1

Current Price Topics

Technology in Commodity 

Markets

Producer Price Index: Third Quarter 2011

U.S. Bureau of Labor Statistics November 2011 Volume 2, Number 10

The Producer Price Index tracks price changes 

for a variety of agricultural commodities that 

have price movements which are influenced 

by the commodity markets. The commodity 

markets are composed of a number of 

international commodity exchanges, including 

the Chicago Mercantile Exchange Group 

(CME)1

 and the New York Mercantile Exchange 

(NYMEX). Common types of contracts, such 

as spot, futures, and options, are frequently 

traded on these exchanges at a high volume. 

Traditionally, commodity trading had been 

performed using the open outcry system, a 

communication method that consists of floor 

traders shouting or using hand signals to buy 

or sell orders while standing in a trading pit.

There are many factors that affect commodity 

prices, including inclement weather 

conditions, such as droughts or floods; overall 

consumption; or the supply and demand for 

the commodity in the market. Historically, 

conditions such as these have led to 

commodity prices experiencing periods of high 

volatility when the commodities were traded 

using the traditional open outcry system. 

The emergence of electronic trading has only 

served to exacerbate the level of volatility in 

commodity prices, as seen in some Producer 

Price Indexes. 

Electronic Trading 

In the last decade the open outcry system has 

been eclipsed by electronic trading. In electronic 

trading, a broker-dealer uses a computer to 

execute point-and-click trades on the electronic 

trading platforms and networks that make up a 

virtual marketplace. On August 1, 2006, the CME 

introduced electronic trading of agricultural 

futures contracts, and electronic trading took 

place alongside the open outcry system. Trading 

volume quickly migrated from the floor to the 

computer, and within 6 months electronic 

trading of futures contracts accounted for 

50 percent of the total trading volume.2

 The 

Commodity Futures Trading Commission (CFTC) 

estimates that electronic trading now accounts 

for a majority of the more than one billion 

futures and option contracts that are traded 

annually, and its share is expected to continue to 

increase dramatically.3

Algorithmic Trading

In recent years, the use of mathematical 

formulas called algorithms has gained 

prominence in electronic financial markets. 

Algorithmic trading (AT) uses a mathematical 

set of instructions and parameters, scripted 

by computer programmers for their clients, to 

make decisions about buying and selling. The 

dominant use of algorithms in the commodity 

space is for risk assessment or straightforward 

limit-order and stop-loss trades in click-andpoint trading.4

 However, algorithmic trading of 

commodities futures, also known as black-box 

trading, has quickly evolved to the point that 
CURRENT PRICE TOPICS

2

the computers are now enabled to make trading 

decisions. This type of trading uses sophisticated 

algorithms to read the market data, analyze 

trading opportunities, and transmit order 

messages with little or no human intervention.5

High Frequency Trading

High frequency trading (HFT), a subset of 

algorithmic trading, analyzes market data to 

capture trading opportunities that may open 

for only a fraction of a second. The success of 

HFT depends upon how fast and effectively 

the trades are made. For HFT to be considered 

successful, trades must be made at lightning 

speeds. High frequency traders compete with 

other high frequency traders for very small, 

consistent profits by making large purchases 

which may be held for only minutes. Whether 

HFT has a positive effect on price behavior 

is a matter of debate among traders. Some 

traders believe that HFT increases market 

liquidity because buyers and sellers are always 

available at every price level, and that HFT 

promotes good trading opportunities.6

Other traders believe that HFT contributes 

to the volatility in commodity markets, as 

seen recently with agricultural commodities, 

specifically the PPIs for corn and wheat.

7

A comparison of the 5-year period before 

the introduction of electronic trading in the 

commodity markets (July 2001–July 2006) with 

the 5-year period after electronic trading was 

introduced (August 2006–July 2011) shows a 

statistically significant increase in the volatility 

of monthly price movements.8

 (See charts 1

and 2.) Some traders and regulators feel this 

volatility can be attributed to electronic trading 

and the presence of index traders in the corn 

and wheat commodity markets. During periods 

when many traders purchased and held futures 

contracts, it created excess demand compared 

with the cash market for these commodities.9

In turn, this excess demand led to higher prices, 

-25.0 

-20.0 

-15.0 

-10.0 

-5.0

0.0 

5.0 

10.0 

15.0 

20.0 

25.0 

Jul 2001 Jul 2002 Jul 2003 Jul 2004 Jul 2005 Jul 2006 Jul 2007 Jul 2008 Jul 2009 Jul 2010 Jul 2011 

