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Risk Management and the New Dynamics of Ag Markets
Perspectives from an Exchange, Commercial Participant and Academia
Mike Adams, Moderator
Host, AgriTalk Radio
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Bryan Durkin
Senior Managing Director & Chief Operating Officer
CME Group
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Market Evolution: Increased Use of Ag
Commodities
Corn and Wheat Futures ‐ Average Daily Volume
2000‐2013
600,000
500,000
400,000
300,000
200,000
100,000
0
Corn
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Wheat
Market Evolution: State of Futures Markets
Average Daily Volume*
• CME Group futures markets have become
increasingly electronic
(contracts in millions)
12.3M contracts
7.3M contracts
1.8M contracts
0.8M
contracts
1980s
1990s
Innovation / Electronification / Demutualization….
0% electronic
5
8% electronic
2000s
2010s
Innovation / Diversification / Globalization
80% electronic
Highest 88% electronic
Averaging 6% privately negotiated/OTC
*The average daily volume graphed assumes that CME, CBOT and NYMEX were combined the entire time –
with NYMEX data beginning in 1983
Market Evolution: Factors Impacting Food Prices
www.cmegroup.com/effectivemarkets
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David Baudler
Nourishing ideas.
Nourishing people.TM
President, Cargill AgHorizons
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Demand: Rising world population
and standard of living
actual and projected
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7.5
7
6.5
6
5.5
5
4.5
4
3.5
3
2011 Population
6.88 billion
GDP/Capita
6.200
(000 1997 USD)
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
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Supply: global food production,
area and of yield
(grain, rice, major oilseeds)
production – bil mt
3.0
2.8
2.6
2.4
2.2
2.0
+98%
1.8
1.6
1.4
1.2
1975
1985
1995
2005
area and yield (1975=100)
190
180
170
160
150
140
130
120
110
100
90
yield +76%
area +12%
1975
1985
1995
2005
9
Global food commodity supply / demand
(grain, rice, major oilseeds – bil mt)
3.0
production
2.8
2.6
consumption
1980‐2003
consumption
trend extended
2.4
2.2
2.0
1.8
1.6
1.4
1.2
1975
1980
1985
1990
1995
2000
2005
2010
10
World Stocks
35.0%
33.0%
31.0%
29.0%
27.0%
25.0%
23.0%
21.0%
19.0%
17.0%
15.0%
650.0
600.0
550.0
MMT
500.0
450.0
400.0
350.0
300.0
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
250.0
Stocks / Use Ratio
Source: USDA
Ending Stocks
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Includes: Coarse Grains, Wheat, Oil, Rice
US Wheat Stocks vs Price
$9.00
2500
$8.00
2000
1500
$6.00
1000
$5.00
$ / Bushel
MBU
$7.00
$4.00
500
$3.00
$2.00
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
0
Ending Stocks
Source: USDA
Average Price
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US Corn Stocks vs Price
6000
$8.00
5000
$7.00
MBU
$5.00
3000
$4.00
2000
$ / Bushel
$6.00
4000
$3.00
$2.00
0
$1.00
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
1000
Ending Stocks
Source: USDA
Average Price
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Iowa land values
$ value per acre
9003
8003
2012
$8,296/acres
7003
6003
5003
4003
3003
2003
1003
3
1975
1980
1985
1990
1995
2000
2005
2010
Source: Iowa State University
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Scott Irwin
Laurence J. Norton Chair of Agricultural Marketing University of Illinois
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FAO Index of Real Food Commodity Prices,
January 1990-May 2012
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“The Masters
Hypothesis”
http://www.nytimes.com/2008/09/11/washington/11speculate.html
http://www.loe.org/images/content/080919/Act1.pdf
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CBOT Wheat Futures Prices and Index Trader
Net Long Positions, January 2004-September 2009
250
1400
Index Trader Open Interest
(left scale)
1200
1000
150
800
100
600
50
400
Nearby Contract Price
(right scale)
0
Sep-09
May-09
Jan-09
Sep-08
May-08
Jan-08
Sep-07
May-07
Jan-07
Sep-06
May-06
Jan-06
Sep-05
May-05
Jan-05
Sep-04
May-04
200
Jan-04
Thousand Contracts
200
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Relationship between CBOT Wheat Returns
and Index Trader Net Long Positions,
June 2006-December 2009
20%
% Change in Market Price, Week t
15%
y = 0.0002x ‐ 0.0798
R² = 0.0187
10%
5%
0%
‐5%
‐10%
‐15%
‐20%
‐12,000
‐9,000
‐6,000
‐3,000
0
3,000
6,000
9,000
12,000
Change in Net Position, Week t
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December 2012
“The current state of knowledge indicates only a few, and weak, findings that verify the assumption that the rise in financial speculation in recent years has increased (1) the level or (2) the volatility of agricultural commodity prices……
Seen in this light, the alarmism about financial speculation should be classified as a false alarm: Those who desire to effectively combat hunger in the world have to take real‐economy precautions to ensure that food supplies will match the envisaged increasing demands”
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Pricing Function for Storable Commodities
is Highly Non-Linear
Source: Wright (2009)
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Structural Changes in Commodity Markets in
the Last Decade
•Electronic trading
Percent of Futures Volume Transacted on Electronic Platform, 2004‐2011
•Online discount brokers
100%
•Index investment
90%
80%
•Exchange‐traded funds (ETFs)
Percent
•High frequency trading (HFTs)
70%
60%
50%
40%
30%
•Real‐time release of gov’t reports
20%
10%
0%
Jan-04
Jan-05
Jan-06
Jan-07
Corn
Jan-08
Jan-09
Month
Soybeans
Jan-10
Jan-11
Wheat
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