Agricultural Economics II. Popp, József Agricultural Economics II

Food price volatility over the last four years has hurt millions of people, undermining nutritional status and food security. The level of price volatility in commodity markets has also undermined the prospects of developing countries for economic growth and poverty reduction. After staying at historic lows for decades, food prices have become significantly higher and more volatile since 2007. A first price spike occurred across almost all commodities in 2007/2008. After a drop in 2009/10, prices are now climbing again and volatility remains high (Figure 1). Periods of high or low prices are not new. In fact, price variability is at the core of the very existence of markets. Since 2007, however, the degree of price volatility and the number of countries affected have been very high. This is why food price volatility in the context of higher food prices has generated considerable anxiety and caused real problems in many countries (Headey, 2011b).

11.1. ábra - Figure 1: Food Price Index, annually, 1960-2011 (2000 = 100)

Source: World Bank (2011)

1. 11.1. What is volatility?

In a purely descriptive sense volatility refers to variations in economic variables over time. Here we are explicitly concerned with variations in agricultural prices over time. Not all price variations are problematic, such as when prices move along a smooth and well-established trend reflecting market fundamentals or when they exhibit a typical and well known seasonal pattern. But variations in prices become problematic when they are large and cannot be anticipated and, as a result, create a level of uncertainty which increases risks for producers, traders, consumers and governments and may lead to sub-optimal decisions. Variations in prices that do not reflect market fundamentals are also problematic as they can lead to incorrect decisions (Prakash and Stigler, 2011).

2. 11.2. Price levels and food security

Behind concerns about volatility lie concerns about While producers benefit (or at least those who are net producers and whose asset base and knowledge enable them to respond effectively), consumers, especially poor consumers, are severely adversely affected by high prices. Food accounts for a very high share of the total budget of the poorest households. And because poor households often consume foods that are less processed the effect of rises in commodity prices is felt more strongly. These households find their nutrition status (especially of pregnant women, children and those affected by long-term diseases such as HIV), as well as their capacity to purchase education, health care, or other basic needs compromised, when food prices are high.

Producers are more concerned about low prices, which may threaten their living standards as well as their longer term viability when income is too low to provide for the farm family or for the operational needs of the farm. Uncertainty may result in less than optimal production and investment decisions. In developing countries, many households are both producers and purchasers of agricultural products. For this group the impacts of price volatility are complex, with net outcomes depending on a combination of many factors.

Price volatility has a strong impact on food security because it affects household incomes and purchasing power. It can transform vulnerable people into poor and hungry people. Price volatility also interacts with price levels to affect welfare and food security. The higher the price, the stronger the welfare consequences of volatility for consumers, while the opposite is true for producers. This interaction implies that focusing only on price spikes will not address overall welfare consequences.

Food price increases are problems of agricultural price volatility (implicitly suggesting that high prices will not last) and as a quasi-natural and constant problem in agricultural markets. There appears to be a consensus that price volatility in the last five years has been higher than in the previous two decades, but lower than it was in the 1970s. Because of the liberalization of markets over the past 20 years, however, domestic prices in many countries are more connected to international prices than they were in the 1970s. For some developing countries, liberalization has also meant a significant increase in the level of imports in the total food supply, making international food price volatility even more a concern than it would have been in the 1970s (Prakash, 2011).

3. 11.3. Drivers of food price volatility

Based on the view that volatility is the normal state of agricultural markets, three possible causes of international food price volatility are discussed: demand elasticity, trade policies and speculation. Of these three, the role of speculation in the futures market is clearly the most controversial. Nobody contests the dramatic increase in the volume of non-commercial transactions on the futures market. However, conclusions diverge widely as to whether increased non-commercial transactions led to the formation of price bubbles.

