Stable’s research covers the widespread issue of “basis” and “flat price” risk within the agricultural commodities sector. This article defines the term “basis” to describe the difference between a cash market price and the corresponding futures market price with “flat price” risk defined as the risk where the market operator is exposed to the full spot price of a commodity. The article drills into the level of coverage that liquid futures contracts offer in the agricultural commodity markets and highlights the shortcomings in the sector. Overall, Stable finds that only 16% of global agricultural commodity markets are covered by liquid futures markets. This provides a significant issue for risk management in the sector with widespread “basis” and “flat price” risk occurring. A case study on the organic corn market highlights the challenges of price risk management in a relatively new product within the market where no exchange-traded contract exists. This is in contrast with the conventional corn market, which has some of the most established futures contracts in the agricultural commodities sector. Another case study examines the recent price volatility in beef, which was caused by plant closures during the COVID-19 pandemic. The move in prices has disrupted the once tightly knit relationship between the Chicago Mercantile Exchange (CME) live cattle futures and the price of beef, leaving industry participants without a suitable hedging tool for their price exposure. Stable concludes that the market is in need of a modern, targeted solution for the age-old problem of “basis” and “flat price” risk within the agricultural commodities sector.
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