Agriculture Reference
In-Depth Information
sale, the more the seller will increase the contract
price to cover fi nance charges. Cost of fi nancing
is straightforward, and although it affects the total
cost paid for a shipment of wheat, it does not
change the base value or price of the wheat. As a
separate part of the buy-sell transaction, fi nance
charges can be excluded from price discussions.
Thus, parts of the purchasing decision over which
international wheat buyers have control are the
wheat quality attributes they specify, the quantity
of the shipment, the delivery time, and the loca-
tion from which they purchase.
Wheat is purchased not as food but as a food
ingredient, which explains why a high value is
placed on certain functional characteristics. For
instance, wheat is evaluated less on its ability to
meet dietary requirements than on its ability to
create a certain volume of bread. Two broad areas
evaluated for trade value are functional quality of
fl our and physical characteristics related to milling
yield. Milling performance is an important eco-
nomic driver, but it has secondary consideration
in price negotiation. To be considered for pur-
chase, wheat must supply fl our capable of making
a product according to a baker's expectations. If
it cannot, and no matter the expected milling per-
formance, the miller will look elsewhere.
Quality drives purchase, but value defi nes the
trading point at which buying and selling occur.
Understanding these concepts is helpful in under-
standing the wheat trade. Value is a combination
of quality, price, and supply. Quality, as discussed
previously, is based on how well a particular lot
of wheat meets a set of functional requirements.
Price is determined by a functioning marketplace
in which price is the arbiter of all supply and
demand factors present at the time of trade.
Supply, arguably a portion of the price equation,
is held separate as a way to highlight the demand
on millers to deliver a quality product over time.
Consistency of supply affects a buyer's decision;
wheat of suffi cient quality offered at a fair market
price can be less attractive when the quantity
available is insuffi cient to maintain an adequate
percentage in the wheat mix over a given length
of time. In other words, a baker (the buyer of
wheat's functional quality) fi rst demands quality
but also requires that the miller deliver that
quality regularly over time. Millers meet this
consistency requirement by locating or sourc-
ing wheat lots of suffi cient quantity that can
be blended together to deliver repeatable end
results.
Quality characteristics selected by wheat buyers
depend on functional properties for fl our that
bakers need to produce products demanded in
their markets. For example, the quality of wheat
required in the Egyptian market to produce pita
bread is different than wheat quality required in
the South Asian market, where wet noodles are
the primary product. Those characteristics are
more appropriately described in Chapters 20
and 21.
GRAIN EXCHANGES
Historically, people met to haggle over the pur-
chase and sale of grain when the farmer delivered
it to market. The need for a more organized
method of buying and selling resulted in creation
of formal exchanges, or meeting places, such as
the Kansas City Board of Trade (KCBT, char-
tered in 1876). Early trading was primarily in cash
grains, meaning actual grain commodities were
bought and sold.
Today, buying and selling extends to futures
and options contracts in exchanges operated in
Minneapolis, Minnesota (MGEX); Chicago,
Illinois (CBOT); and Kansas City, Missouri
(KCBT). Futures trading allows traders to buy
and sell the right to a quantity of grain of an
understood quality delivered at a specifi ed time
in the future. This mechanism reduces risk for
millers and producers. Producers can “lock in” a
selling price for wheat prior to harvest, and
millers can set the buying price for wheat not yet
delivered to the mill. “Trading” a future contract
of purchase and delivery provides an effi cient
way for buyers and sellers to determine current
as well as future value of a commodity. This
simple idea has contributed to a smooth fl ow of
grain from farmers to the world market for more
than 100 years.
