What does it mean to invest in potatoes?

Question

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?

Answer 1

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.

Answer 2

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.