Exchanges Will Think I am Nuts, but Here’s A Potential New Futures Contract

Did you catch this article in the Wall Street Journal today?  People always wonder what the next great frontier of futures trading could be.  What will be the next innovative new contract?  The reality is we have basically traded the same stuff we have been trading since 1982.  There have been some variants on existing contracts, but these are merely line extensions.  It’s not unlike a soap manufacturer trying to take up shelf space in the supermarket.  There is a flow of hot money and exchanges try to capture it.

Recently, there was an article on the new Apple Juice futures contract the Minneapolis Grain Exchange was launching.  I knew about this contract over a year ago.  I had coffee with the inventor of it in Davidson, NC.  It will be interesting to see if it gains some traction.  The ICE ($ICE) trades Orange Juice futures, and does between 2500-3300 contracts per day.  I find it interesting that ICE and CME passed on apple juice futures.  They must not think it will hit a threshold large enough to cover the costs of listing and supporting it.

But today, I read about pecans.  The pecan market is different than any other nut market.  It has all the ingredients for a bona fide futures market.  Prices of pecans are volatile, and bumper crops drive prices lower.  The industry is fragmented, with lots of unorganized growers.  They also are not concentrated in one geographic area of the US, so a centralized market could transmit and be a conduit for lots of information.  In addition, they are only grown in the US!  Demand for pecans is large.  It’s coming from China.  They think pecans are good for your brain. A futures market would help smooth out demand.  It takes 8-10 years for a pecan tree to begin producing enough nuts to harvest.  There is risk in the harvest, and there is risk in processing.  Shellers absorb a lot of market risk. Bakers and ice cream makers have to absorb the wild ride of prices, so they could use a futures market to smooth out costs and transfer risk.

In 2000, prices were between $2-$3 per pound, and now are over $6. It’s not QE2, it’s Chinese demand and fixed supply. Land prices for pecan orchards have almost doubled per acre.

This has all the ingredients of a good futures market.  Exports and volatile prices with fragmented distribution, production and consumption. Plus, because Chinese demand is so heavy, it gives an exchange a leg into China. Here you go exchanges, it’s waiting for you on a silver platter.

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