|
Since 2004, the Minneapolis Grain Exchange has offered agricultural index futures for corn, soybeans, soft red winter wheat, hard red spring wheat, and hard red winter wheat. The index futures
are unique because the end of contract settlement price is based on actual cash market bids. Using quotes from DTN, the end of contract settlement is determined by averaging the last three days of cash prices. For
soft red winter wheat, the cash index is based on 550 cash bids, and there are over 2,000 bids used for the corn and soybean cash indexes. While the index futures have been slow to gain momentum, the been gaining interest from traders who are looking for a more effective market to hedge their SRW wheat. The soft red winter futures
market at the CME Group has been under scrutiny by regulators and traders because of the lack of convergence between the cash and futures prices. When a futures contract expires, it should expire at a price similar
to the cash markets. This has not been the case in the Chicago wheat futures market, where the futures market is often up to two dollars higher than the local cash markets. This makes hedging on the futures market very difficult because the futures price is not indicative of the cash price, a problem for buyers and
sellers alike. Changes have been made to the SRW future contract in an attempt to remedy the convergence issue, but the problem persists.
To help illustrate the convergence problems with soft red winter futures, you need only to look at the last
contract expiration, September 2009. On September 30, 2009, the SRW index futures which are traded at the MGEX closed at $3.2675. In contrast, the soft red winter wheat futures at the CME Group expired at $4.31.
While there is often some basis adjustment necessary when a futures market expires, a basis adjustment of over one dollar makes hedging very difficult. The September corn futures and cash index futures closed within
a dime of each other.
Although cash index futures for spring wheat have yet to generate interest from traders, it is important for
spring wheat traders to watch the SRW Index futures. The contracts trade every month, instead of just 5 trading months, and the expiration dates coincide with the end of the month. A September futures contract
actually expires on September 30, instead of August 20 and the same applies to any put or call options you purchase. To attract more traders to the cash index futures, the MGEX has increased speculative position
limits. The success of the SRW cash index market could change how farmers market their other wheat classes, corn and soybeans over the next few years.
|