Percent change 

SOURCE: U.S. Bureau of Labor Statistics 

Chart 1. One-month percent change in PPI for wheat, not seasonally adjusted

Introduction of electronic 

trading, August 1, 2006 
CURRENT PRICE TOPICS

3

second quarter.11 This slightly faster rate of 

advance can be traced to prices for finished 

consumer foods, which climbed 2.2 percent 

for the 3 months ended in September, after 

inching down 0.1 percent in the preceding 

quarter. In contrast, the index for finished 

energy goods moved up 0.7 percent following 

a 1.3-percent increase for the 3 months ended 

in June. Prices for finished goods less food 

and energy also rose 0.7 percent in the third 

quarter, nearly the same rate as in the prior 

quarter, 0.8 percent.12 (See chart 3.) At the 

earlier stages of processing, prices received by 

manufacturers of intermediate goods edged 

up 0.3 percent for the 3 months ended in 

September, after climbing 2.1 percent in the 

previous quarter. A slower rate of advance in 

the intermediate core index, combined with 

a downturn in prices for intermediate energy 

goods, outweighed acceleration in the rate 

of inflation for intermediate foods and feeds. 

(See chart 4.) The crude goods index turned up 

independent of typical supply and demand 

factors. According to a U.S. Senate report, the 

activities of these index traders constitute the 

type of excessive speculation that has impaired 

the ability of farmers to price their crops and 

manage price risks over time.10

The effect of electronic trading on the 

commodity markets and Producer Price 

Indexes will continue to be studied and 

debated in the coming years as the use of 

technology increases and evolves.

The PPI for finished goods increased 

1.0 percent in the third quarter of 2011, 

compared with a 0.8-percent rise in the 

Current Price Trends

Producer Inflation Mixed in 

Third Quarter 2011, Food 

Prices Rise

-25.0

-20.0

-15.0

-10.0 

-5.0

0.0

5.0

10.0

15.0

20.0

25.0 

30.0

Jul 2001 Jul 2002 Jul 2003 Jul 2004 Jul 2005 Jul 2006 Jul 2007 Jul 2008 Jul 2009 Jul 2010 Jul 2011 

Percent change 

SOURCE: U.S. Bureau of Labor Statistics 

Chart 2. One-month percent change in PPI for corn, not seasonally adjusted

Introduction of electronic 

trading, August 1, 2006 
CURRENT PRICE TRENDS

4

In the food sector, prices for corn, oilseeds, 

and alfalfa hay advanced in the third quarter 

of 2011. The 2011 yield per acre for corn is 

forecast to be down 3.1 percent to 148.1 

bushels per acre, and projected usage is 

expected to remain strong, significantly 

depleting inventory.13 In the oilseeds market, 

1.8 percent in the third quarter of 2011 after a 

1.1-percent decrease in the preceding quarter. 

Price increases accelerated for both crude 

foodstuffs and feedstuffs and for crude core

commodities, while the index for crude energy 

materials inched down following a steep drop 

in the second quarter. (See chart 5.)

0.8

-0.1 

1.3 

0.8

1.0

2.2 

0.7 0.7

-1.0

0.0 

1.0 

2.0 

3.0 

Overall Food Energy Core 

Percent change 

Mar 11 - June 11 June 11 - Sept 11 

SOURCE: U.S. Bureau of Labor Statistics 

Chart 3. Three-month percent change in PPI for overall, food, energy, and core 

finished goods, seasonally adjusted

2.1

1.9 

2.7 

1.9

0.3

2.6 

-0.2 

0.3

-1.0

0.0 

1.0 

2.0 

3.0 

Overall Food Energy Core 

Percent change 

Mar 11 - June 11 June 11 - Sept 11 

SOURCE: U.S. Bureau of Labor Statistics 

Chart 4. Three-month percent change in PPI for overall, food, energy, and core 

intermediate goods, seasonally adjusted
CURRENT PRICE TRENDS

5

-1.1

1.4 

-5.1 

2.5

1.8

2.9 

-0.5 

3.3

-6.0

-4.0

-2.0

0.0 

2.0 

4.0 

Overall Food Energy Core 

Percent change 

Mar 11 - June 11 June 11 - Sept 11 

SOURCE: U.S. Bureau of Labor Statistics 

Chart 5. Three-month percent change in PPI for overall, food, energy, and core 

crude goods, seasonally adjusted

soybean yield per acre is projected to fall 

3.9 percent in 2011 to 41.8 bushels, and 

with harvested acreage down 3.7 percent 

in 2011, supply and inventory projections 

are pessimistic.14 Higher grain and feedstuff 

prices contributed to rising prices in the 

third quarter for prepared animal feeds and 

slaughter livestock, as well as more highly 

processed goods such as meats and dairy 

products. 

