Chapter 3Futures Exchanges – Future and Forward Prices – Theory of Storage – The Forward Curve

‘I know of no pursuit in which more real and important services can be rendered to any country than by improving its agriculture and its breed of useful animals.’

George Washington

3.1 Major Commodity Exchanges

Agricultural commodity prices have been experiencing unprecedented price moves in the period 2006 to 2014 – in a non-uniform way across commodities, however – and there is no sign of change at the time of writing, with disruptions in supply created by weather or political events. The markets have evolved in a parallel way, with a dramatic growth in volumes and variety of traded contracts, number of operating exchanges (ICE, Mumbai Exchange, Qatar, and Kuala Lumpur), and categories of participants; the prices have reflected the specifities of each commodity in its own right.

The same volatile market conditions across the spectrum of the three commodity classes – energy, metals, and agricultural – are unlikely to drastically change in the near future, with land becoming rare and water insufficient, disruptions occurring because of electricity shortages, geopolitical and social issues in a number of countries producing commodities, and the world population growth. A number of banks have closed their commodities desks at the time of writing, but private equity funds have joined commodity houses in the acquisition of physical assets such as gas storage facilities, soybean crushers ...

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