Expansion of futures markets promises crop gains

by Morton Sosland
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Even as the attention of grain-based foods in the past year has been riveted on the startling gyrations of wheat futures in Chicago, Kansas City and Minneapolis, industry executives would be well advised to appreciate how futures trading has grown globally. Just how many exchanges actually trade wheat on a daily basis is difficult to determine, but 17 of the 32 leading exchanges do list agricultural commodities as part of their business. The growth in the number of exchanges, a phenomenon of the past two decades, is viewed as global endorsement of the way these markets facilitate price discovery and efficient distribution. While dealings in financial derivatives, mainly stock indexes, have fired the recent expansion in trading, agricultural commodities also have had a significant role in the development of grain-based foods.

Essential to understanding this proliferation of trading is the way volume on established exchanges also has grown, setting new records. Instead of meaning competition, the new exchanges encourage participation in these markets, primarily to capture commercial benefits by achieving the openness in prices that long has been absent from many locales. Unlike financial derivatives that have a generic quality and thus may be vulnerable to competition, agricultural commodities have a regional identity that is impossible to transfer over long distances. The creation by merger of mega-exchanges has had scant effect on trading expansion in the markets continuing independent.

Hardly anything is more revealing than realizing that the heaviest volume of futures trading is not in the great markets of the United States, which all enjoyed new trading records in 2007, but on an exchange in a city in the middle of China. It is the Zhangzhou Commodity Exchange, which trades in two different wheat contracts, strong gluten and hard white winter, that has the most active market. Dealings on a single day in September reached a record 1.4 million contracts of 10 tonnes each in strong gluten wheat. That compares with the 100,000 wheat contracts the Chicago Board of Trade deals on a "good day." Yes, the 10-tonne contract on the Zhangzhou exchange is much smaller than the 5,000-bushel contract in Chicago, but the contract number difference is stark. Not so incidentally, the same small contract size has made the Korea Stock Exchange the world’s leader in global futures and options volume.

Rapid expansion of futures trading in fast developing countries like China, India and Korea is expected in light of the central economic role these markets play. What is so unusual is their emergence in the poorest of nations. Almost before any other facet of a modern economy is established, some less-developed nations are turning to commodity futures exchanges as a way of alleviating food shortages and encouraging modernization of agriculture. A notable example is the Ethiopia Commodity Exchange being set up in Addis Ababa. The idea for this exchange grew out of severe food shortages in the past decade that were blamed, not on crop setbacks due to weather, but on "market failure." A system of warehouses has been established as integral to the new exchange, with each offering certified weights and grades. The hope is that by establishing reference prices at numerous locations, the exchange will encourage farmers to improve their production and marketing.

In view of massive problems standing in the way of investment in agricultural production in places like Ethiopia, grain-based foods would most certainly agree with the warning that the new futures exchanges should not be considered a panacea. Yet, as an official of the United Nations Conference on Trade and Development observed, the success of futures markets in Asia, not just the record volume but also their role in establishing prices on which many decisions may be made, has "enlarged the bounds of the possible."