Economists note there should not be two prices for one thing at the same place and time. Could a drugstore sell two identical tubes of toothpaste, and charge 50 cents more for one of them? Of course not.
But, in effect, exactly that has been happening, repeatedly and mysteriously, in trading that sets prices for corn, soybeans and wheat - three of America's biggest crops and, lately, popular targets for investors pouring into the nation's volatile commodities market. Economists who have been studying this phenomenon say they are at a loss to explain it.
Whatever the reason, the price for a bushel of grain set in the derivatives markets has been substantially higher than the simultaneous price in the cash market.
When that happens, no one can be exactly sure which is the accurate price in these crucial commodity markets, an uncertainty that can influence food prices and production decisions around the world.
These disparities also raise the question of whether American farmers, who rely almost exclusively on the cash market, are being shortchanged by cash prices that are lower than they should be.
"We do not have a clear understanding of what is driving these episodic instances," said Scott H. Irwin, one of three agricultural economists at the University of Illinois at Urbana- Champaign who have done exten- sive research on these price distor- tions.
Market regulators say they have ruled out deliberate market manipulation. But they, too, are baffled.
The Commodities Futures Trading Commission, which regulates the exchanges where these grain derivatives trade, has scheduled a forum April 22 where market participants will discuss these anomalies and other pressure points arising in the agricultural markets.
The mechanics of the commodity markets are more complex than selling toothpaste, however. The anomalies are occurring between the price of a bushel of grain in the cash market and the price of that same bushel of grain, as determined by the expiration price of a futures contract traded in Chicago.
A futures contract is an agreement to deliver a specific amount of a commodity - 5,000 bushels of wheat, say - on a certain date in the future.
Such contracts are important hedging tools for farmers, grain elevators, commodity processors and anyone with a stake in future grain prices.
Close match
A futures contract that calls for delivery of wheat in July may trade for more or less for each bushel than today's cash market price. But as each day goes by, its price should move a bit closer to that day's cash price.
On expiration day, when the bushels of wheat covered by that futures contract are due for delivery, their price should very nearly match the price in the cash market, allowing for a little market friction or major delivery disruptions like Hurricane Katrina.
But on dozens of occasions since early 2006, the futures contracts for corn, wheat and soybeans have expired at a price that was much higher than that day's cash price for those grains.
Futures higher
For example, soybean futures contracts expired in July at a price of $9.13 a bushel, which was 80 cents higher than the cash price that day, Irwin said. In August, the futures expired at $8.62, or 68 cents above the cash price, and in September, the expiration price was $9.43, or 78 cents above the cash price.
Corn has been similarly eccentric. A corn futures contract expired in September at $3.36, which was a remarkable 55 cents above the cash price, but the contract that expired in March 2007 was roughly even with the cash price.
"As far as I know, nothing like this has ever happened in the corn market," Irwin said.
Wheat futures had been especially prone to this phenomenon, going back several years. Indeed, the 2007 study by Irwin and his colleagues concluded that wheat price distortions reflected a "failure to accomplish one of the fundamental tasks of a futures market."
While the situation improved sharply for wheat futures in Chicago late last year, it deteriorated for futures traded in Kansas City. And it has gotten worse for corn and soybeans, Irwin said.
'A lot of shocks'
Many people have a theory about why this is happening, but none of them seem to cover all the available facts.
Mary Haffenberg, a spokeswoman for the CME Group, which owns the Chicago Board of Trade, where these contracts trade, said the anomalies might be a temporary result of "a lot of shocks to the system," including sharp increases in worldwide food demand, uncertainty about supplies and surging commodity investments.
Veteran traders and many in the farm community blame the new arrivals in the commodities markets - hedge funds, pension funds and index funds.
Price distortion
These investors and speculators, they complain, are distorting futures prices by pouring in so much money without regard to market fundamentals. Representatives of the new financial speculators dispute that.
Some economists are exploring whether some unperceived bottlenecks in the delivery system explain what is going on. But traders believe that such bottlenecks would eventually become known in the market and prices would adjust.
What is not happening in these markets is equally mysterious.
Normally, price disparities like these are quickly exploited by arbitrage traders who buy goods in the cheap market and sell them in the expensive one. Their buying and selling quickly brings the prices back into balance - but that isn't happening here.
"These are highly competitive markets with very experienced traders," the University of Illinois' Irwin said. "Yet they are leaving these profits alone? It just doesn't make sense."