Iowa Public Television

 

Futures Market Can Be Boon

posted on August 17, 2001


As farmers are acutely aware, agriculture is a capital-intensive industry. Farmers' production costs like those of their urban industrial counterparts can vary with interest rates, and the price of inputs ranging from energy, seed, feed, fertilizer and insurance. No one understands the impact of commodity market swings better than farmers.

That's why the ability to hedge price risk through commodity markets can be so important to producers. Future exchanges have attempted to devise contracts that can be utilized by producers and processors. But, industry trends in some cases have cornered the market before one could be made.

Futures Market Can Be Boon Despite heavy promotion the Chicago Mercantile Exchange's Broiler Futures contract simply didn't fly. In fact its failure confirmed the arrival of agricultural vertical integration.

Slug: Chicken trucks

In the years prior to the Merc's 1990 introduction of its futures instrument much of the nation's broiler supply had already come under the control of a handful of giant processors who contracted with farmers to raise the birds. The open market for chicken was effectively closed.

Slug: Lean Hog trading

The Merc's lean hog futures contract has come under similar pressures. As much as half of the nation's hog production is now under contract to a handful of processors.

Slug: milking parlor

However, the same cannot be said of another livestock commodity. Despite the growth in scale of some operations, most of the nation's milk production is still produced on small and medium sized owner-operated farms. Processing is not centralized. Indeed the only national brand of milk is Horizon Organic milk.

The fact milk is perishable and used in a multitude of consumer and industrial applications, says Iowa State economist Robert Wisner, underscores the need for some form of price protection for dairy producer and processor alike.

Winser: "We have had more volatility in price, much less government involvement in storage of dairy products, so we've had some extremes in the price, in recent years. I think the top end in the cash milk markets, probably was in the area of $17 per hundredweight. At times some producers, even a little bit above that. The low end probably, down in the $10 per hundredweight range. So there's a risk management need there, a major one."


Tags: agriculture markets news