November 27th, 2012 at 8:32 am
The following post is by Kara Newman, author of The Secret Financial Life of Food: From Commodities Markets to Supermarkets
My new book, The Secret Financial Life of Food, focuses on the history of agricultural commodities, including the personalities and stories behind the contracts and how that has impacted what trades today.
However, the questions I’ve been asked most often center around the future of these commodities. What might be next? Keeping in mind that I’m neither an economist nor a fortune teller – just a food writer with an affection for culinary history – I’ll do my best to peer into my crystal ball to find some answers. What I do know is this: just as food traditions will continue to evolve, so will the commodities markets.
Prediction #1: If U.S. exchanges introduce new food-based contracts, they will reflect a global perspective – not American-only eating habits. Several chapters in my book focus on how certain contracts flamed out in spectacular fashion due to scandal (onion futures) or petered out when they no longer were needed (pork bellies). But won’t we ever see any new contracts start up?
I predict yes – but they’ll center around foods consumed by global populations. Just like the market for soybeans has flourished as global populations consume soybeans in any number of forms, next up might be the fledgling apple juice concentrate market – a product increasingly made and consumed outside of the U.S. Some of my other picks for potential food-based futures contracts that might one day soon trade on American exchanges: canola and/or olive oil, both of which already trade on other bourses; sheep and/or lambs (a pilot pricing program already is underway), and although this is a long shot, grapes or grape juice concentrate, representing the third most-produced fruit worldwide.
It’s not such a far leap to wonder if a fully global marketplace, trading fully global food-based futures contracts, might be an option in the not-so-distant future.
Prediction #2: Trading in commodities pits will go extinct. This prediction isn’t going to win me any friends at the commodities exchanges. But the fact is, every year more and more trading migrates off the exchanges. A story even ran in the Wall Street Journal last month announcing that the IntercontinentalExchange (ICE) was closing its last trading pits. The story notes that 90% of ICE’s futures and options trading had moved to electronic trading. So that scene depicting the drama of orange juice futures trading on the floor, and the furor of traders in colorful jackets gesturing frenetically and shouting across the floor? Gone – along with those who gesticulated about cocoa, coffee and sugar futures. It makes me sad to see such a colorful piece of history go, and I’m glad I had the opportunity to see it in person during my lifetime.
My understanding is that Chicago is the last exchange in the U.S. where traders still can be witnessed on the floor, just as they could have been seen a century ago. If you can score entry to the CME trading floor, you’d better go now: in another decade or two –if not sooner– I expect Chicago to evolve to fully electronic trade too.
Prediction #3: The problem of high food prices is not likely to go away anytime soon. Sorry. But I’m not the only one who thinks so: The United Nations predicts that food output will have to increase by an extraordinary 70% by 2050 as the world population grows to 9 billion people from 6.6 billion at present. And as food supply and demand shifts accordingly, expect financial investment related to food commodities to shift accordingly. Indeed, another United Nations report shows that money invested in food commodities shot from $13 billion in 2003 to $260 billion just five years later.
Why do so many investors want to put their cash into the commodities markets, anyway? Frankly, the biggest bullish factor for food prices is simply strong demand. Food demand is growing, not only because of a rising global population but also because of the improvement in living standards in the developing world, where people can afford to buy a higher quantity of better quality food. As people gain more household income, they typically move up the protein scale and eat more meat and dairy products, which in turn requires more grain and feed to support higher livestock production. The UN predicts that three-quarters of the growth in food demand in the past decade has come from the emerging markets.
Farmers, food processors and manufacturers, importers and exporters, retailers, restaurants and consumers all are reliant on some degree on the futures market for its role in helping to get food to market and on the table. Certainly, one fact is clear: the commodities markets and food prices are linked more closely than ever before.
And if you don’t approve of that linkage? Well, you can always shop at your local farmer’s market – buying direct from the producer is the closest you can get to “opting out” of the commodities market altogether.