By contrast, the effects of both the demand from the biofuel industry and the use of restrictive trade measures (mostly export bans) on prices are far less controversial. But both issues are very sensitive politically. Biofuel support policies in the United States and the European Union have created a demand shock that is widely considered to be one of the major causes of the international food price rise of 2007/08. Similarly, the restrictive trade measures adopted by many countries to protect consumers during that time are widely seen as having accelerated price increases. Both biofuel support policies and export restraints have led many governments to question whether they can rely on international markets as part of their food security strategies (OECD, 2008).

3.1. 11.3.1. Demand elasticity

Increasing volatility may also be related to a decrease in price elasticity of demand as a result of increased income. The richer consumers are, the less likely it is that they would reduce food consumption because of a price increase. This is because the share of staple food in the total expenditure of relatively rich people is smaller relative to their income. As a result, an increase in prices does not necessarily lead to a decrease in demand. Given the overall growth in world incomes, food demand is now less price sensitive, which, as price theory shows, can lead to more volatility (HLPE, 2011).

This observation raises an international equity issue. In the international markets, consumers with very different income levels compete for access to food. Consumers in poor countries are much more sensitive to price changes than consumers in rich countries. This is true of richer and poorer consumers within countries as well. It also means that, when supplies are short, the poorest consumers must absorb the largest part of the quantitative adjustment necessary to restore equilibrium to the market. While a spike in food prices forces the poorest consumers to reduce their consumption, richer consumers can maintain more or less the same level of consumption, increasing inequity in the overall distribution of food.

The second explanation of the current behaviour of international food prices points to the fact that there have been periodic food crises (1950s, 1970s, and present) that can be explained by the dynamics of agricultural investment. High prices trigger a rush of investment and technological development that succeeds in raising production and lowering prices. In contrast, persistence of low prices leads to a reduction of public interest and waning investment. This situation persists until supply is so low that prices begin to spike, which again triggers a new round of investment. From the end of the 1970s to the mid-1990s, the growth of world Agricultural Capital Stocks (ACS) slowed, ultimately stabilizing at a low growth level. Several developed regions even experienced a process of decapitalisation in agriculture. In developing regions, the growth of ACS stayed positive, but slowed and is still slowing in Latin America, sub-Saharan Africa, and south Asian countries. The slowing of agricultural investment growth occurred during a period of restricted public support for agriculture in developing countries.

The third explanation sees the current price increases as an early signal of a long-lasting scarcity in agricultural markets. According to this explanation, the world could be facing the end of a long period of structural overproduction in international agricultural markets, made possible by the extensive use of cheap natural resources (e.g. oil, water, biodiversity, phosphate, land) backed by farm subsidies in OECD countries. In other words, we might be at the end of a period of historically unprecedented growth in agricultural production that relied on a strategy akin to mining. At the same time, new demands for biomass are emerging. Biofuels are just the most visible part of increasing demand for biomass to provide not only food but also building materials, heat, and transportation.

This explanation of rising food prices in terms of scarcity is not new; it was much discussed in the 1970s. But our understanding of the environment has deepened. Today, we see more clearly the costs of industrial agriculture, including the associated pollution, depletion of freshwater aquifers and loss of biological diversity. We also see the costs of long-term under-investment in agriculture and agricultural research. We are asking new questions about what to expect from climate change and how the introduction of potentially unlimited demand on agricultural resources from the energy sector will play out. We can be optimistic that human ingenuity will find solutions, but only if we are prepared to learn from our past mistakes. The long-term challenges confronting agriculture today on both the supply and the demand side are very real (FAO, IFAD, IMF, OECD, UNCTAD, WFP, the World Bank, the WTO, IFPRI and the UN HLTF, 2011).

