Kub's Den

Perhaps it was the ancient Egyptians who first put a public price on next year's grain harvest, a radical innovation that gave farmers some certainty and motivation to grow as much grain as possible, fueling a great empire. History tells us it was the medieval Japanese shoguns who first formalized grain trading with interchangeable futures contracts and warehouse receipts -- the eternally powerful idea of commoditization. One basket of good rice was interchangeable for any other basket of good rice, making them tradeable. Being able to lock in a commodity's price, now and in the future, gives producers the confidence to buy inputs and grow that commodity, and it gives end users confidence about how much their own inputs will cost. When the aliens offer us 30 Altairian dollars per bushel of corn in 3031, we will know whether or not it will be profitable to grow corn in that year.

In the United States, there are all the usual things we think of as "commodities" that have been traded via futures contracts for as long as anyone can remember: wheat (of various varieties), corn, soybeans, coffee, sugar, cocoa, cotton, lean hogs, live cattle, feeder cattle, crude oil, heating oil, RBOB gasoline, natural gas, aluminum, copper, nickel, lead, zinc, gold and silver.

Of course, that's not a full list of all the commodities in the world. Table salt is a commodity; copier paper is a commodity; concrete blocks are a commodity. A type of stuff doesn't need to have an active futures-trading market to be considered a commodity. Any widely available, unspecialized economic good or substance that is interchangeable with all other samples of the same grade of the same substance can call itself a commodity.

One of the hottest commodities in the world right now is dry ice, suddenly needed to transport cases of coronavirus vaccines from manufacturing plants in Michigan and Belgium all over the world at -94 degrees Fahrenheit. There is a connection to our agriculture industry here -- dry ice (carbon dioxide that has been pressurized into blocks or pellets) can be a byproduct of ethanol fermentation. The ethanol industry still hasn't fully recovered its pre-COVID-19 production levels (976,000 barrels per day last week versus 1,066,000 barrels per day at this time last year), but maybe it can get a boost from suddenly hot dry ice prices?

Unfortunately, that's not terribly likely. While a few dry ice manufacturing and packaging plants in strategic geographic locations will no doubt expand their sales in 2021, the raw material for the commodity isn't at all scarce and prices may not surge much above their typical $1 to $3 per pound.

One wonders how the price dynamics of dry ice might be different in the middle of a worldwide vaccination campaign if this was one of those commodities that anyone could trade with derivative futures contracts on an exchange.

Looking outside the United States, there is a lot of useful commodity "stuff" that does trade via futures contracts. At the Shanghai, Zhengzhou and Dalian commodity exchanges in China, traders can gain exposure not only to the same metals, energy products and grains that we're familiar with here in the U.S., but also steel rebar, steel wire rod, hot rolled coils, stainless steel, bitumen, natural rubber, TSR 20 block rubber, wood pulp, early rice, japonica rice, late indica rice, polished round-grained rice, cotton yarn, apple, jujube (a type of fruit), ferro-alloy, soda ash, glass, methanol, urea, polyester staple fiber, corn starch, eggs, RBD palm olein, fiberboard, blockboard, LLDPE, PVC, coking coal, ethylene glycol and ethenylbenzene (used in the manufacture of polystyrene). Traders can also buy and sell options and indices on some of these commodity futures. Most are only available for Chinese citizens and Chinese companies to trade, but some are being internationalized (notably, copper and palm oil).

If we look to India, the list of futures-tradeable commodities expands to gold bullion, gold petal, cardamom, kapas (a type of cotton), mentha oil, castor seed and black pepper. There is also the influential Malaysian palm oil futures market. In Australia, traders can buy and sell various types of wheat futures, but also barley, sorghum, broad wool, fine wool and greasy wool futures ... and electricity futures! Is electricity a commodity? Sure, in terms of classifying it among financial contracts.

Back in the U.S., on the Intercontinental Exchange, we find more philosophical quandaries like that when we consider not only electricity futures contracts, but also the carbon allowances and emissions that can be traded via futures. But how about futures contracts for the price of bitcoin? Let's agree that one's not a commodity, but instead a currency, or a security maybe? ... but definitely not a commodity.

Water is a commodity, and it could even be thought of as an agricultural commodity. Any gallon of H2O is an interchangeable substance, and when available at a certain location at a certain time, it can be given a price. Now, since Dec. 7, 2020, water can be traded via futures contracts at the CME. The new market is billed as the first-ever water futures contract, with prices settled according to the NASDAQ Veles California Water Index, which averages surface and groundwater prices in U.S. dollars per acre foot at five California regions. While it would no doubt be useful for agricultural producers in California to lock in irrigation costs and remove some of their input cost risks, this futures contract may not be a perfect hedge for that purpose, and it may not surprise you that, so far, the total open interest in the CME's new water futures market is -- wait for it -- 16 contracts. It seems that even the speculators who might feel bullish about California water prices in a scarce environment could be skittish about the optics of profiting from that trade.

While we're thinking about new and interesting agricultural trading opportunities, let's also consider LeafLink, a start-up company that matches wholesale cannabis buyers and sellers via an online marketplace. There's no futures market for cannabis (yet), but with standardized grading factors and confident price tracking (and legal acceptance from the U.S. government), it certainly someday could be a commodity physically delivered against a futures contract. LeafLink, the startup, estimates it already handles 25% of the wholesale cannabis market essentially like an online grain-trading portal, with buyers showing bids and producers offering their commodity to the market. Therefore, it can track a pretty comprehensive set of commodity prices: cannabis concentrates priced at an average of $15.10 per gram in Colorado in 2019, for instance, or flower priced at an average of $1,148 per pound in Washington. With even more states allowing this (still-federally-illegal) commodity to trade in 2021, doesn't it feel like it's only a matter of time before No. 2 Cannabis Bud joins soybeans and live cattle in an agricultural commodity futures trading index?

Remember, in all these markets, the purpose and the power of locking in future prices is so that producers and end users can transfer risk and confidently plan ahead to run a profitable business. To that end, may all your commodities stay interesting in the new year and may your plans be profitable!

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

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