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| Taken at the Chicago Board of Trade. |
There's another group of people who have a difficult time deciding whether or not they should undertake a lengthy endeavor: farmers. How do they hedge the risk of planting in April and not knowing the price of corn when they'll be delivering in October? Well, there's always the futures market.
How it works, thanks to a helpful explanation from the Kansas City Board of Trade:
A futures contract is just what it's called - a contract. It is not equity in a stock or commodity. It is a contract - a contract to make or take delivery of a product in the future, at a price set in the present. If you agree in April with your Aunt Sue that you will buy two pounds of tomatoes from her garden for $5, to be delivered to you when they're ripe in July, you and Sue just entered into a futures contract. [snip]
Professionals such as grain merchants, energy firms and portfolio managers use futures and options to reduce the risk to their business associated with volatile prices. For example, a flour miller might use a futures contract to set a price now for wheat that he knows he will need to purchase in the future, rather than face the chance that prices could be even higher when he buys the wheat. Similarly, a natural gas producer might use a futures contract to set a price now for gas he will sell in the future, locking in a profit rather than being exposed to the possibility of lower prices. These types of futures and options users are known as hedgers, and are in the market specifically to reduce risk.One could imagine a futures contract made with employers after a graduate student's candidacy exam, i.e. 2-3 years ahead of graduation: the student agrees to take a position at a specific wage in the future, locking in a somewhat lower wage in exchange for some stability. The employer agrees to "take delivery" of the Ph.D. student, with a knowledge that they won't be subject to spikes in labor costs. If this were to happen on an exchange (anonymized, in some fashion), people could see what the going rate for future chemists were, and whether or not they should attempt to "plant" more chemists.
I doubt that employers would be interested in participating in this sort of system; I assume there will always be plenty of chemists for them to choose from. I'm sure there are other awful flaws in my thinking, and there's no guarantee that there won't be a warehouse full of shrink-wrapped pallets of postdocs down by the docks who are all owned by Goldman Sachs. But there's something to be said for getting some price discovery on a future in chemistry.
One problem with the idea is while one pound of grain is much like the next pound, not every grad student is going to be as good as the next, and it is not always apparent 2-3 years before graduation which ones will be best for the future needs of the company (assuming pharma has a future at this point.) Also, how many undergrads stop working at 100% after being accepted to grad school? Would the same thing happen to a grad student that knew he had a guaranteed job? Any futures contract would have to have a clause to account for the students continued efforts, but how do you quantify that?
ReplyDeleteIt might be easier to set up a futures market than you think. There are already futures markets for election outcomes, economic events,...such as the Iowa Electronic Markets, or The Hollywood Stock Exchange. Why not set up a Ph.D. Stock Exchange?
ReplyDeleteI agree with John - something like this could work if a financial instrument was indexed to the average salary of a PhD, and companies could insure themselves against the risk of a labor price spike, while students could insure themselves against the risk of falling salaries in their chosen field. This would be a lot more feasible than some kind of indentured servitude arrangement involving an individual grad student.
ReplyDeleteI have a friend who received a stipend from a company through the duration of grad school with an understanding that once he got his PhD he would join the company. Of course that was some 15 years ago and I've never seen such arrangement again, but that was pretty much a PhD futures.
ReplyDeleteChemjobber,
ReplyDeleteEep. This represents a fundamental misunderstanding of the structure and function of futures markets. You are not in bad company, many people have (mistakenly) tried to understand futures market as insurance markets, they are not.
Aaron Brown's book Red Blooded Risk (http://www.amazon.com/Red-Blooded-Risk-Secret-History-Street/dp/1118043863) eventually led me to Williams' book (http://www.amazon.com/The-Economic-Function-Futures-Markets/dp/0521389348), where some very fundamental questions (which I didn't have answers to) were finally addressed.
The common narrative of good old fashion farmers in straw hats (which protect them from nightmares about future price fluctuations) always sounded like a fairy tale to me, Williams explains why. It isn't that one cannot use futures contracts to potentially hedge basis risk, but that isn't really the basic function of futures markets. It would be like saying gold markets were invented so that we could protect against price changes in equities.
The idea that futures markets are insurance markets ignores several very basic facts about both types of markets, and fails to explain many of the specific characteristics of futures markets.
Futures markets, combined with spot markets for cash (spot or immediate) delivery together form an implicit loan market. Consider a canonical transaction by a grain miller who purchases spot wheat and *at the same time* goes short a futures contract; what the miller has done is effectively borrow wheat (without going to the bank to get a loan for cash).
Williams' theory of accessibility demand (which builds on Working's storage supply) explains several key features of futures markets, including:
-That contracts are typically divided into a small number of delivery dates per year.
-Futures contracts generally only extend out one year.
-Contracts only exist for commodities than have some variance in yield and demand from expensive processing facilities that have inflexible marginal processing costs.
-There are only a contracts traded for a small number of distinct commodities.
-After discounting capital and storage costs, the spread between prices for contiguous delivery dates is always negative.
-The reason we have futures markets instead of explicit loan markets for commodities is subtle and involves some frozen accidents and the fact specific laws make futures transactions cheaper than explicit loans.
What you are suggesting in your post is an insurance market for employers against wage (with respect to inflation and costs) fluctuations. No such market exists for any such type of labor, why? Wage fluctuation isn't really that variable (somewhat easy to predict that it keeps getting cheaper), quite sticky, and is derivable from other numbers which aren't (things like interest rates, commodity prices and federal employment rates, NIH funding numbers etc.).
Thanks for your expertise, TDW. I know that it was far-fetched; I am thankful for the effort you put into your response.
DeleteAdding reasons why the idea of a futures market doesn't make any sense:
ReplyDelete-laborers are not fungible
-hardly a liquid market (in spite of PhD overproduction)
-employment is (in the most general sense) 'at will' in America.
Thinking about a futures market for people in Total Synthesis? bwahahaha!! Ok, maybe other fields...maybe.
ReplyDeleteSomeone out there will always require a chemist to stitch together biologically relevant molecules. I don't think we'll vanish quite like the Walkman, 8-track tapes, or the steam engine. There might be fewer of us, but never 0.
DeleteEmployers hire and fire at will. There's rarely a need from the employer's perspective to lock in a particular wage since they can slash the wage anytime they want (supply and demand).
ReplyDeleteThe employer has access to the global labor market right now and can pick and choose
from that massive pool.
The value of a commodities contract is tied in part to the energy required to find, refine and bring the commodity to market. That serves as a useful reference point embedded in thermodynamics to guide pricing. Also all commodities of a particular class are assumed equal in quality (http://en.wikipedia.org/wiki/Commodity).
Singers and football players get contracts because their abilities are considered UNIQUE, not fungible. Their skills match the time and place perfectly.
A better idea would be to have career insurance (AFLAC?), like life insurance. This only works if the majority of the participants are employed. Right now at least 50% of all graduating chemists walk right to the unemployment line. The US labor market is intentionally broken. Dow and Pfizer will push the market until chemists live in card-board boxes outside the plant.