In the energy sector, moderating inflation for 

refined petroleum products and processed 

gas fuels (utility natural gas and liquefied 

petroleum gas) led to more modest price 

changes in the indexes for both finished 

and intermediate energy goods. Wellhead 

natural gas prices exhibited a steep drop 

in the third quarter, in response to ample 

injections to underground storage of natural 

gas and Energy Information Administration 

(EIA) projections for moderate winter heating 

demand.15 According to EIA, the National 

Oceanic and Atmospheric Administration 

forecasted that the upcoming winter will likely 

be about 2 percent warmer than last winter. 

The PPI for crude petroleum, which dropped 

over 31.1 percent from May to August, surged 

23.0 percent in September.

Finished goods

The PPI for finished goods moved up 1.0 

percent for the 3-month period ended 

September 2011, subsequent to a 0.8-percent 

advance for the 3 months ended in June. 

Spurring this acceleration, prices for finished 

consumer foods turned up from June to 

September, after inching down in the prior 

quarter. By contrast, the indexes for both 

finished energy goods and finished goods less 

foods and energy advanced less than they had 

in the 3 months ended in June.
CURRENT PRICE TRENDS

6

From June to September, prices for finished 

consumer foods advanced 2.2 percent, 

compared with a 0.1-percent decline in the 

preceding quarter. Leading this upturn, 

prices for meats climbed 6.6 percent in the 

third quarter after falling 2.2 percent for 

the 3 months ended in June. The index for 

fresh and dry vegetables fell less in the third 

quarter, and prices for processed fruits and 

vegetables increased more than they had in 

the second quarter. By contrast, the index for 

eggs for fresh use moved down 2.3 percent 

in the third quarter, following a 38.2-percent 

jump from March to June. Prices for sugar 

and confectionary products and for soft drinks

also turned down after rising in the second 

quarter.

Finished energy goods prices moved up 0.7 

percent from June to September, compared 

with a 1.3-percent gain in the previous 

quarter. The increase in the index for 

liquefied petroleum gas slowed to 1.7 percent 

in the third quarter, following a 12.0-percent 

jump for the 3-month period ended in June. 

Prices for gasoline and finished lubricants

also rose less than they had in the second 

quarter. The index for residential natural 

gas turned down after increasing for the 3 

months ended in June. Conversely, prices 

for residential electric power turned up in 

the third quarter, advancing 1.5 percent 

after declining 1.2 percent in the previous 

3-month period. The index for home heating 

oil fell less from June to September than it 

had from April to June.

The index for finished goods less foods and 

energy advanced 0.7 percent for the 3-month 

period ended in September, following a 

0.8-percent gain in the second quarter. From 

June to September, higher prices for light motor 

trucks, cigarettes, pharmaceutical preparations, 

apparel and other fabricated textile products, 

printing ink, and rubber and rubber products

outweighed lower prices for passenger cars. 

Intermediate goods

The PPI for intermediate materials, supplies, 

and components inched up 0.3 percent for 

the 3 months ended in September, following 

a 2.1-percent rise for the 3 months ended in 

June. Leading this deceleration, the index 

for intermediate goods less food and energy

advanced less than it had in the second 

quarter. Also contributing to the smaller rise 

in prices for intermediate goods, the index 

for intermediate energy goods fell for the 3 

months ended in September, after moving 

up in the previous quarter. In contrast, prices 

for intermediate foods and feeds rose more 

than they had in the preceding 3 months.

Prices for intermediate materials other than 

foods and energy edged up 0.3 percent in the 

third quarter after increasing 1.9 percent in 

the preceding quarter. The rise in the index 

for thermoplastics resins and materials slowed 

to 3.0 percent from 7.2 percent in the second 

quarter. Prices for industrial chemicals, plastic 

products, steel mill products, and aluminum 

mill shapes turned down in the third quarter. 

