Modern commodity exchange in global agribusiness – part 2
Agribusiness, as a sphere of production for both food and raw materials for the processing, textile, and energy industries, is a strategic branch of every economy.
The importance of this sector globally is also evidenced by the fact that it is the source of livelihood for 2.5 billion people, or about 38% of the world’s population. The specificity of the agricultural commodity market, resulting from the seasonality of supply as well as dependence on natural conditions, led to the birth of the commodity exchange in the mid-19th century, which organized and facilitated commodity trade. Over the years, under the influence of market needs, this institution evolved to currently take on the character of a financial institution. The commodity exchange owes its current shape, among other things, to the progressive globalization of the market observed in the last twenty years. Although the food economy, compared to other sectors of the economy, has so far been the least subject to direct globalization processes, the phenomenon of globalization is progressing and causing an increasing inclusion of farms and agribusiness enterprises in the commercialized national or global food chain.
Currently, we can speak of a global market in relation to such raw materials as: cereals, corn, soybeans, cotton, coffee, and tea. However, the development of companies with a global scope of operation creates new economic and organizational conditions for the functioning of the agri-food market. The global agricultural commodity market in the last decade has been characterized by high price volatility, which was particularly felt in 2008 and 2011 in the case of, for example, cereals. It is therefore a market particularly susceptible to various categories of risk, and in particular to the risk of adverse price changes, which disrupts the stability of agribusiness entities in the short term and has a huge impact on the level of investment determining activity in the long term. Therefore, striving to mitigate the adverse effects of price risk, participants in the agricultural commodity market use various instruments and techniques. However, the greatest opportunities in this regard and a crucial role in managing price risk, and thus stabilizing income in agriculture and the agri-food industry, are seen in the use of futures market instruments offered by modern commodity exchanges. Hence, the further part of this article will be devoted to a diagnosis of current trends in the development of the global exchange market, as well as the place and importance of agricultural raw materials in the turnover of current exchange operators.
Development of commodity exchanges on the global market
Commodity exchanges have been functioning in the world economy for 150 years. Initially, they were local institutions, concentrating supply and demand for agricultural raw materials of a given region or country. Over time, however, under the influence of market needs, they underwent specialization, creating commodity exchanges, freight exchanges, stock exchanges, or monetary exchanges with an international reach. The market for commodity futures (so-called derivatives) was created in the mid-19th century in Chicago thanks to the activity of the agricultural commodity exchange founded in 1848 – Chicago Board of Trade. This was also a period of the formation of commodity exchanges in various European countries, including London, Amsterdam, Paris, Berlin, and Warsaw. For 110 years, these institutions offered contracts, mainly for agricultural products and metals. The breakthrough came at the beginning of the 1970s and was related to the collapse of the monetary system adopted in Bretton Woods in 1944 and the simultaneous floating of exchange rates. The first response to the new market needs was the creation by the Chicago Mercantile Exchange (CME) in 1972 of the International Monetary Market, which was focused on currency trading. New opportunities caused a rapid development on many commodity exchanges of markets for derivatives used to manage the risk of adverse exchange rate changes in international trade. This was the beginning of the development of the currency derivatives market in the world. The next, but already modern, great breakthrough in the development of commodity exchanges in the world was the appearance of new opportunities in the economy related to the Internet and the introduction of online trading platforms at the end of the 1990s. This gave the previously local commodity exchanges the character of international institutions. The ability to trade on any exchange from anywhere on Earth gave an impulse to a wave of consolidation of these institutions around the world.
The article comes from the magazine “Logistyka” 6/2011.