Although rising international food prices represent a serious threat to vulnerable people in developing countries, it is domestic food price inflation and volatility that determine the poverty and food security impacts of international food crises. In most developing countries, the 2007/08 international food price rise was transmitted to domestic prices, although not evenly and in some cases with significant delays. Moreover, the subsequent drop in international prices was only partially transmitted – average consumer prices in developing countries remained up to 50% higher than they were before 2007/08. The international price rise that started in 2010 and continues today was transmitted to domestic markets even more quickly than the 2007/08 price spike. However, the uneven transmission of international price spikes to domestic prices across countries, commodities, and time periods means that each case will require careful characterization of the transmission in order to appropriately formulate price stabilization and food security policies (Headey and Fan, 2010).

In many poor countries, price volatility on domestic markets for locally grown products is the result of both the transmission of international price volatility and of purely domestic (sometimes called endogenous) sources. Even when international prices are stable (as they were between 2000 and 2007) many poor countries exhibited very high price volatility across space and time. Again, there is a large heterogeneity with respect to the mix of imported and domestic sources of volatility. Each country should therefore accurately identify the sources of its own price volatility. Appropriate policies to stabilize, manage, and cope with domestic price volatility can be quite different depending on the sources of price volatility. To date, there is no institutional mechanism that systematically collects and analyses data with a view to informing a global and dynamic vision of the actual impact of food price crises on vulnerable populations.

There is considerable heterogeneity across countries in terms of how increased price volatility could affect a given country. Key sources of heterogeneity include: agro-ecological conditions and connectivity (e.g. landlocked countries may be affected differently from those with coastal access), preferences of staple food (e.g. diversified versus single staple focus), institutional capacity to implement policies, and macroeconomic health. There is consequently no “one policy response fits all” approach.

The feasibility and effectiveness of some of the most commonly recommended policy prescriptions for poor countries – such as scaling up social safety nets and introducing weather insurance programmes for risk management – will vary from country to country. Therefore, information regarding cross-country heterogeneities needs to be assessed in order to make these policies work. Every country will need to design its own comprehensive food security strategy. This will involve objective assessment of the existing food security policies and programmes, identification of gaps, and working towards building the internal institutional capacity to address them.

4. 11.4. Trade policies

Building a rules-based multilateral trading system able to guarantee food access for every country is now a major challenge for the international community. Since the Uruguay Round, negotiations regarding agriculture have been conceived and conducted in the context of a structural overproduction. This means that the focus has been on how to limit trade conflicts amongst exporting countries and how to open up protected economies to more imports. The objective of the rules was to guarantee fairness of competition between suppliers and to protect market access for exporters. Access to world markets was not negotiated for importers and export restrictions were hardly disciplined. The increase in international food prices and the breakdown of the Doha negotiations opens the possibility of a new project in which confidence in international markets would not be based on unrestricted free trade. The food price crisis showed that sovereign states are not prepared to serve international markets at the expense of domestic priorities. This political “reality check” suggests that trade policies, and the multilateral rules that frame them, need to be reconsidered. Multilateral rules are more essential than ever (Headey, 2011a).

The relationship between stock levels and price volatility is well established: low stocks are strongly associated with price spikes and volatility (Figure 2). It is likely that some international coordination of stocks would also make an important contribution to restoring confidence in international markets. Empirically, a minimum level of world stocks seems to be a sufficient condition to avoid price spikes. Experience also shows that, in a crisis, access to financing mechanisms may not secure stocks during supply shortages. Past experience shows that managing world stocks for price stability is difficult as this requires intergovernment cooperation and information. This needs international agreement regarding complex issues – among other issues – when to stock, governance of the systems, location, coordination, and ensuring that the stocks reach those who need it most.

