The food price series (part 1): A first look at commodity exchanges

As mentioned earlier, food prices are determined by a large number of overlapping factors, some of which I listed in last week’s intro to this series. How these factors influence food prices is probably most obvious, and most immediately visible, at the commodities exchanges.

 

A commodities exchange is a place where a range of commodities are traded, mostly in the form of contracts. This contract idea has gained widespread acceptance because selling or buying a contract for the delivery of wheat is so much more convenient than driving up in a lorry to dump or pick up 500 tonnes of wheat yourself. (In current corporate public relations speak, you could also say that selling and buying a contract has the better carbon footprint.)

 

 

The list of food commodities traded in exchanges includes – but is certainly not limited to - wheat, maize, coffee, cocoa, cattle (both alive and frozen) and dairy products (such as milk, cheese and butter)… but this is just a selection from a choice that is actually significantly wider.

 

Outside the food arena, commodities exchanges also trade energy sources (oil, electricity, coal etc) and metals (both for industrial production and jewellery), among other things, as well as currencies and financial products (such as the famous credit default swaps that have been in the public debate since the economic downturn escalated in 2008).

 

Probably the most well-known commodities exchange for grains is the Chicago Board of Trade. The CBOT, as it is also referred to, is part of the CME Group, which also runs a number of further exchanges. Food commodities traded at the CBOT include corn, soybeans, oat, rice and wheat. I’m mentioning this example now because in one of my next updates, I’d like to compare recent wheat price developments with recent bread price trends – simply to demonstrate how strongly and how fast price changes in the commodity markets translate into changing prices for extraordinary shoppers like you and ordinary shoppers like me at the local bakery or supermarket.

 

 

In terms of contractual formalities, food commodities are mostly traded in the shape of futures contracts (also called ‘futures’) and spot contracts. However, these won’t be looked at here, but in a separate blog post in the near future. That’s partly because I need some lunch now, but also because this series is supposed to be made up of short pieces that someone busy actually has the time to read.

 

And that’s it for today.

 

Have a good week,

Boris

 

 

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