Conversely, the lumber index moved up 0.8 
CURRENT PRICE TRENDS

7

Crude goods

The PPI for crude materials for further 

processing turned up 1.8 percent for the 3 

months ended in September, after falling 1.1 

percent during the preceding quarter. The 

indexes for crude foodstuffs and feedstuffs

and for crude nonfood materials less energy

rose more in the third quarter than they had 

from March to June.  Prices for crude energy 

materials decreased less than they had in the 

second quarter. 

The increase in the index for crude foodstuffs 

and feedstuffs accelerated to 2.9 percent in 

the third quarter from 1.4 percent in the prior 

quarter. Slaughter livestock prices turned up 

2.3 percent from June to September, after 

decreasing 1.9 percent during the previous 

quarter. The index for fresh vegetables 

(except potatoes) decreased less in the third 

quarter, and prices for corn rose more than 

they had in the second quarter. By contrast, 

the index for Irish potatoes for processing

turned down 19.6 percent for the 3 months 

ended in September, following a 105.3 

percent jump from March to June. Prices for 

slaughter poultry and wheat also declined 

after moving up in the second quarter.

The decline in the index for crude energy 

materials slowed to 0.5 percent in June to 

September, a decrease from 5.1 percent in 

the previous quarter. In the third quarter, 

a 7.8-percent drop in natural gas prices 

outweighed advances of 3.4 percent for crude 

petroleum and 2.7 percent for coal. 

percent for the 3 months ended in September, 

after dropping 3.9 percent for the 3 months 

ended in June. 

Prices for intermediate energy goods inched 

down 0.2 percent for the 3 months ended in 

September, following a 2.7-percent increase 

in the previous quarter. The asphalt index 

dropped 4.2 percent after surging 25.6 

percent in the second quarter. Prices for jet 

fuel, utility natural gas, and residual fuel also 

turned down in the third quarter. The index 

for liquefied petroleum gas rose at a slower 

rate than it had in the preceding 3 months. In 

contrast, electric power prices advanced 2.5 

percent for the 3 months ended in September, 

following a 1.7-percent decrease for the 3 

months ended in June.

The index for intermediate foods and feeds

increased 2.6 percent for the 3 months 

ended in September, after moving up 1.9 

percent in the previous quarter. Leading this 

acceleration, meat prices jumped 6.6 percent 

in the third quarter, following a 2.2-percent 

decline for the 3-month period ended in June. 

The indexes for processed cheese and related 

products and for soybean cake and meal

advanced after falling in the second quarter. 

Conversely, the index for meat and bone meal

dropped 18.5 percent for the 3 months ended 

in September, following a 17.3-percent surge 

in the preceding 3 months. Prices for flour and 

flour-base mixes and doughs and for refined 

sugar and byproducts also turned down in the 

third quarter.
CURRENT PRICE TRENDS

8

received by long-distance general freight 

truckers, which fell 0.4 percent in the third 

quarter, after a 2.6-percent rise in the previous 

quarter. The indexes for couriers, line-haul 

railroads, and specialized freight trucking also 

turned down in the third quarter after increasing 

from March to June. Conversely, prices received 

by the industry for freight transportation 

arrangement moved up 2.9 percent for the 3 

months ended in September, after decreasing 

1.0 percent in the prior quarter. The index for the 

U.S. Postal Service was unchanged after rising 

from March to June. 

Traditional service industries

The PPI for the net output of total traditional 

service industries rose 0.4 percent for the 3 

months ended in September, following a 

0.7-percent increase from March to June. Most 

of this slower rate of advance can be traced to 

prices received by the industry for commercial 

banking, which moved up 0.5 percent 

compared with a 7.7-percent jump a quarter 

earlier. From June to September, the indexes 

for portfolio management, engineering 

services, and newspaper publishers declined 

after rising in the previous 3-month period. 

By contrast, prices received by general 

medical and surgical hospitals advanced 0.6 

percent after edging down 0.1 percent. Prices 

received by offices of physicians increased 

in the third quarter, following no change for 

the 3 months ended in June. The industry 

indexes for savings institutions and passenger 

car rental turned up after decreasing in the 

second quarter.

The rise in the index for crude nonfood 

materials less energy accelerated to 3.3 percent 

for the 3 months ended in September, from 2.5 

percent in the previous quarter. The index for 

gold ores advanced 21.8 percent in the third 

quarter, following an 8.7-percent fall in the 3 

months ended in June. Prices for raw cotton

and copper ores also turned up after decreasing 

in the second quarter. Conversely, the index for 

nonferrous scrap fell 1.2 percent after rising 

2.4 percent in the preceding quarter. Prices for 

wheat also turned down in the third quarter, 

and the index for corrugated wastepaper rose 

less than it had in the second quarter.

