Futures Prices a Farm Fantasy
by: Anne Keller. a director of news services for the American Farm Bureau Federation.
Farmers commonly are associated with the work of planting seeds, watching the skies, harvesting mature crops and a multitude of other chores. Monitoring the movement of commodity prices and knowing when and how much of the crop to sell also are essential components, though these tasks tend not to be as visible to family members, friends and neighbors not intimately familiar with the ways of farming.
However, the term “small business owner” fits most farmers better than almost any other because no matter how straight the crop row, no matter how tall it grows, if the farmer cannot manage risk and successfully market the harvested crop, then all the work is for naught.
While running a small business is an ongoing fact of life for farmers and ranchers, other events such as the development of the ethanol industry have transpired to raise the public profile of U.S. agriculture.
As farmland values escalate and prices for food and other items rise, Americans several generations removed from family farms and ranches want to know more about modern agriculture and the sources of the food they eat. Prominent media outlets have responded by devoting more time and space to farm-related issues.
This combination of factors has helped shine a spotlight on the widening disparity between prices offered in the cash and futures markets in recent months. Farmers generally receive cash prices when they physically transfer their wheat, corn, beans, cotton and even livestock to local elevators, warehouses and auction barns—the daily spot markets in their communities. Local cash markets traditionally look to futures markets for “price discovery.”
Futures markets initially were designed as a price discovery mechanism for farmers looking to sell the fruits of their labors. Crops are not actually traded in futures markets; special contracts called “futures” are bought and sold there. These legally binding agreements specify prices and times when commodities will be transferred down the road. Markets that offer futures are the Chicago Mercantile Exchange, the Minneapolis Grain Exchange and similar trading hotspots.
Sky-high futures prices are at the center of media attention these days, and Americans may think all farmers are bringing home the proverbial bacon.
However, local grain elevators generally do not offer prices as high as distant futures markets, due to “price convergence” and “basis” issues. Space constraints make it impossible to explain these somewhat complicated concepts, but it is safe to assume farmers are not receiving the high, even record, prices some exchanges advertise.
But the higher and more volatile futures prices have caused the futures exchanges to raise their margin requirements—those funds held in reserve to cover price changes—to a point that they exceed users’ abilities to pay. Consequently, a handful of grain elevators have gone out of business when operators were unable to extend their credit lines to meet these margin calls.
Given this highly volatile business climate, the Commodity Futures Trading Commission (CFTC) will convene a public meeting to discuss events affecting the agriculture markets on April 22. Topics will include the lack of convergence between the futures and cash prices, higher margin requirements and their effects on market participants, and the role of speculators and commodity index traders. Transparency issues are sure to be on the minds of some participants, as well.
The American Farm Bureau Federation will participate in the CFTC meeting to convey the concerns of farmers across the country. Regardless of the types of crops produced on farms near you, be assured Farm Bureau will continue to monitor this developing situation, urge the CFTC to be engaged, and speak out on behalf of U.S. farmers and ranchers.
4/21/08
