Wednesday, February 27, 2013

How Are Farm Commodity Prices Set

The price of agricultural commodities, such as corn and soybeans, are set in open market trading, where buyers and sellers come together at exchanges such as the Chicago Board of Trade. This firm brokers large quantities of certain products through futures contracts.

Corn, for example, is sold through 5,000 bushel contracts. The contract stipulates that the corn will be delivered to the contract holder on a specified date in the future. Commodity buyers bid on these contracts to ensure they have a reliable supply of corn at a predictable price. Speculators may also bid in hopes that the value of the corn increases before the contract comes due. The buyers consider factors such as the weather, the number of acres planted and the anticipated demand for corn as they bid.

Local grain elevators use these bids as a guide to determine what price they will pay area farmers for their crop. Farmers can sell at the price offered by the elevator, or store the crop in hopes that the price will improve. Farmers can also sell their crop through a futures contract, which can be risky as they are often selling a crop which hasn’t yet been harvested. There is a complicated set of marketing tools farmers can use to manage this risk, but in the end, they do not get to set the price of their crop.

Will the high price of corn and soybeans as a result of last year’s drought affect the price of your groceries? Among the many factors that influence food prices, weather is one. But the price of food also includes packaging, advertising, processing, labor, transportation and other costs. Corn, for example, makes up just a few cents of the final price of corn flakes. So if corn prices doubled, your cereal might go up by about nickel.

In addition, commodity prices are guided by global supply and demand. If a crop is grown over a wide geographical area, it is unlikely that local weather will disrupt overall production. On the other hand, a significant or extended weather event that limits the availability a crop would eventually be reflected in the cost of food. Typically, it is individual farmers who feel the greatest impact of adverse weather.

For more information, visit the Darke County OSU Extension web site at, the OSU Extension Darke County Facebook page or contact Sam Custer, at 937.548.5215.

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