Expected value futures market, the analysis

As is known, from week 45 onwards the CS will be determined weekly by the stock exchange (EEX) in Leipzig. The CS is composed by input from physical listings in the Netherlands, Germany, France and Belgium, each with a 25 percent share. The input from the various countries is determined separately in each country, but ultimately calculated back to product specifications as the potatoes are traded on the futures market.

The futures market quotes a price based on what the potato price will be in week 17. At this moment, the futures market assumes that the average potato price of potatoes suitable for fries in week 17 will be 20,30 euros. The general rule is that the daily price of potatoes plus the storage fee plus a risk premium would be the price of the futures market. The calculation should then be:
22,50 euros (CS of week 10) + 6 weeks storage fee (week 17 -/- week 11) + risk premium/expected value.

Based on the average expected value of the past 5 years in week 10 (see graph), this would now be approximately 2,00 euros (1,40 euros expected value + 0,60 cents storage premium). Based on this calculation, the futures market should be at 24,50 euros today.

However, today it stands at 20,40 euros, which means that the futures market is showing a special phenomenon. That is a 'negative expected value', something that has rarely occurred in the past 15 years. From the data of our potato database It turns out that this only happened in 2012. Then too, a negative expected value arose, but always for a short period (1 week). In addition, 2012 was a year with a relatively high scarcity of potatoes and therefore also high volatility.

In fact, showing a negative expected value is a negative signal for confidence in the market. The negative is explained more strongly than the positive. The expected value is often added by speculators in the market. A professional trader in the futures market will always make a decision when buying potatoes; whether he buys it on the futures market or in the physical market. 

At the moment people are choosing not to buy on the futures market, but it also feels calm on the physical market. Most processors appear to have their position in order by partially filling their coverage ratio in the autumn with the purchase of potatoes that are normally not intended for processing (starch potatoes, table potatoes and oversized seed potatoes).

Ultimately, the physical market (CS) and the futures market will touch each other in week 17. Whether the (negative) futures market is right or whether the (positive) physical market is right remains to be seen. But it is clear that what is happening now is exceptional.