Worthy of consideration for those working and trading in the agriculture and farming industries is an alternative commodity exchange, a marketplace in which commodities are traded in a fair and orderly fashion, and in which traders can rely on an efficient dissemination of price information and up to 5% better prices. Known as Coordinated Discovery Markets(CDM), this exchange will impact and influence Producers, Consumers, Speculators and the Coordinated Discovery Market itself. Below is a brief overview of the perspective of each of these four market participants and how the coordination and combination of those perspectives may serve to form markets which are less expensive, safer, and more stable than known alternatives.
A Producer using this market sees, for example, this week's price of wheat, as well as wheat prices for each week years into the future as published by the CDM.This week's price is fixed, and while it may be, and probably is different from last week's and next week's price, it hasn't changed much for the last 6-12 months. The costs to Speculators rise rapidly to make prices fluctuate in the short term. If the Producer is willing to make delivery, he registers the number of contracts to sell, and at settlement the system will inform him of the amount of supply required up to the amount he registered for trade. If he is average or small in size, the chance that his full supply is not used is essentially zero. He then makes delivery and is paid for his goods at the CDMpublished price.
A Consumer is in the same position as the Producer but the price paid by the Consumer includes the commission costs of the CDM. Like the Producer, if the Consumer is small to average in size, the chance of not having his order filled in full is quite small. The CDM uses a "bottom up" matching strategy which minimizes marginal costs of price errors. This means that any mismatch between supply and demand is resolved with the smallest orders being filled first. This is done for two reasons. First, the law of diminishing marginal returns provides that missing part of a large order is less important than missing an equal fraction of a small order. Second, this eliminates all incentives to misrepresent true desire to trade as no advantage and some risk is taken by submitting an order larger than desired. For example, if the CDMsettlement of supply and demand results in fulfillment of 999 of 1000 contracts, then the Producer/Consumer in this case would have gotten 999 contracts with a bid of 1010 or 2000 or any other number greater than 999, but those bids would cause the Producer/Consumer to risk having to deliver/take more than 1000 contracts.
A Speculator is one who wagers on the future prices in what could be called "pari-mutuel pools" associated with each price. It is analogousto racetrack betting, in which those holding winning tickets divide the total amount bet in proportion to their wagers, except rather than taking a percentage for management costs and taxes a reward is added based on the amount of trade generated by theoutcome. Movement of the price away from the final settlement price causes a loss of the original investment. Movement toward that price pays 100% returns on an annualized basis. For example, if the price of wheat in a given week wound up being $7.50 per bushel, then a Speculator who had wagered and thus moved the price from $7.40 to $7.30, will lose that bet, and a Speculator who moved the pricefrom $7.70 to $7.60 would win. Essentially all prices will be publicly negotiated to be as attractive as possible to both buyers and sellers. Those who participate by moving prices toward their final values will be compensated by their share of the market commission and at the expense of those who move prices away from their final values. Alternatively, those who wish to focus on production or consumption may do so with a fixed, known, and lower cost of doing business.
The Operator of a CDM is the company responsible for the marketplace much like the Chicago Mercantile Exchange(CME) or the New York Stock Exchange(NYSE). The Operator maintains and publishes the future price calendar along with its history of change. He escrows the "pari-mutuel pools" of the Speculators and the buy orders of Consumers during the settlement period. The Operator takes and settles the desires of the Producers and Consumers to match up trades. The Operator will take a small part of the commission income for himself and then distributes the rest, along with the "pari-mutuel pool," to Speculators as trades settle. Otherwise the operation of these markets are similar to existing systems.
By setting the pace of operation at human rather than computer speeds the operational costs of markets using this Coordinated Discovery Market design are considerably lower than existing systems. This pace eliminates brokerage and hedging costs and can lead to a significant reduction in financial service costs and up to a 5% greater return to the farmers and Consumers. The separation of speculation from exchange activity makes regulation simpler. The ability to set the difference between buyer and seller prices allows the pricing of transaction costs, thereby allowing this kind of exchange to provide the services of today's current exchanges but at lower costs based on lowering financial overhead, reducing time commitment, and simplifying regulatory burdens.
