Agriculture Reference
In-Depth Information
relationship changes in the wheat marketing
system, all other price relationships adjust, and
new equilibrium prices result.
Supply
Commodity futures exchanges
In a dynamic marketing and price discovery
system where the information fl ow requires con-
tinuous adjustment in prices, central locations are
needed to facilitate price discovery. The futures
commodity exchanges provide a central location
where supply and demand information can be
converted into a price. The price discovery
process is transparent, and the resulting prices
are available to all players in the market almost
instantaneously. The success of futures exchanges
is due to their convenience and extremely low
transaction costs.
Three commodity exchanges are instrumental
in US wheat price discovery. Chicago Board of
Trade (CBT) wheat contracts are used mostly
for soft red winter wheat. Kansas City Board of
Trade (KCBT) wheat contracts are used for hard
red winter wheat. Minneapolis Grain Exchange
(MGEX) wheat contracts are used for spring
wheat. Market players who buy and sell the
physical commodity base their buy and sell price
offers on quoted commodity exchange prices.
Other market players are speculators, brokers,
and pit traders who rarely own the physical
commodity (Fig. 23.1).
Brokers receive sell and buy orders from specu-
lators and owners or potential owners of the phys-
ical commodity. Once a broker receives a sell or
buy order, the order is communicated to a pit
trader to auction off the order, or the order may
be sold or bought via the electronic trading system.
Pit traders “fi ll” the sell order by selling to the
highest bidder or fi ll the buy order by buying
from the lowest bidder. The resulting price is
communicated to the broker who then notifi es the
buyer or seller. The entire process of selling or
buying a futures contract may be completed in
less than one minute. The resulting price is
recorded and released for public use.
Rights to publish commodity futures contract
prices are sold to commercial distributers that
P
Demand
Q
Quantity per unit time
Fig. 23.2
Supply and demand curves determining equilib-
rium price, quantity demand, and quantity supplied.
consumed. Thus, the market players compile
information from across the world and use this
information to estimate the supply and demand
curves. As new information is obtained and ana-
lyzed, the supply and demand estimates are
adjusted. As supply and demand estimates change,
the intersection point changes for the supply and
demand curves, and price changes.
As wheat harvests are completed around the
world, the wheat supply curve shifts to the left or
to the right. A harvest that exceeds expectations
will shift the supply curve to the right, which
signals that more wheat will be delivered at a
given price. A harvest that is below expectations
will shift the supply curve to the left, which
signals that less wheat will be delivered at a given
price.
Wheat price discovery is a dynamic process.
New information continuously causes expecta-
tions to change. As expectations change, price
bids and offers change. To visualize this process,
compare the marketing system and price discov-
ery to a spider web. Any force that changes the
tension at any connecting point on the web will
have a ripple effect that changes the tension at
every other connecting point. When one price
