Agricultural market participants are urging prediction market operators to look beyond products that closely resemble existing futures contracts, while leaving the door open to contracts targeting risks traditional derivatives do not easily cover.
The issue was a focus at the Commodity Futures Trading Commission’s Agricultural Commodity Futures Conference (AgCon) in Kansas on 23 October, six months after Kalshi launched a commodities trading hub with event contracts linked to agricultural futures prices, including corn, soybeans and wheat.
Rather than trading the futures themselves, participants could take yes-or-no positions on whether those prices would settle above or below specified levels. The launch brought the round-the-clock model associated with newer prediction markets up against established agricultural futures markets with defined trading hours and, for some contracts, physical delivery.
The launch drew pushback from agricultural groups over round-the-clock trading and a lack of industry consultation, as well as questions about the implications for price discovery and the ability of farmers, ranchers and other commercial market participants to manage risk effectively.
Kalshi subsequently restricted trading hours for its agricultural contracts to align more closely with traditional US markets. The agricultural price contracts launched in April do not currently appear among the markets displayed on Kalshi’s commodities page.
“The scale and the speed at which these innovations are happening are scary,” said Ed Prosser, a senior vice president at agricultural supply chain company Scoular, speaking on a panel at AgCon. “24/7 trading in agriculture is not good and not appropriate. Six months ago, we woke up on a Thursday morning, and a corn look-alike was trading 24/7.”
“I think there are a thousand potential added-value places for prediction markets or event contracts in the ag community,” added Reggie Griffith, global head of regulatory compliance at Louis Dreyfus Company, a global merchant and processor of agricultural goods.
But Griffith questioned the value of “look-alike” contracts, arguing that prediction markets should instead focus on risks that existing derivatives do not capture.
“There are lots of other risks that are not being captured that are complementary to our deliverable contracts,” he said. “Any time you start to mess with our deliverable contracts, we are going to be very, very defensive of them for a reason.”
Still, Griffith said the episode had opened a useful conversation. Speaking to Udesh Jha, chief risk officer at Kalshi Clearing, sitting next to him on the stage, he said, “The good news is, you got us talking, you got us thinking about it. I don't think it was a great start, but I think we can move forward and look for better ways these products can be integrated into the ag community and in risk management.”
Getting the structure right
Jha acknowledged that agricultural contracts require different considerations from some other prediction markets, particularly around trading hours and the link to physical markets.
“The points are very well taken – it has to be done the right way. Certain markets may work 24/7, ags may not work 24/7. You’ve got to respect that,” he said. “Convergence is a very big deal with ag markets. Physical delivery is involved. Real movement of goods is involved.”
Those considerations need to inform how agricultural contracts are designed, Jha said.
“Building a financially sound contract doesn’t make it the right contract for the commercial market,” he said, pointing to convergence, delivery, liquidity and trading hours as important factors. “Being in Kansas, talking to the agriculture community has further resolved that, and we look forward to continuing to engage with the agricultural community.”
On Kalshi’s initial corn contract, Jha added: “I look at that more as a glass half full. You start somewhere, you learn, you react and you adjust. That’s our approach.”
Other prediction market operators on the panel also supported closer engagement with the agricultural industry.
Steve Humenik, chairman of OG Prediction Markets, said exchanges seeking to enter new asset classes must research demand and work with the relevant market before listing contracts.
“If we want to offer contracts in other asset classes, we need to do the work and we need to do the research,” Humenik said. “We can’t just throw contracts up every day just to see what sticks.”
Complement
The speakers identified several areas in which prediction markets might complement traditional futures by addressing narrower or more localised risks.
Prosser said agricultural markets already struggle for liquidity beyond the largest contracts, making it risky to divide trading between economically similar instruments.
“I think that bifurcating liquidity in different markets is not a very good idea,” he said.
But Prosser identified exposures that existing futures do not easily isolate, including the corn-soybean ratio used to assess planting incentives and regional changes in crop production that affect rail freight capacity.
“There are going to be things where we are not going to steal liquidity for our flagship contracts, and they are going to be effective,” he said.
Asked which event contract agricultural firms and exchanges might test together, Prosser suggested a product settled against US Department of Agriculture data, potentially based on corn yields or crop stocks.
Griffith proposed weather contracts focused on significant agricultural regions. He said such products could allow commercial firms to maintain an existing futures hedge while separately managing the tail risk associated with a weather event or an unexpectedly large crop report.
Traditional futures would remain the “bedrock” of agricultural price discovery and risk management, Jha agreed, with event contracts potentially addressing more bespoke exposures and basis risks.
When it came to liquidity, panellists differed over whether prediction markets would bring new liquidity into derivatives markets or redistribute activity already taking place elsewhere.
Neal Kumar, chief legal officer at Polymarket, argued that the products were bringing new money into derivatives markets and could help participants isolate risks otherwise embedded within broader futures positions.
Prosser, however, was more cautious. “I can’t tell whether we are bringing new liquidity with event contracts; it’s too new,” he said. As futures markets have added options, expiries and strike prices, he said, “all of that has simply taken the same liquidity and spread it over different instruments. I am a little sceptical that it might be different when we add prediction markets.”
Overall, commercial users on the AgCon panel did not argue for excluding prediction markets from agriculture. Their message was that the products must undergo sufficient scrutiny and serve a distinct economic purpose.
Griffith called on the CFTC to conduct appropriate due diligence and seek input from agricultural market participants when examining new contracts, while Prosser said regular engagement between the industry and its regulator would be crucial as the market develops.
“Communication is the key,” Prosser said. “We cannot predict where all this stuff is going to go. We are going to have to react, and a good relationship with our regulators is the only way that we are going to be able to make sure this goes in the right direction.”
