What is the Chicago Mercantile Exchange and How Does it Impact Farmers?
The Chicago Mercantile Exchange (CME) Group is a stock exchange based in Chicago that revolutionized the financial markets and brought sustainability, security, and success to farmers and buyers. Nowadays the CME sets the global standard for grain prices and creates the market prices that affect the entire worlds economy.
During harvest time in the mid 1800s, Chicago became especially busy. Farmers would be coming to town with their goods to sell them at a centralized location. Chicago was the best place to have such a large farmers market because it was easy for both buyers and sellers to access; the Chicago River allowed the farmers to transport their goods in bulk and connected the city to the Eastern seaboard, including the Gulf of Mexico. This is still relevant as farming, much like everything else, is more globally focussed. These connections caused the ‘farmers market’ to flourish allowing agriculture products to stabilize in price for the first time and to set standards for what could be bought and sold.
Despite this new market, farmers were still making almost all their money at harvest time; a problem if you have a bad crop. Futures were invented to give the farmer stability and give the buyers another opportunity to make money, a win-win. A future will give a producer a predetermined price, guaranteeing his income at the time of delivery. These futures can be bought and sold at any time of the year, and thanks to the CME’s Globex system, anywhere as well. There are two sorts of people that buy and sell futures. The Hedger and the Speculator. The Hedger is the person trying to avoid risk; by selling their goods at a fixed price they know what their profit will be at harvest time. The Speculator is buying that risk from the hedger so that they can hopefully make money should the price fluctuate, as the markets are wont to do.
The CME is the worlds largest market of futures and options. It sells everything to do with agriculture, and then some more. In fact, it sells just about everything. The overarching CME Group owns the DOW Jones market and has been described by the Economist as “the biggest financial exchange you’ve never heard of”. Every single farmer is impacted by the CME Group, in fact every single person in the world is affected by the CME Group. The Chicago Mercantile Exchange determines the prices of grains; by having the most liquidity the CME has the largest marketplace for futures and options giving more options to buy and sell. With trading becoming more global, the CME not only affects the American farmer, but it affects the South American farmer, the Indian farmer; anyone who uses the markets to buy and sell goods.
For the farmer, this will allow you to sell your crops in June even though they may not be arriving until October or November. If you do not want to take any risks in your crops, or if you think that prices are going to drop, then you can sell your crops now and get paid the current price. Regardless of what the market does between now and then. This needs to be done through an organization such as the CME so that it is a properly legally binding deal and to protect both parties. These middlemen (CME) will standardize everything, from quality and quantity to the place of delivery, so that only the price is variable. This gives both the farmer and the purchaser confidence. Taking the risk out of something like farming helps not only the farmer, but also those who use the agriculture goods. If a food processor knows the price of Wheat months before the harvest comes in, they know how much money they must spend that year to get their resources. If it is less than expected they can invest that money into expansion projects thereby driving the economy forward and upwards.
With the advent of new technologies producers are given a better chance at making more profit than ever; especially if they learn how to use the markets to their advantage. With technology like yield monitors widely available, farmers can know how much crop they are likely to have, and know that with a slim margin of error. This margin of error is often less than 3%. If you know that you are going to have a good crop that year then you can wait for a high price, sell that future contract and reap the extra money when it comes time to harvest. If the market anticipates X amount of a commodity, but you are able to deliver X+1, then the price will go down (because of supply and demand). Therefore, it is often better to sell the product while the market still thinks that you will only have X. Alternatively, if you are going to have X-1 then you can sell the product at a higher price to guarantee profits regardless of whether it was a bad year.
The CME is one of the worlds largest financial exchange in the world; and the most important for farmers and producers around the world. With the ability to sell futures, farmers are protected from the price fluctuations and fluidity of crops annually. The ability to guarantee X amount of income greatly helps farmers secure the future for themselves and their families.
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