Agricultural and Soft Markets

This chapter provides an overview of agri-food futures markets. It focuses mainly on agricultural commodity markets. The chapter defines commodity markets and competition, forward and futures contracts. It provides a short history of futures markets, price volatility and supply-demand balance. The chapter also focuses on the determinants of demand and supply for agricultural commodities: determinants, the specificity and dynamics. It analyses the features of major agricultural markets. The chapter further presents short hedging and long hedging to illustrate how commercial operators deliver or use agricultural commodities. In hedging, price risk fluctuation is reduced to basis risk fluctuation. Basis risk fluctuation may be managed by operators. Commercial operators hedge to mitigate the risks of price volatility on physical markets. Then, they reduce price fluctuation risks to basis fluctuation risks and some residual risks. Finally, the chapter discusses the key success factors for agricultural commodity futures contracts.