Iowa Public Television

 

Futures Market Can Be Boon

posted on April 27, 2001


Agriculture is one of the economy's more capital-intensive industries. Hundreds of thousands of dollars if not millions are wrapped up in the land and facilities of a typical farm.

Farmers' production costs like those of their urban industrial counterparts can vary with interest rates, and the price of inputs ranging from energy to seed, feed, fertilizer, and insurance. And 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 for farmers. Futures 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.

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.

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.

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. That's a huge variation. Keep in mind that when you take the cost of production out, the variation in net income to the dairy farmer is even larger. So there's a risk management need there, a major one."

 


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