Taming the Bulls & Bears

Making Sense of New MGE Corn, Soy Index Futures

By Betsy Jensen
Ag Commodity Instructor, NCTC

On February 15, the Minneapolis Grain Exchange launched
MGEXpress, which are the National Corn Index and National Soybean Index futures contracts. These contracts have several new features that you should understand before you start buying and selling.

These contracts are based on a cash index price, as quoted by DTN based on the average of approximately 1,500 cash prices quoted from elevators across the U.S. We commonly talk about our local cash price in comparison to the futures prices, such as a soybean bid of -60 under the soybean futures. The new cash index futures already have a basis calculation bid into them, since they are based on cash prices across the U.S.

This doesn’t mean that a National Soybean Index quote of $4.15 means your local price is $4.15. A cash bid on the Mississippi River in Illinois will be much higher than a soybean cash bid in central North Dakota. You need to remember that the NSI quote is an average of all U.S. prices quoted in the index, and your local elevator will have its own quote.

It’s possible that farmers might have to start tracking two separate basis quotes: One based on the Chicago corn and soybean futures, and one from the MGEX cash index contracts. There is indeed a difference between the two systems.

On the Chicago Board of Trade, the futures are settled by delivery. If you buy a futures contract, and hold it until the last trading day, you will end up with 5,000 bu of that commodity. Options expire approximately 10 days before the contract goes into delivery, and the delivery period lasts for approximately 3 weeks.

The new MGEX index futures are cash settled, which means you can hold your options and futures until the final day of trade, with no risk of ending up with the actual cash commodity. The cash settlement prices are based on the average of the final three days of trade.

For farmers, there are several advantages to cash settled futures. We can hold options and futures contracts until the final day, with no risk of delivery.  This can be very expensive for farmers, since delivery must occur at specific elevators and specific locations.  Further, with a cash settled contract, we are free to hold those futures or options until the final day, just as commercial firms can do today.

There is some controversy surrounding the cash settlement. One reason for the traditional commodity delivery process is to maintain price integrity in the contracts. The cash and the futures prices must meet on the final day, which ensures there isn’t any price manipulation in the futures market. On the final day of delivery, if the futures price were higher than cash, then a wheat miller would buy cash and sell futures, eventually bringing those prices together. The cash index contracts have futures and options quotes for all 12 months, which means if you want to deliver corn in January, you can sell the January futures.

The cash index futures are also traded electronically. Electronic trading is new to U.S. ag contracts, but is becoming very popular. The trading system used at MGEXpress is also used by 25 commodity exchanges worldwide. Instead of open outcry, your futures contracts are traded by computer. It’s very likely that all futures contracts will eventually be traded electronically, but it’s very expensive to change existing open outcry systems, like the longstanding pit trading at the CBOT and MGEX. Electronic trading is less expensive to operate than open outcry, but the costs required to change systems is considerable. The largest commodity exchange in the world, EUREX, is an electronic exchange.

Dr. Bill Wilson, agricultural economics professor at North Dakota State University and member of the MGEX Board of Directors believes electronic trading will be very beneficial to farmers. “Eventually, FCM’s (futures commission merchants) will adopt software allowing farmers to trade from their computer,” says Wilson. You will still need to trade through a broker, but you won’t have to make a phone call, wait on hold, place your order, and then wait for the phone call about your order being filled. 

A study has shown that the MGEXpress futures will be more effective than the corn and soybean futures at CBOT.  There is a very strong correlation between local prices and the movement in the DTN cash index. The key to success of these contracts will be volume. They cannot be effective without volume, and that means some farmers, commercials and speculative traders must begin trading.

One problem many farmers have this spring is the strong basis for harvest delivery.  That’s right, I said the strong basis is a problem. Farmers want to take advantage of the strong basis, but they don’t want to lock themselves into one elevator since basis contracts do not include premiums and discounts, and those pennies per bushel could make a major difference to the bottom line. These cash index futures are already taking into account the strong U.S. basis, so you can take advantage of the strong basis without locking yourself into one elevator. 

If you want to use these new contracts, you should contact a broker who can help you find a contract with some volume. Since commodity traders are creatures of habit, it’s likely that the December corn and November soybean contract will be the best contracts for new crop, since those months are also traded on the CBOT.  I would caution you against using these contracts for all of your hedges, since they are so new, but they are ready and waiting for your orders.

“Taming the Bulls and Bears” is a market education feature of Prairie Grains, made possible by the Minnesota wheat checkoff managed by the Minnesota Wheat Research and Promotion Council. If you have a question or topic related to marketing that you’d like to see addressed in this feature, send it to: Minnesota Wheat Council, Attn: Prairie Grains Editor, 2600 Wheat Drive, Red Lake Falls, MN, 56750; Phone: 1-800-242-6118 or email Jensen: bjensen@nctc.mnscu.edu