The chicken market is so hot right now. Why can’t I trade on it?

You might not have noticed yet, but there's a calamity underway in the beef market: Cattle futures have reached record highs, driven by smaller herds that have been winnowed by years of drought.


That's some pricey beef! (Barchart.com)

Over time, that will make beef more expensive on the shelf. But at least in the shorter term, the retailers that sell a lot of it -- big fast-food companies, for example -- are able to hedge their risk by buying futures contracts, which lock in the price for a certain amount of time. That at least allows them to plan for the supply problem by factoring price increases into their menus.

The same isn't true, however, of poultry. Americans have been eating more and more of the birds in recent decades, but there is no futures market for this increasingly valuable commodity -- which saddens commodity traders who see consumers opting for chicken as beef prices rise.

"If I could be 'long' chickens right now, that would be the trade of a lifetime," trader Dan Norcini of Coeur D'Alene, Idaho told The Wall Street Journal.


That's a lot of fried chicken. (Pew Environment)

Too bad for him! But so wait: Why is there a futures market for beef, but not for chicken?

Well, there used to be. Different commodities exchanges have tried three times to cash in on the growing demand for poultry, first with the Chicago Board of Trade in the 1960s, again in the 1980s and 1990s with the Chicago Mercantile Exchange. Each attempt has failed, for reasons that tell us a lot about how agribusiness works.

First, consider what you need for a successful futures market. One: Size, as measured in volume and value of the commodity. Check! Two: Large buyers who need to insulate themselves against price shocks. Check as well! And three: Some level of price volatility, which creates the need for end users to hedge their risk, and the opportunity for speculators to make money by taking the other side of the bet. That's where the difficulty comes in for the poultry market.

Now, let's take a step back. The meat industry has changed a ton over the last few decades, as farms have bought other farms and concentrated huge numbers of animals into smaller spaces. That started with poultry production, and spread to other types of livestock:

feature-kandel-fig02

Very consolidated industries can also ensure more price stability, since giant companies are better able to manage all their inputs (like feed grains) and outputs (the clients they sell to). But that still doesn't tell us why there's a futures market for beef and not chicken.

The difference comes in with how each sector is structured.

First, chickens are more like widgets. You can produce them all year around, and one can go from egg to table within a matter of months. By contrast, beef is more seasonal -- although many cattle are grown on feedlots, a good number are still pastured and bear calves at certain times of the year. That means it takes years for farmers to respond to supply shortages -- created by, for example, a drought -- making long-term hedges essential.

Second and more importantly, the poultry industry is more vertically integrated: Giant processing companies like Tyson and ConAgra own all aspects of production, and already have contracts with end users like McDonalds and KFC, which lock in prices for a good amount of time. In the cattle industry, the big beef processors buy their stuff from independent farmers, which means they're not as in control of the price. That's why the repeated attempts at a chicken futures market never attracted much interest, and trading volume just sank to zero:

The flop of broiler futures. (Chart by S. Aaron Hegde, North Carolina State University)
The flop of broiler futures. (Chart by S. Aaron Hegde,North Carolina State University)

"The bottom line is that you have to have someone who's going to use the contract to hedge. If there's no price movement, you don't need it," explains Andrew McKenzie, a professor of agricultural economics at the University of Arkansas. "The guys who are actually the gorillas, they don't have price risk on that side of it, because they're guaranteed the price."

So it's true, betting on chicken futures would be a good gig right now. Sometimes, though, the market just doesn't work how you want it to.

Lydia DePillis is a reporter focusing on business policy, including lobbying, government contracting, and international trade, with a bit of urban affairs and infrastructure on the side.
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