. Auto manufacturers aren’t going to just let a year go by without producing automobiles because, e.g., they think the price of steel is “too high”. People also have to eat and they have to travel. On the production side, the farmer with a crop in the field isn’t going to just plow it under if the price plummets because he has already invested in the crop and will produce it anyway, even at a loss because his loss will be greater if he doesn’t. So, within very wide margins, supply and demand don’t really regulate speculator activity in the short run. Over time, it would, but even then, only to a degree. People would still buy oil at $300 because they would have a limited ability to do without it. It’s not even gambling, except in the sense that a card player who can determine the cards in the deck as well as the order of dealing is “gambling”.
I believe much of the problem we are now seeing with wild gyrations in the prices of all sorts of things; commodities, financial instruments, stocks, currencies is due to manipulators. Now and then, the actions of manipulators get exposed or they simply disclose themselves because they’re proud of themselves for making a lot of money doing it. George Soros comes immediately to mind (Ribozyme will doubtless scan for Soros’ name and come into this thread to defend him.) Soros himself said the following about his “breaking” the British pound.
“When I sold sterling short in 1992, the Bank of England was on the other side of my transactions, and I was in effect taking money out of the pockets of British taxpayers. But if I had tried to take social consequences into account, it would have thrown off my risk-reward calculation, and my profits would have been reduced.”
He claims that if he had not done so, someone else would have. Maybe so, maybe not. Soros as an individual aside, (and he’s not the topic) this sort of thing seems to be getting increasingly pervasive as individuals or institutions of enormous and increasing wealth, doubtless helped by electronic means that allow widespread, largely anonymous activity in a global network, execute sudden, and massive intervention into markets. Anyone who remembers the conspiracy of oil sheiks and Bunker Hunt in the silver market years ago could hardly doubt the phenomenon.
There are those who believe the current high prices of oil and food and the low price of the dollar are, to a significant degree, both due to speculation.
I’m not sure what the answer is to this, if there is an answer. Governments seem particularly inept when it comes to intervening in markets to achieve social objectives, or even when it comes to knowing when manipulation is happening.