Tradovate Futures Trading Blog

Could These Innovations Disrupt Commodities?

Posted by Sarah McNabb on October 13, 2015 at 10:00 AM
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Tech innovations evolving the futures industry influence product AND market pricing.

Invention shapes the futures market

In the 1840s, Chicago became a commercial center with railroad and telegraph lines connecting it with the East. Around this same time, the McCormick reaper was invented which eventually lead to higher wheat production. Midwest farmers came to Chicago to sell their wheat to dealers who, in turn, shipped it all over the country. This new method of commerce encouraged increased production and a more complex way of doing business produced new risks that needed to be managed along with the need for a robust way for discovering prices. Supply, demand, and their effect on market price brought this innovative form of commerce -- that we know today as the futures industry -- to life.


And here we are, over a century later, and the industry continues to evolve thanks to innovations across markets that not only influence the product but market pricing as well.

Change is the only constant:

Innovations can have significant bearing on futures pricing through supply and demand. For example, oil discovery innovations such as the engineering technology which has allowed for deep sea drilling, has increased crude supply by getting to those untapped areas. And it is this technology that has continued to disprove peak oil theory time and again. Crude oil, which came close to $200 a few years ago, is now at $47.46 and traders who did not pay attention to the changing fundamental storyline took it on the chin.


Exploratory innovations in natural gas fracking have also affected prices. Combined with horizontal drilling, fracking opened up new areas for gas exploration. Shale formations, for instance, would ordinarily not release enough gas or oil to be worth it but fracking changed that. Because this form of extraction is relatively cheap, it has helped keep natural gas prices down.


Philip Budzik, a research analyst at the EIA and one of the contributors to the agency's "Energy Outlook 2014", an annual report that projects energy use and production, said fracking was a big reason that natural gas prices are as low as they are, even though they went up and reached a peak in 2008. Considering that prices have cratered from $12.69* per million British thermal units in June 2008 below $3.00** today (representing a jaw-dropping amount of more than $90,000 in profit or loss when trading one contract), traders who were paying attention had the context to make informed (and potentially very valuable) decisions.


*Source: EIA
**Source:Tradovate - Nov. 15 contract opening at $2.544 on 10/13/15

Could new commodities rise up?

Recently, Audi developed a synthetic gas using just carbon dioxide and water. And while it was only a small amount, if future production could take place on a larger scale cost-effectively, just imagine how a low-priced alternative to fossil fuel like this could impact oil prices!


Is an innovation such as this likely to spur on new futures products such as carbon footprint futures?


While it would be forward-thinking, the idea has floundered in past initiatives such as the ICE Climate Futures Exchange, which failed to reach viability in 2011 due to low trading and lack of a federal carbon reduction plan. An expansion in ecology-based futures markets products has a chance of making a potential comeback if the 2016 election shakes out with a party that institutes carbon tax, cap-and-trade, or other incentives or penalties for companies to reduce emissions.


Effects of innovations ripple across commodities

In the broader scope, how would innovations such as these affect other markets such as grains?


Farming innovations affecting the grains and meats markets are also surfacing. Besides the development of vertical farms and advancements in agrotech R&D, producers have tapped into intelligence that ultimately impacts futures commodities prices.


Technology meant to increase production such as satellite applications that help farmers monitor pastures and livestock are becoming popular. And on a granular level (pun intended), John Deere leverages data innovation with yield-mapping technology on its farm equipment to track seasonal production and adjust for future plantings. Besides improving productivity, “smart farming” also helps cater to the rising population’s demand for food while simultaneously helping reduce waste.


The new sets of data points from these technological innovations can combine with other farming data to allow producers to gain a wide view of conditions in order to better manage crop yields, control costs, and help gauge market pricing.

The innovation train doesn’t stop

While innovation is generally accepted as a good thing, why should traders pay attention and why should they care? That is a good question and the answer points back many times to supply, demand, and the market price. What was true yesterday may not be true tomorrow (think “oil is depleting and prices must go up”) and, as a result, paradigms shift. And prices with it. And, with prices, trading opportunities and trader’s P&L statements. Does that sound like a good reason to care? We thought so.


These latest advancements could have a major impact on commodities production and prices to come and we at Tradovate are excited to see what new opportunities that result from innovations are around the bend for futures traders.


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