11.2. ábra - Figure 2: World stocks as a percentage of world consumption for corn, wheat, rice and vegetable oils, 1960–2010

Source: World Bank (2011)

5. 11.5. Hedging agricultural commodity with futures and options (USA)

Producers of agricultural commodities are faced with price and production risk over time and within a marketing year. Furthermore, increased global free trade and changes in domestic agricultural policy have increased the price and production risks of agricultural producers. As price and production variability increases, producers are realizing the importance of risk management as a component of their management strategies. One means of reducing these risks is through the use of the commodity futures exchange markets. Like the use of car insurance to hedge the potential costs of a car accident, agricultural producers can use the commodity futures markets to hedge the potential costs of commodity price volatility. However, like car insurance in that the gains from an insurance claim may not exceed the cost of the cumulative sum of premiums, the gains from hedging may not cover the costs of hedging. This guide was designed to introduce agricultural hedging and aid you in better evaluating hedging opportunities. The primary objective of hedging is not to make money. The primary objective of hedging is to minimize price risk and this includes using hedging to minimize losses.

5.1. 11.5.1. Commodity arbitrage and the operations of a commodity exchange

Arbitrage is the process whereby a commodity is simultaneously bought and sold in two separate markets to take advantage of a price discrepancy between the two markets. A commodity futures exchange acts as a market place for persons interested in arbitrage. The factors driving arbitrage are the differences and perception of differences of the equilibrium price determined by supply and demand at various locations. For instance, suppose there is a shortage of corn in North Carolina to feed livestock. If I believe that I can profit from buying corn in Missouri, paying shipping costs, and selling corn in North Carolina, I will continue to do so until the supply and demand for corn are equal in North Carolina, thus the Missouri corn price plus the shipping costs equal the North Carolina corn price (Parcell and Pierce, 2013).

For the futures market, the arbitrage activities are carried out through the exchange of paper promissory notes to sell or buy a commodity at an agreed upon price at a future date. As persons with different perceptions of where supply and demand are currently and how supply and demand will change in the future interact, commodity prices are driven to equilibrium. As new information enters the market, people’s perceptions change and the process of arbitraging begins again.

For example, let’s say Bill believes the domestic fall production of corn has been under estimated in mid-summer, and Tom believes the domestic fall production of corn has been over estimated in mid-summer. Using the commodity exchange as a market place, since Bill believes corn prices will drop, Bill sells a futures contract, and Tom buys a futures contract because he believes the price is going to go higher. Assume that Bill and Tom sell and buy their contracts for the same price and they are held by each other, and in three months, Bill must buy back his contract and Tom must sell back his contract. By both individuals ending up with no obligations, this clears the market. Furthermore, the contract price is allowed to freely change in value during the three months depending on the change in supply and demand for the underlying commodity (Parcell and Pierce, 2013).

Now, depending on what happens to prices over the following few months, either the contract will not change in value, appreciate, or depreciate. If the value doesn't change, neither person benefits. If the value appreciates, Tom would earn a profit by selling back his contract at the new higher price and Bill would lose money by buying back his contract at the new higher price. If the value depreciates, Tom would lose money by selling back his contract at the new lower price and Bill would profit by buying back his contract at the new lower price.

So, is arbitrage through a commodity exchange really this simple? In some ways yes, and the rules of trading allow for the buying and selling of the contract at any time. There is no minimum time you must hold a contract. However, as you might suspect from the above scenario, arbitrage through the futures is in some way a gamble like buying insurance. Sometimes it pays for itself and sometimes it doesn’t. Furthermore, the scenario described above between Bill and Tom is called speculating. That is, neither party has actual ownership of a commodity, but they believe they can “out-guess” the market. Hedging, is the process whereby a person owns the commodity and uses the commodity futures markets to transfer their risk (Parcell and Pierce, 2013).

There are two main locations where arbitrage occurs for agricultural commodity futures markets. Chicago is the location of both of these main futures exchanges. The Chicago Board of Trade (CBOT) is where the agricultural commodities corn, soybean, soybean oil, soybean meal, and wheat futures are traded. The Chicago Mercantile Exchange (CME) is where the agricultural commodities lean hogs, live cattle, stocker cattle, and feeder cattle are traded. In addition to these commodity markets, cotton is traded at the New York Cotton Exchange (NYCE), and rough rice is traded at the MidAmerica Commodity Exchange.

