Milling & Baking News - July 26, 2022 - 23

TUES | 07 26 2022
industries) to mitigate risk as indicated
by soaring volume around the world. All
acknowledge the vast volatility in the
markets. The process undoubtedly has
changed, as have volumes and other key
elements of futures markets made possible
by technology.
" Due to inflation fears and the devaluing
of the dollar's purchasing power the past 20
years, commodities have become an asset
class that investors want to fight against
inflation, " said Chris Kristufek, director,
Trilateral, Inc., Chicago. " This leads to more
money flowing into these food commodity
markets, causing more volatility. My guess
is that was an unintended consequence of
the FED's monetary policy. "
EXCHANGES FILL A NEED
It's been nearly 175 years since the
Board of Trade - long the foundation of
grain futures trading - was conceived
and formed by a group of Chicago merchants
to help farmers and commodity
consumers manage risk by removing
price uncertainty from agricultural products
such as wheat and corn. The Board of
Trade of Chicago was founded on April 3,
1848, but initially involved only cash trading.
The earliest version of the Board of
Trade was a group of men who met voluntarily
with no legal standing in the city or
state. Fittingly for Milling & Baking News,
the Board of Trade got its start in rented
space above the Gage and Haines' flour
store at 105 South Water Street for $110
per year and included a brick warehouse
to store grain. The purpose was to " meet
there to consult markets, transact business,
etc., " according to the Chicago Daily
Journal. Futures contracts were created
in 1865. The Chicago Mercantile Exchange
was founded several years later in 1898
with early contracts on butter and eggs,
later adding livestock and meat. The CME
Clearinghouse was established in 1919.
Then the timeline jumps forward about
50 years to the next major event - the
launch of foreign exchange futures in
1972 followed by Eurodollar futures in
1981. The first options on futures contracts
were introduced in 1982. Ten years later
the first electronic trading system was
launched - CME Globex. That changed
everything. The CME and CBOT merged
bakingbusiness.com
in 2007 to establish the CME Group, which
also acquired the New York Mercantile
Exchange two years later. The newest
major derivatives market is the Intercontinental
Exchange. Formed in 2000 and
launched with electronic trading only, ICE
quickly became a global market force with
contracts on soft commodities, metals,
financial instruments and many others,
clearing operations and other services.
While forward thinking merchants
brought the Board of Trade to life, the markets
eventually developed a life of their
own and evolved, with other exchanges
around the world, in some cases becoming
massive financial institutions that would
play a key role in determining the price
that producers are paid for raw commodities
to what consumers pay for food.
Today there are about 100 exchanges
worldwide trading mostly in three broad
categories: agricultural commodities,
non-agricultural commodities (energy,
industrial and precious metals, for example)
and financial instruments. The vast
majority are traded electronically. Some
exchanges trade a single item while others
trade nearly all categories. Many trade
both futures contracts and options on those
futures, among other types of contracts.
Agricultural futures and options include
grains, oilseeds and oilseed products, softs
(sugar, coffee, cocoa, tea), lumber, cotton
and others. Non-agricultural commodity
futures and options include precious and
industrial metals, crude oil and petroleum
products, energy/power (coal, natural gas,
electricity, renewables and others), minerals,
chemicals, nanomaterials, climate
(emissions, carbon offsets and others),
freight and others. Financial futures and
options include contracts on interest
rates, swaps, stock and commodity
indexes, individual stocks, treasury
bonds, currencies and many others.
Major futures exchanges listed in
order of annual volume include the
National Stock Exchange of India,
B3 (Latin America), CME Group (Chicago
Board of Trade, Chicago Mercantile
Exchange, New York Mercantile
Exchange, Commodity Exchange Inc.,
Kansas City Board of Trade and NEX
Group), and Intercontinental Exchange
(ICE, which includes ICE Futures US, ICE
Futures Canada, ICE Futures Europe, and
others). Dozens of smaller exchanges are
scattered around the world, including the
key Bursa Malaysia exchange that is the
primary palm oil trading market.
MARKET CONCERNS PERSIST
Futures markets have never been without
their critics. Many farmers have long
distrusted futures in part because of the
role of the speculator (who is needed to
provide liquidity). Others " knew " someone
who lost money in the markets. One
legitimate concern has been the impact
of weather on crops and not absolutely
knowing if there would be a crop at the
end of the season to deliver or cash settle
the contract at or before expiration.
One of the long-running concerns
about commodity and ingredient buyers
and sellers is that only about 10% of the
world's commodities are listed on a futures
exchange. Over time, some of that has been
compensated for by forward contracting
between producer at some point along the
food manufacturing chain mainly on a cash
level, and through other creative ways. The
same goes for food manufacturers selling
their products, often through the use of
brokers, wholesalers or distributors.
Stable USA Inc. is implementing a new
concept.
" In the world of agriculture, only 16%
can be managed with listed futures contracts, "
said Jim Sullivan, vice president,
Commercial Development, Stable USA
Commodities traders on the Chicago
Board of Trade floor circa 1949.
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