Futures markets, which deal in commodities, are at the heart of a system that is in great need of reform, in the interests of producers and consumers. This year we have seen wheat prices soar. However, due to the current structure of commodity markets, it is the intermediaries who pocket the profits. To better understand these mechanisms and how they could evolve, Yann Gourvennec, CEO of Visionary Marketing, asked Noah Healy, founder of Coordisc, to shed some light on this subject. [NDLR Cet article a été rédigé par Mandy Phillips, étudiante américaine, dans le cadre de son stage chez Visionary Marketing durant l’été 2022]
This year, the price of wheat has risen sharply and continues to fluctuate. Inflation and supply restrictions are to blame, following the crisis in Ukraine in particular.
Yet farmers are not the ones benefiting from this price spike. It is the middlemen who get rich because of the way commodity futures markets are structured.
Noah Healy, the founder of Coordisc, seeks to “disrupt” this The very notion of the B2B or B2C market is at the heart of the marketing approach. A market is the meeting of supply and demand. conveniences and to propose a fairer solution, we interviewed him in order to better understand what is going on.
Here is the report of our interview that you will find in the podcast associated with this post.
Commodity futures markets
Commodity futures markets link producers to consumers. A commodity market is usually a virtual market [NDLR C’est-à-dire consultable au travers de places de marchés électroniques] where one can sell, trade or buy different commodities immediately or at a later date [d’où le terme de « vente à terme » ou « futures » en anglais].
The The B2B persona defines who your target buyers are. main is made up of hedge funds and other traders. It is a financial system similar to that of a broker or a bank.
You go there and make bets on what you think the prices are going to be in the future. If there is someone who is ready to make a reverse bet, then the system takes this price into account and publishes the fact that someone has bet on this price
Then, a millionth of a second later, it all starts again with all the people who showed up during that microsecond to make those deals.
Each trade has an expiration date. On this date, all bets that have not yet been sold or withdrawn are settled. About 97% will be liquidated and 3% delivered, says Noah.
We then speak of a futures market: an agreement to buy or sell a specific commodity on a date and at a price set at a date in the future.
Commodity prices and agricultural workers
Farmers participate in the commodity market to determine the value they can get for their crops.
Most farmers go into debt and borrow money season after season. They must ensure that their cash flow will be sufficient so that after a normal season, their loans can be repaid.
If their credit history is good, farmers can continue to borrow. This is how farmers are forced to accept the prices offered by the market, and find themselves prisoners of the future.
Ukraine crisis pushes up wheat prices
With the Ukrainian crisis, fields have been destroyed and Russia could remain under sanctions. There seems to be a “sustained contraction in supply,” says Noah.
Other regions of the world should be able to increase their production to compensate for the loss of wheat in Ukraine. However, as farmers’ incomes have been fixed by contract, they are not sensitive to price increases..
Price increases do not affect agricultural workers, as they have agreed to a specific price in advance. Middlemen who bet in front of farmers will reap the benefits
It should be noted, however, that Russia has recently concluded an agreement with Ukraine to allow the export of cereals. Due to the war, supplies had hitherto been blocked in the Black Sea ports.
Russia will allow Ukraine to export 22 million tons of grain and other agricultural products. It is impossible to know how the agreement will affect wheat prices or whether Russia will be able to renege on this agreement in the future.
[NDLR La tendance de long terme est visible ci-dessus, c’est sur ces chiffres qu’il faut se baser et non sur des fluctuations à court terme]
Who pulls the chestnuts from the fire?
It’s the people who bet against you who benefit the most, says Noah:
You made a bet to sell at a given price in the future. Someone has the counterpart of this bet. If the price were to drop between now and the future, that person would incur a loss, because that price is locked in to your advantage. If the price increases between today and the future, on the contrary, she realizes a gain, because she is the one who has the most favorable price.
It’s kind of like a gambling game and not everyone can always win..
Those betting in front of you are wealthy enough to take those risks. Some bets pay off, some don’t. All in all, the bets will most likely pay off
They also do not incur as much cost as farmers. And finally, these people (or companies) are essential to the functioning of this futures market.
The current market structure would disappear if an institutional or systemic change took place. If they started to lose money, state intervention would cover their losses and keep them afloat.
More equitable commodity futures markets?
Noah Healy wants to reinvent this type of market by allowing producers and consumers to negotiate directly with each other. It will then rely on computer communication to create universal messaging and batch processing. This goes through…
The creation of large groups ofBuyer behavior in B2B: Internet and social networks have changed buyer behavior in B2B, which is closer to B2C and sellers who can agree on a common price. This price may be lower than the common price that emerges from the existing pattern
Intermediaries will not want the new system to circumvent them. Either way, change needs to be implemented proactively.
Noah metaphorically compares the market to a cake. Each middleman has a piece of this pie and they tend to take bigger portions to collectively get a big slice of the pie.
There is no real collusion between these intermediaries who do not form a homogeneous “block”. On the contrary, they are in competition with each other.
The mechanism imagined by Noah offers intermediaries the opportunity to get out of the game and establish themselves as an operator.
The sooner they do it, the more significant they can take. The size of the share will be larger than what would have been possible with the original market, but the total size of the new market will also be smaller.
The second phase of its device consists in modifying the mechanism of measurement and reward of the market.
You can create a market where returns are, say, ten times what expected returns were before by making it much cheaper to invest in the market
The first person to turn away from the old market can thus obtain a much higher income than before. Those who play the game can participate and replicate their old income. However, they invest less or receive a smaller share while earning a much higher rate of return.
Noah is working to implement this new system, whether in the United States, South Africa or Singapore. There is hope for the future, but he is not yet able to tell us when a significant change may be visible.