Sunday, February 20, 2011

A tale of peppers & Penang

Ladies and gentlemen, presenting the Penang A1 Aerated Water embossed bottle. Our grandpas and granduncles used to drink from them as a source of thirst quenchers. Well, there are many other aerated water brands out there at that time. Just so happen I have these.

Houston, we are ready to take off

Looks mint coz its clean

But I like to start by exploring on futures contract in this post.

What is futures contract?

In layman's term, it's a financial contract between 2 parties to transact (buy/sell) a specific product/service/commodity/asset at a standard quantity and quality at a specified future date at a price agreed today.

So why futures?

Because no one knows how the supply and demand would affect the price of the product in the future. Thus by agreeing on the price today, no matter how much the price the product changes (rise or fall) in the future, we are paying for the price agreed TODAY.

Still confused? Here's a scenario to illustrate just a basic idea:

Suppose Ali is an oil palm plantation owner. No wait, that's stereotyping, let's restart.

Suppose Jackson Michaels predicts that black pepper harvest will be abundant during the next harvesting season, we will have lots of pepper right? But critics don't agree due to current situation such as changing weather patterns resulting in crop failures. Hence the current black pepper price is around RM12,500.00 per tonne (latest mid Feb 2011, I think) and rising.

However, Michaels is not forecasting on pepper prices, instead he is betting on freights cost that are used to transport the peppers.

He successfully negotiated low prices with ship companies to allow him to use their cargo/containers during harvest time to transport the peppers.

And why in the world the ship companies agree to charter their boats to him at a low price?

Because no one knew if pepper production would be plentiful or pitiful. At least Michaels' contract guarantees them a business regardless of pepper harvesting results.

When the harvest time came, the increase of pepper supply will cause the pepper price to fall. A lower pepper price will then ignite a buying frenzy, which in turn creates a shortage of boats to transport so many peppers.

Now Michaels can let go of his ships at any price he likes, making large amounts of money.

Coming back, what do futures got to do with embossed bottles such as the one below?

Pepper in Penang? Better luck finding bottles there than pepper.

The bottles are currently retailing at RM160. It is yet to be on the endangered species list but its population is shrinking fast.

From a futures trading perspective, you may want to get one for yourselves now at RM160. The price may go up as it will become rarer in future. Who knows, it may go beyond RM200? Just a hunch.

This could look like a marketing gimmick but I'm letting one of these babies go for only Rm120. FIRST COME FIRST SERVED ONLY. After that, the price reverts to RM160.

Penang mari, or at least originated from Penang long long time ago.

From a futures trading perspective, this lower price is just mad. Or am I implying a sudden discovery of more A1 bottles in the near future? :)

Penang A1 Aerated Water embossed bottle (400ml) retails for RM160.
Shop Under The Sun is giving this away at RM120*
* One only, first come first served.
** Kindly contact 012 6736161 (Mr. Ho) if you are interested in this product. Thank you.

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