Taming the Bulls and Bears

New Minneapolis Grain Exchange Index Contracts
A dream come true – they just need more trading volume

By Betsy Jensen
Ag Commodity Instructor, Northland Community and Technical College, betsy.jensen@northlandcollege.edu

When you have bins full of wheat, it’s always easy to find someone to blame for low prices. When your bins are empty, it’s easy to find someone to blame for selling before prices are rallying.

I’m often the victim of such ridicule (especially from my husband) but no single entity gets blamed more often than The Funds – Those evil, money-hungry, farmer-hating companies who always seem to be meddling with our commodity markets and driving down prices.   Unfortunately, they’re never around when you need them.

While many farmers would argue that we never need The Funds, I’d like to see them get involved a little more often, particularly in the new electronically traded ag index futures and options contracts launched by the Minneapolis Grain Exchange in December.

Instead of trading futures prices, the cash index contracts trade cash prices for corn, soybeans, and wheat. Through DTN, the MGEX surveys over 1 ,000 cash elevator bids every day to determine prices for the cash index contracts.

We often talk about futures, basis and cash prices, but now the cash index futures take into consideration all those factors and roll them into one contract.  The contracts are cash settled, which means you never have to worry about delivery since the account value is adjusted when the contract expires.

Whether you own a put option or a futures contract, you can just let it expire and all it will take is a simple cash adjustment. Even better, futures and options expire on the same day!  With traditional futures markets, the options expire approximately one month before the futures contract. 

One added bonus is that every month trades.  That means if I want to deliver my soybeans in February, I can sell the February futures contract, instead of March.  It’s cleaner and easier than the traditional futures markets. 

These contracts sound like a dream come true, but they have yet to catch on with traders. We need volume, and that’s where the funds could help. As a farmer, I’d much rather trade these cash indexes, but there aren’t too many other traders who agree with me just yet. Volume in these new contracts has been slim to none thus far without speculative funds or even commercial traders, who buy grain for their actual use, such as a wheat miller or soybean processor.

Volume for the contracts can be found on the Minneapolis Grain Exchange webpage, www.mgex.com but the numbers aren’t encouraging thus far. We desperately need some funds to join the trading to provide liquidity.

So we have this wonderful tool available for us to use, but I’m hesitant to use it without more liquidity. I’m keeping my eye on the contracts, and if volume begins to increase, you can bet I’ll be selling the hard red spring index futures instead of the traditional Minneapolis spring wheat futures.

The MGEX also made overnight trade available for spring wheat futures. I tried placing an order to see if I could be the first one filled, but as it turned out, someone beat me to the punch. There are several contracts traded each night, and I don’t see a big advantage to farmers if they choose to use overnight trade. Personally, I think I’ll stick with daytime trading – I lose enough sleep the way it is without trying to watch the markets all night. 

Jensen farms with her husband Brian near Stephen, Minn.  Her market education activities including this column are supported in part by the Minnesota wheat checkoff, directed 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, call 1-800-242-6118, or email Jensen at betsy.jensen@northlandcollege.edu .