There is an amusing thread on Reddit where people discuss what they would do with an unlimited supply of potatoes: http://www.reddit.com/r/AskReddit/comments/37yawp/you_have_an_almost_infinite_supply_of_potatoes/

Some of the comments discuss investing in potato futures. This is something I don't understand.

Potatoes aren't oil or steel, there are many different breeds, strains and types - things like soil condition and the type of fertiliser all play a part in the actual value of the finished potato product. Tack on to that the costs of transporting potatoes to their destinations.

So what is it to invest in potatoes? How can all potatoes have the same price per ton? If I tell my stockbroker "take this $100 and invest it in potatoes" where does that money go, exactly? This isn't like investing in stock where I get a piece of paper saying I own a share of a company, where are the potatoes I bought? How can I eat those potatoes?

  • 6
    There are many different kinds and grades of oil and steel as well. There's a big difference between West Texas Intermediate and Dubai Crude (e.g. sulphur content of .24% versus 2%), to name just two different grades of oil that are used for pricing benchmarks. And steel is even more variable, with all kinds of additives such as nickel, chromium and molybdenum to give it the desired properties for a particular application.
    – Mike Scott
    May 31 '15 at 20:50
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    @mike right. So why don't I see investment in Idaho vs Irish potato futures?
    – Dai
    May 31 '15 at 20:55
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    One does not invest in commodities, one speculates in them. You have a contract to accept delivery, or to deliver, (say) one ton of potatoes on a specific date at a specific price. Someone else has a contract to deliver to you, or to accept from you, one ton of potatoes on that date at that price. Neither of you has ever laid eyes on a ton of potatoes, let alone the ton that is supposed to change hands on that date. If the market price that date is different from the price agreed upon, one of you two is going to lose money and the other to make money. Only the makers of Tater Tots.. May 31 '15 at 22:52
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    ... and other such fine products will actually accept delivery of that ton of potatoes on that date, and only giant agricultural firms will actually deliver that ton of potatoes on that date. Everybody else is just gambling, pure and simple, with futures contracts; some betting that the price will go up and others that the price will go down. (Note: commodities contracts are usually bought on margin and you can make spectacular profits or suffer spectacular losses from investing relatively small amounts of money). May 31 '15 at 22:55
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    @user662852 Reminds me of one of the best dailywtf articles, back before that site got stupid: thedailywtf.com/articles/Special-Delivery - always fun to reread that one.
    – neminem
    Jun 4 '15 at 16:36

In order for a commodity to be offered as a future, the exact specifications must be specified by the exchange. This includes not only the particular grade, strain, etc (depending on what we are talking about) but also the exact delivery location (otherwise transportation costs is an issue as you noticed).

Once there is a standardized contract, the exchange can match up buyers and sellers who are agreeing to the terms of the contract.

From a fun little article on commodities:

... you will have to go either to Europe to trade European Processing Potato futures on Eurex [...], or to India, to the Multi Commodity Exchange of India (MCX). [...]

On the MCX, two different types of potato are deliverable, "Agra" potatoes with the 3797 as its "basis variety" of potato and "Tarkeshwar" potatoes with the Kufri Jyoti as its "basis variety."

So let's look at an example, the Agra future contract on MCX. It specifies

  • delivery unit: "30 MT with a tolerance limit of 5%"
  • delivery location and storage: "Ex-cold storage, Agra. Delivery can be effected from the MCX approved cold storage only."
  • Potato type and grade is specified: "Potato of 3797 variety, with matured and thick skin, stored in cold deliverable grades storage (farm-fresh potatoes not allowed for delivery), free of common scab and blight."
  • Potatoes come in odd shapes, so the contract attempts to specify a reasonable compromise on size:

(size measured from at least one side by way of passing through sieve) • Acceptable size 4–8 cm
• Rejected If below 4 cm and above 8 cm exceeds 5%

... and more details regarding the financials.

  • So if the contract lays out the precise specifications, why do I see general commodity prices in financial news? What prices are they referring to? Are they averaging-out the price of all agreed futures contracts per ton? Wouldn't that be meaningless if there was a wide variety in the base pricing of different strains of potatoes?
    – Dai
    Sep 4 '16 at 4:05
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    That's perceptive. News prices are just there to convey a general sense. Consider examples like crude oil which appear in newspapers without much detail. US news like the WSJ would typically quote a WTI Crude Oil contract on Nymex. European sources like the Financial Times would typically quote a Brent Crude contract on ICE. The contracts quoted would be for the most liquid month. There is no hard and fast rule for which market to pick, although activity and regional preference play a role. Sep 4 '16 at 5:28
  • As for how the choice of markets affect the prices quoted, to a large extent, major price movements will usually be reflected across different markets for the same commodity. While there are pricing differences due to location, commodity grade, settlement procedure, pricing currency, etc., (expectations of) supply and demand are major drivers. The markets are typically efficient enough that one market will adjust fairly rapidly in response to changes in another to eliminate any significant mispricings. Sep 4 '16 at 5:34

comments discuss investing in potato futures.

Learn / ready about commodity trading or commodity futures. An investopedia article How To Invest In Commodities is a good start. There are quite a few commodities offered for normal trade or as futures. Potatos may not be offered on quite a few exchanges. Found some here

Investing in commodities is fraught with quite a bit of risk, some like you have already pointed out. Of course you can't eat all and have to sell.

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