November 1997
Market Q & A: Taming the Bulls and Bears
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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.
Send your questions on marketing to: Minnesota Association of Wheat Growers, attn: Prairie Grains Editor, 2600 wheat drive, Red Lake Falls, MN, 56750. Phone: 218-253-4311, Fax: 218-253-4320,e-mail: mnwheat@means.net. We can't guarantee your question will be published, but include your address and we'll do our darnedest to see that your marketing question is answered.
1. What keeps the Exchange from manipulating the market?
The Minneapolis Grain Exchange is a nonprofit organization that provides a forum for public trading by its members. The MGE is also the only federally regulated marketplace for price discovery in hard red spring wheat, soft white wheat, feed barley, and white and black tiger shrimp.
Officially, the Exchange itself must be completely price neutral. All MGE employees are prohibited from trading in or maintaining a profit interest in the commodities traded at the MGE and also any related commodities traded at other exchanges. This prohibition also extends to the public provision of market opinions by MGE staff. We must maintain the strict price neutrality of the Exchange.
2. What happens when more wheat is traded on paper than actually grown?
Trading volume on a futures contract has no relation to the underlying supply of the commodity. A futures is a zero-supply market - for every buyer there is a seller and vice versa. The net position of the market is always neutral. Unlike the stock market, there is no fixed limit on the amount of "shares" that can be traded. Because futures contracts are standardized, the same bushel of wheat can be traded multiple times as the contract is reassigned through delivery offset.
Futures volume is merely an indication of market activity. Research has shown that price volatility is the primary determinant of futures volume. The greater the volatility, the greater the trading volume. It is not unusual for the MGE hard red spring wheat futures to trade five times the size of the underlying supply of wheat. On average, only around 3% of all trades are actually held for delivery, the remaining 97% are offset prior to contract maturity. Futures contracts are financial contracts, they are not intended to be used as a sourcing or sales outlet for physical grain. Physical delivery on a commodity futures serves only to guarantee price convergence of the futures to the par cash at the time of delivery. It is this threat of delivery arbitrage that keeps the market price honest.n
Top Issues Affecting Ag
The biggest issues facing U.S. agriculture today are industry consolidation, adapting to new technology, repercussions of the Freedom to Farm Act, market volatility and government regulation, according to an informal study recently of agricultural publishers conducted by the Agricultural Publishers Association. Other issues they ranked of importance: urban encroachment on farmland, consumer attitudes towards food, food safety and consumer knowledge of the role of producers. Nearly all respondents mentioned changes within the worldwide marketplace as a crucial issue affecting U.S. agriculture. n