Commodities Volatility Drives Increasing Futures Trading Down Through Food Chain

Grocers and suppliers have increasingly turned to sophisticated financial instruments to stabilize their food stocks after volatile commodity prices surprised the industry in 2008 and 2009, according to a recent report by financial firm CME Group Inc.’s (NASDAQ:CME) OpenMarkets.

Many major players, like Kraft Foods Group Inc. (NASDAQ:KRFT), already use futures contracts to obtain fixed prices on foods, as a hedge against unpredictable corn or coffee prices.

But they now require a more strict and systematic approach from their fresh produce suppliers, too.

Ronnie De La Cruz, a principal at De La Cruz Consulting, told OpenMarkets that growers have already responded by tweaking their harvesting techniques to best accommodate a futures market.

Grocery distributors are forced to play the game, too. Associated Wholesale Grocers, a co-op distributor serving more than 2,900 independent grocers in 24 states, works with cheese vendors, using technical instruments like milk futures or cheese futures contracts.

Companies often contract with suppliers for up to 90 percent of their projected crop volumes, according to De La Cruz. Once prices are fixed, the supplier must deliver at the agreed price and volume, even if the crop runs short.

And if there are shortfalls, suppliers have to buy produce on the open spot market, whatever the price difference, to meet that agreed quota. International produce demand is playing even more of a role, said De La Cruz.

This type of risk management for grocers is a step beyond the usual insurance protection against natural disasters.

“I’ve seen more volatility, especially in commodity prices, over the last five to seven years,” AWG category manager Linda Whiteside, who has worked in the industry for 17 years, told OpenMarkets. “… All the more reason we have to study them more closely.”