In a market place like the CBOT or CME, the number of buyers equals the number of sellers. However, no specific buyer and seller are obligated to each other. Therefore, a person is allowed to sell his/her contract or buy a contract at any time within the trading specifications for the exchange. As contract months change, the market enters a contract expiration month in which all persons end up with zero contracts for that trading period. That is, if you sell (buy) one contract, you must buy (sell) back one prior to contract expiration. However, the physical delivery of commodities allows for the substituting of the commodity for the contract.

Hedging is a transfer of risk through arbitrage. Price risk can occur for a number of reasons. For agricultural commodities, price risk may occur due to drought, near record production, an increase in demand, decreased international production, etc. The commodity futures markets provide a means to transfer risk between persons holding the physical commodity (hedgers) and other hedgers or persons speculating in the market. Futures exchanges exist and are successful based on the principle that hedgers may forgo some profit potential in exchange for less risk and speculators will have access to increased profit potential from assuming this risk. For example, suppose a person works on commission and receives USD2 000, USD8 000, USD5 000, and USD13 000 in salary for four consecutive months for an average salary of USD 7 000/month over this period. Now suppose the person could accept a salaried position for a known USD 6 000/month. If the person prefers less income variability, they would pay for the decreased variability and accept the, on average, USD 1 000/month pay cut. Alternatively, the employer would require the USD 1 000/month to off-set the risk he/she now assumes from the person not being motivated to sell more (Parcell and Pierce, 2013).

This same concept applies to hedging in which hedgers might be willing to give up some of the revenues for a known price, and speculators would require the opportunity for more revenue by assuming the price risk. For example, suppose that in late April Joe Farmer plants 500 acres of corn. At this time, Joe Farmer notices that he can forward price a portion of his corn production through the futures market at USD 2.80/bushel. Knowing that his cost of production is USD 2.45/bushel, Joe is willing to price one-third of his anticipated production at USD 2.80/bushel. That is, hedging by the agricultural producer generally involves selling the commodity at the commodity exchange market because producers want to lock in a price floor (a minimum price they will receive). Joe sells a futures contract for his corn, speculators or hedgers (entities such as grain elevators looking to lock in a price ceiling for the grain they are forward contracting) simultaneously are buying the contracts. Now, what can happen? The following analysis holds basis constant (Parcell and Pierce, 2013).

5.1.1. 11.5.1.1. If the future price goes higher, lower or does not change

Assume the fall futures and cash price of corn goes up to USD 3.00/bushel when Joe is ready to harvest the crop. Joe loses USD 0.20/bushel in the futures market, but he gains this back in the cash market through the simultaneous cash price increase with the futures price [what happens to basis, the difference between the cash and futures market, during this time will determine how much Joe makes in the cash market]. At worst, Joe receives USD 2.80/bushel for his hedged grain (commissions are not used for this example which would lower the price Joe receives by a small amount).

The fall futures and cash price of corn goes down to USD2.50/bushel when Joe is ready to harvest the crop. Joe gains USD0.30/bushel in the futures market, but loses in the cash market through the simultaneous price decrease with the futures price [again, what happens to basis, the difference between the cash and futures market, during this time will determine how much Joe makes in the cash market). At worst, Joe receives USD2.80/bushel for his hedged grain less commissions. The fall futures and cash price of corn stays at USD2.80/bushel when Joe is ready to harvest the crop. Joe does not gain in either the futures or cash market except for potential basis gain or loss. At worst, Joe receives USD2.80/bushel for his hedged grain less commissions (Parcell and Pierce, 2013).

What do all of these scenarios have in common? Joe generally knew what price he would receive for the portion of his hedged corn. Why is this important? Joe does not need to worry about a price decline that would affect revenue; therefore, Joe knows approximately how much of a revenue stream he will have for cash flow analysis. However, there may be some types of production risks that cannot be covered through futures. If persons are concerned about production risks due to natural type catastrophes, persons may want to inquire about crop insurance to cover production short-falls. Also, the basis component of hedging was not discussed. A change in basis can increase or decrease a net price decrease or increase from hedging.

