Commodity Derivatives: Markets and Applications

11

Agricultural Commodities and Biofuels

A change in supply typically means a short-term change in price, but a change in demand typically means a change in the long term price.

Futures magazine (November 2006)

SYNOPSIS The purpose of the chapter is to describe a number of “soft” agricultural markets and how they are being increasingly used to produce ethanol. A number of exchange traded and OTC derivative structures are also detailed.^e

 

Over the years a substantial amount of literature has been produced about agricultural products and their associated derivatives. Traditionally they focused on the use of:

• Exchange-traded futures for personal investment or speculation

• Derivatives for the hedging of a direct exposure to the change in agricultural prices.

This chapter aims to review some of the “soft” agricultural markets and then show how they are evolving as a result of the increased demand for alternative fuel sources such as ethanol.

The chapter concludes with an overview of the main exchange-traded and over-the-counter derivatives.

Readers interested in the application of futures to hedge a pure agricultural exposure on this type of focus are referred to the different commodity exchanges, such as the Chicago Board of Trade. In addition, many of the structures already considered within this book could be adapted for the agricultural market.

11.1 AGRICULTURAL MARKETS

11.1.1 Physical supply chain

The physical supply chain for grains such as corn and wheat would typically ...