	Introduction

This report focuses on the major factors affecting price formation for the five largest U.S.program crops -- wheat, rice, corn, soybeans, and cotton. What's Behind Market Price Differences

The general price level of an agricultural commodity, whether at a major terminal, port, orcommodity futures exchange, is influenced by a variety of market forces that can alter the currentor expected balance between supply and demand. Many of these forces emanate from domesticfood, feed, and industrial-use markets and include consumer preferences and the changing needs ofend users; factors affecting the production processes (e.g., weather, input costs, pests, diseases, etc. );relative prices of crops that can substitute in either production or consumption; government policies;and factors affecting storage and transportation. International market conditions are also importantdepending on the "openness" of a country's domestic market to international competition, and thedegree to which a country engages in international trade. Product Characteristics. Agricultural Commodity Futures Markets. U.S. Department of Agriculture (USDA). Commodity Futures Markets

		Overview

A distinguishing feature of the U.S. and international commodity markets is the importanceof futures markets. Unlike cash markets which deal with the immediate transfer of goods, a futuresmarket is based on buying (or selling) commodity contracts at a fixed price for potential physicaldelivery at some future date. (10) 
A futures exchange provides the facilities for buyers and sellers to trade commodity futurescontracts openly, then reports any market transactions to the public. (11) 
As a result of this activity, futures markets function as a central exchange for domestic andinternational market information and as a primary mechanism for price discovery. Commodity markets rely heavily onUSDA reports for guidance on supply and demand conditions. The release of USDA supply and demandestimates has the potential to substantially alter market expectations about current and futurecommodity market conditions and are, therefore, closely watched by market participants. However, certain characteristics of agricultural product marketsset them apart from most non-agricultural products and tend to make agricultural product prices morevolatile than are the prices of most nonfarm goods and services. (49) Three such noteworthycharacteristics of agricultural crops include the seasonality of production, the derived nature of theirdemand, and generally price-inelastic demand and supply functions. Asa result, local and international market conditions for these substitutes play a role in U.S. andinternational cotton price formation.
This report provides a general description of price determination in major U.S. agriculturalcommodity markets for wheat, rice, corn, soybeans, and cotton. Understanding the fundamentalsof commodity market price formation is critical to evaluating the potential effects of governmentpolicies and programs (existing or proposed), as well as of trade agreements that may open U.S.borders to foreign competitors. In addition, an understanding of the interplay of market forces overtime contributes to flexibility in making policy for what may be short-term market phenomena. Thegeneral price level of an agricultural commodity, whether at a major terminal, port, or commodityfutures exchange, is influenced by a variety of market forces that can alter the current or expectedbalance between supply and demand. Many of these forces emanate from domestic food, feed, andindustrial-use markets and include consumer preferences and the changing needs of end users;factors affecting the production processes (e.g., weather, input costs, pests, diseases, etc.); relativeprices of crops that can substitute in either production or consumption; government policies; andfactors affecting storage and transportation. International market conditions are also importantdepending on the "openness" of a country's domestic market to international competition, and thedegree to which a country engages in international trade.
A distinguishing feature of U.S. commodity markets is the importance of futures markets. Unlike cash markets which deal with the immediate transfer of goods, a futures market is based onbuying (or selling) commodity contracts at a fixed price for potential physical delivery at some futuredate. A futures exchange provides the facilities for buyers and sellers to trade commodity futurescontracts openly, and reports any market transactions to the public. As a result of this activity,futures markets function as a central exchange for domestic and international market information andas a primary mechanism for price discovery, particularly for storable agricultural commodities withseasonal production patterns.
The U.S. Department of Agriculture (USDA) plays a critical role in monitoring anddisseminating agricultural market information. Commodity markets rely heavily on USDA reportsfor guidance on U.S. and international supply and demand conditions. The release of USDA supplyand demand estimates has the potential to substantially alter market expectations about current andfuture commodity market conditions and are, therefore, closely watched by market participants.
In general, certain characteristics of agricultural product markets set them apart from mostnon-agricultural product markets and tend to make agricultural product prices more volatile than arethe prices of most nonfarm goods and services. Three such noteworthy characteristics of agriculturalcrops include the seasonality of production, the derived nature of their demand, and generallyprice-inelastic demand and supply functions. In addition, wheat, rice, corn, soybeans, and cottoneach have certain unique structural characteristics that further differentiate the nature of market priceformation from each other. This report will be updated as conditions warrant.