When to hedge? By knowing the enterprise cost of production, Joe can determine at what prices he might consider forward pricing portions of this crop. Thus, it is imperative that a producer knows his/her cost of production when hedging a commodity. For instance, if Calvin knows his cost of production on 400 pound feeder calves is USD60/cwt., then Calvin might consider forward pricing a portion of his calf crop through the futures market when the futures market price allows for Calvin to cover his cost of production. It is important that producers determine a target profit margin, because people have a tendency to always want to price at the market high. Some words of advice, it is nice to say you received USD5/cwt. more on your calf crop then your neighbour, but it is even better to say you retired a farmer by making wise choices instead of risky choices.

The costs of hedging are straightforward; however, these expenses can become substantial over time. Commissions are paid to a broker for administrative costs, futures exchange operation, and futures exchange regulation. These costs can range from USD 9 to USD 35 or more per order. An order is either a buy or sell order. Therefore, to enter and exit the market the total costs can range from USD18 to USD70 or more (Parcell and Pierce, 2013).

Margin money is only paid on futures positions and not options positions. Margin money refers to earnest money placed in a brokerage account to cover potential losses. The initial margin is needed to start trading. Typically, a futures position will require the initial cost of between 3% to 10% of the actual cost of the contract being traded (e.g., a 5 000 bushel corn contract may require an initial margin of USD 750/contract). The exact percentage is determined by the commodity broker. The maintenance margin is used to step up the initial margin account. For instance, suppose the maintenance margin on the corn contract is USD500/contract. Therefore, whenever the initial margin account drops to USD500 because of “paper” losses in the futures market the account must be added to so that the balance in the account returns to the brokerage set minimums. There is no maximum number of times a margin call can occur (Parcell and Pierce, 2013).

5.2. 11.5.2. Options

The options market is sometimes referred to as insurance. Why? Because by hedging through the options market an individual locks in the costs of hedging and then can lose at most only the cost of the option premium while having unlimited profit potential. Alternatively, holding a futures position limits profits and losses by the hedged price.

For the options market, the trading activities are carried out through the exchange of paper promissory notes to sell or buy a commodity at an agreed upon price at a later date. This promissory note gives the individual the right to either buy or sell at a later date and not the obligation to buy or sell as with futures hedging. As new information enters the market (exchange), people perceptions change and the process of arbitraging begins again. Options change in value due to the perception of traders of where the market will go in the future.

Before proceeding, a few careful notes are needed as to the terminology used with the options market. A put option gives the individual the right but not the obligation to sell a futures contract at a later date. A call option gives the individual the right but not the obligation to buy a futures contract at a later date. The price at which the futures market can be entered at a later date is referred to as the strike price. The premium paid is in relation to the strike price. The strike price is a predetermined range of values that is different for each commodity. A put (call) option is said to be in the money if the strike price is above (below) the underlying futures price. A put (call) option is said to be at the money if the strike price is equal to (equal to) the underlying futures price. A put (call) option is said to out of the money if the strike price is below (above) the underlying futures price. At any given time, the range of strike prices quoted will cover values in the money, at the money, and out of the money. Thus, a hedger or speculator has the option of purchasing an option at any of these three levels. Typically, options in the money will have the highest premium, followed by options at the money, and options out of the money will have the lowest premiums (Parcell and Pierce, 2013).

