Commodity Derivatives, 2nd Edition

CHAPTER 12Agriculture

12.1 AGRICULTURAL MARKETS

When discussing this segment of the commodity market it is often convenient to distinguish between two main sub‐categories. Soft commodities include products such as coffee, sugar, cocoa, and cotton. The production of these commodities is often concentrated in a small group of developing countries and as such can be prone to output problems. Agricultural commodities are typically widely produced in developed countries. For example, wheat is widely produced and as a result farmers can usually respond quickly to rising prices by expanding their acreage.

12.2 DEFINITIONS

As ever, it is always useful to define some relevant terms:

Supply – this usually comprises of three main components:

• Surplus stocks left over from the previous year. This could be referred to either as ‘inventory’ or sometimes ‘carry in’.
• Production from the current year.
• Imports.

Demand – typically comprises of two elements:

• Domestic use
• Exports

Carry over – this is defined as the remaining supply from the previous year plus current year production plus imports.

Stocks to use ratio – this is defined as the current year ending stocks divided by current year use. As a rule of thumb, in ‘normal’ markets the ratio should be 20–40%. A lower ratio could indicate market ‘tightness’ and possibly increased price volatility.

12.3 AGRICULTURAL PRODUCTS

12.3.1 Physical supply chain – wheat

The physical supply chain (Figure 12.1) for grains such as wheat would typically ...