Trade industries

The PPI for the net output of total trade 

industries moved up 0.8 percent in the 

third quarter, compared with a 1.1-percent 

increase for the 3 months ended in June. 

(Trade industry PPIs measure changes 

in margins received by wholesalers and 

retailers.) From June to September, higher 

margins received by merchant wholesalers 

of nondurable goods, family clothing stores, 

pharmacies and drug stores, and supermarkets

outweighed lower margins received by 

department stores and merchant wholesalers 

of durable goods. 

Transportation and warehousing industries

The PPI for the net output of transportation and 

warehousing industries declined 0.4 percent 

from June to September after advancing 1.4 

percent in the previous 3-month period. About 

a third of this downturn is attributable to prices 
CURRENT PRICE TRENDS

9

Notes

1 In July 2007 the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT) merged to form the CME Group. 

For actions taken by either the CBOT or CME prior to merger, we will refer to them as the CME group.

2 Pia Bandyopadhyay, Valeria Martinez, Yiuman Tse, “Market Quality Conditions in Agricultural Commodities Futures Markets,” 

September 2008, http://69.175.2.130/~finman/Reno/Papers/commodities.pdf.

3 “Advanced Research Technology Initiatives for the Commodity Futures Trading Commission” (Commodity Futures Trading 

Commission), March 3, 2011, https://www.fbo.gov/index?s=opportunity&mode=form&tab=core&id=55f92b9147102939756a

ac47524d2ac6&_cview=0. 

4 Ivy Schmerken, “Commodities Traders Increasingly Adopt Algorithms,” Wall Street & Technology, March 29, 2010, http://www.

wallstreetandtech.com/trading-technology/224200634.

5Will Acworth, “Algorithmic Trading: Seeking an Edge,” Futures Industry Magazine, July/August 2007, http://www.

futuresindustry.org/fi-magazine-home.asp?a=1192.

6 Daryl Guppy, “Fast work important in trading,” China Daily, July 25, 2011, http://www.chinadaily.com.cn/usa/

business/2011-07/25/content_12975777.htm.

7 “High frequency trading in agricultural commodities, a practice under close surveillance,” Momagri, March 21, 2011, http://

www.momagri.org/UK/a-look-at-the-news/High-frequency-trading-in-agricultural-commodities-a-practice-under-closesurveillance_869.html. 

8 For corn and wheat indexes, an F-test for equality of variance was used to determine there was a statistically significant increase in 

variability of monthly price movements in the time period following the introduction of electronic trading (August 2006–July 2011) 

compared to an earlier time period where the traditional outcry system was used (July 2001–July 2006).

9 Paul-Florent Montifort, “Increasing Commodity Index Speculation,” Momagri, http://www.momagri.org/UK/focus-on-issues/

The-U-S-Senate-denounces-excessive-speculation-on-agricultural-futures-markets_538.html.

10 “Excessive Speculation in the Wheat Market” (Senate Committee on Homeland Security and Governmental Affairs), June 

24, 2009, http://hsgac.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=fb439667-dcd3-4025-b95b1b91f8ea29d1.

11 Price movements for PPIs described in this article include preliminary data for the months of June 2011 through September 2011. 

All PPI data are recalculated 4 months after original publication, to reflect late data received from survey respondents. In addition, 

seasonally adjusted PPIs are recalculated on an annual basis for 5 years, to reflect more recent seasonal patterns.

12Within the PPI stage-of-processing structure, indexes for goods other than foods and energy commonly are referred to as the core 

indexes.

13 “Feed Outlook,” FDS-11i, Sept. 14, 2011, United States Department of Agriculture, pp. 3 and 15, http://usda01.library.cornell.

edu/usda/ers/FDS//2010s/2011/FDS-09-14-2011.pdf.

14 “Oil Crops Outlook,” OCS-11i, Sept. 13, 2011, United States Department of Agriculture, pp. 1 and 8, http://usda01.library.

cornell.edu/usda/ers/OCS//2010s/2011/OCS-09-13-2011.pdf.

15 “Natural Gas Weekly Update,” Energy Information Administration, http://www.eia.gov/oog/info/ngw/historical/2011/10_13/

ngupdate.asp.