There are two components which make up the value of the option, intrinsic and time value. Both of these values are implicit values not observed, but theoretically present. Intrinsic value is the value of the option relative to the underlying futures price. That is USD76/cwt. Put option for feeder cattle has an intrinsic value of USD2.50/cwt. if the underlying futures is priced at USD73.50/cwt. This is due to the fact that the Put option could be exercised (sell a futures contract at USD76/cwt. and buy back at USD73.50/cwt). Typically, the change in intrinsic value of the option is determined by the change in futures price. However, the change in option price is typically not as large for out of the and at the money options. Additionally, there is a time component to the value of an option. The time value reflects the time between the options premiums quote and contract expiration. Typically, the larger the time period the greater the implicit time value of the option. That is, the greater number of days until contract expiration, the higher the probability of the futures market changing in value enough to improve the intrinsic value of the option (Parcell and Pierce, 2013).

Here is an example. Bill believes the domestic fall production of corn has been under estimated in mid-summer, and Tom believes the domestic fall production of corn has been over estimated in mid-summer. Using the commodity exchange as a market place, since Bill believes corn prices are destined to go lower, Bill purchases the right to sell a futures contract (Put) at a predetermined price at a later date, and Tom purchases the right to buy a futures contract (Call) at a predetermined price at a later date because he believes the price is going to go higher. Unlike the case of the futures, Bill and Tom will not off-set each other’s position. In the options market there are writers of options. These people are like an insurance agency. A writer of an option is willing to take a set premium per unit of commodity in exchange for the risk that the commodity price may move against them.

Suppose Bill purchases the right to sell (put option) a future contract for corn at a later date at a strike price of USD2.60/bushel for a premium of USD0.15/bushel and the futures price is at USD2.70/bushel that day, then Bill would initially pay the commodity broker USD 750 (5 000 bushels multiplied times USD0.15) plus commissions. The USD750 would go to the writer of the option. Anyone can write options. Why would anyone write an option? Because if the price does not decline or the price rises the premium would decline over time and the option writer would profit USD750. However, the futures market price could have decreased to USD2.40/bushel and the premium increased to USD0.35/bushel. Note, generally there is not a one-to-one relationship between a change in the futures market price and option premiums due to less risk in the options market. Thus, Bill could now either sell the option for USD0.35/bushel and profit USD0.20/bushel (USD1 000) or exercise the option. Exercising an option should only be done if there is concern as to the liquidity in filling an order to sell the option. More detail on the exercise of an option can found in the options examples of this guide series (Parcell and Pierce, 2013).

5.3. 11.5.3. Future contract specifications for selected agricultural commodities

There are two primary regulatory bodies overseeing futures/options trading. These entities are the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA). Each agricultural commodity contract has specifications unique to that commodity. For instance, Chicago Mercantile Exchange feeder and live cattle futures/options contracts have weight specifications of 50 000 lbs. and 40 000 lbs., respectively. These weights approximate the weight of a semi load of feeder and live cattle. Additionally, each commodity contract price quote is expressed differently, and changes in the price quote differ by commodity. The contract specification information listed below is intended to help producers and agribusinesses better understand futures/options contract specifications.

Various commodities are traded at more than one commodity exchange. For example, corn is traded at the Chicago Board of Trade and Mid-America Commodity Exchange. The difference in these contracts is that the Chicago Board of Trade contract is for 5,000 bushels of corn per contract and the Mid-America Commodity Exchange contract is for 1,000 bushels. You should be aware of the difference in trading volume between these markets. Lack of adequate trading volume can cause difficulty when entering or exiting the market; however, mini-contracts can be useful to those lacking finances or the production quantity necessary to purchase or sell a full contract.

Column heading definitions are offered here. The Futures column heading represents the commodity being traded. The Exchange column heading represents the commodity exchange where the listed commodity is traded. Contract Size refers to the size of the contract being traded. Trading Hours refers to the hours of trading of that specific commodity at the given commodity exchange. Minimum Fluctuation refers to the change in overall value of the contract from a unit movement in the price quoted (for instance, if the CBOT corn price increase by 1/4 cent, the contract increases in value by USD12.50). Daily Limit refers to the maximum allowable change in price allowed for the specific commodity on a given day (note, the daily limit may be waived during the expiration month).