I have solved this issue and am posting the solution here since I could not find the problem when searching this forum.
When using apt-get to install Hugo on Ubuntu 17.10, an old version of Hugo 0.25.1-2 is installed from the Ubuntu repositories. The problem is that files with the .md extension does not seem to be parsed as markdown files in this version of Hugo. Neither does Hugo shortcodes seem to work.
My solution was to execute “sudo aptitude purge hugo” under Ubuntu and to download a recent tarball intended for Ubuntu from the Hugo releases at https://gohugo.io/categories/releases . I copied to binary file “hugo” from that tarball to the ~/.local/bin directory (where my own binaries are stored) and magically my Hugo project parsed Markdown correctly.
The downside was that purging Hugo also deleted the Ubuntu man files for Hugo. I should investigate restoring them selectively without installing the old Hugo binary from the Ubuntu archives.
As an aside, I have been using Middleman in Ruby for many years and while I am twisting my head around the Hugo way of doing things, Hugo is exactly the offline static site creation tool that Middleman should have been. This has inspired me to learn, or at least dabble in the Go language as well.
Hope this helps someone in future.