Markets

46 Million Tons of Apples a Day Keeps the Doctor Away

Crazy commodity trading in China may actually reflect the wisdom of crowds.

Them apples.

Photographer: Stephen Shaver/Bloomberg

The company that makes your iPhones isn’t the only Apple that matters on global markets. Have a look what’s happening in China. 

Trading volume in the apple futures that launched on the Zhengzhou Commodity Exchange in December has been soaring in recent months. On Tuesday alone, 4.6 million contracts changed hands — representing 46 million metric tons of apples, or about half the world’s entire annual crop.

Overripe

Tuesday's apple trading volume in Zhengzhou is equivalent to China's entire annual crop, or half of global production

Source: Food and Agriculture Organization

That seems insane until you consider that we’ve seen this picture — or one much like it — before. In March 2016, Chinese imported iron ore prices jumped 26 percent in a day and daily trading volumes of the Dalian contract soon rose to about three-quarters of the country’s annual imports. A month later, enough cotton was traded in Zhengzhou in a single day to make 9 billion pairs of jeans, enough to clothe every person on the planet.

Apple Turnover

Trading volume in Zhengzhou apple contracts has soared over the past month

Source: Exchange data, Bloomberg

Note: Each contract is for 10 metric tons of apples. Latest day's data is smaller because it was taken before the end of the trading day.

If you’re wondering what happened to all the stock-tipping shoe-shine boys, taxi drivers and beggars who lost their shirts in those previous commodity bubbles, don’t cry for them: In each instance, the wisdom of crowds showed a lot more predictive power than the sage advice of greybeard market analysts.

Rusty Memories

Those who quit the Dalian iron ore market when it went insane in March 2016 don't look so wise in retrospect

Source: Bloomberg

If you’d been one of the people who bought Dalian iron ore during that crazy day, March 9, 2016, you’d have seen a mid-price of about 423.8 yuan ($66.50) a metric ton on generic front-month futures. Despite skepticism about the strength of the price rally at the time, they’ve been above that level on about five out of six trading days since. A trader who bought February 2017 iron ore futures at that day’s closing price of 357 yuan a ton would have doubled her money if she held to maturity.

Cottoning On

Chinese cotton futures have mostly stayed well above their levels at the time the market went mad in April 2016

Source: Exchange data, Bloomberg

It’s a similar picture with cotton. Prices fell back a little from the 12,985 yuan a ton at which they closed during that commodity’s day of madness — April 22, 2016 — but over the past two years, they’ve averaged 15,138 a ton, almost 17 percent above that level.

That shouldn’t be surprising. Liquidity is the friend, not the enemy, of financial markets, fine-tuning the price discovery that’s meant to be the whole point of the process.

The temptation when looking at the 27 percent jump in Chinese apple futures over the past month is to declare the action out of touch with reality and sell into the market’s strength.

Big Apple

The price of generic front-month Zhengzhou apple futures has soared in recent weeks

Source: Bloomberg

As my colleague Shuli Ren argued in December, China’s apple market is in a glut after years of overinvestment, and the stock of sufficient quality to be delivered against the Zhengzhou contract is limited.

The humbler course of action may be the wiser one, though. Agricultural gluts have always morphed into dearths eventually, so this one, too, could be on the turn. Maybe all those nickel-and-dime — sorry, jiao-and-fen — Chinese retail investors know more about the market than you do.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    David Fickling at dfickling@bloomberg.net

    To contact the editor responsible for this story:
    Paul Sillitoe at psillitoe@bloomberg.net

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