February 21, 2002

Market Advisor: New Futures and Options Contracts for Corn and Soybeans

by George Flaskerud, Crops Economist
NDSU Extension Service

National Corn Index (NCI) and National Soybean Index (NSI) futures and options contracts began trading on the Minneapolis Grain Exchange (MGE) on Feb. 15. Contracts can be traded for every month of the year. Basis charts for Hunter, N.D. and contract information are available at www.ag.ndsu.nodak.edu/aginfo/cropmkt/analysis/anal.htm . Additional charts and detailed information on the contracts are available at www.mgex.com .

The NCI and NSI futures contracts are settled on indexes that are calculated by Data Transmission Network (DTN). The indexes are calculated from cash prices that DTN collects from a large number of elevators from throughout the United States. During January 1999 - September 2001, the average number of bids collected per day was 1,581 for corn and 1,469 for soybeans.

The futures and options contracts can both trade until the last day of trading and they expire simultaneously. The last trading day is the last business day of the trading month.

Open futures positions on the last trading date are settled in cash. Settlement prices for the corn and soybean contracts are the average of the NCI and the NSI, respectively, for the last three trading days of the settlement month. In-the-money options are automatically exercised unless notified otherwise. Delivery on a futures contract is not an alternative.

The size of the futures and options contracts is 5,000 bushels. The maximum daily price move allowed is 25 cents per bushel for corn and 60 cents per bushel for soybeans. Strike price increments are multiples of 5 cents for corn and 10 cents for soybeans.

The futures and options contracts are expected to be effective for hedging. A study by Sparks Commodities that was commissioned by the MGE indicates that the MGE contracts will be at least as effective as the Chicago Board of Trade (CBT) contracts. The study shows that cash prices at select locations throughout the country correlate better with NCI and NSI prices than with CBT prices.

The correlations in the Sparks study are similar to those calculated for Hunter, N.D. During January 1997 - September 2001, the correlation of the Hunter corn price was 98.2 percent with the NCI price and 96.3 percent with the CBT price. For soybeans, the correlation was 99.7 percent with the NSI price and 99.5 percent with the CBT price.

A less volatile basis is also a positive factor for the contracts. During January 1997 - September 2001, the Hunter corn basis varied by 34 cents when calculated relative to the NCI and by 48 cents when calculated relative to the CBT price. For soybeans, the basis variation was 86 cents relative to the NSI and 95 cents relative to the CBT.

The NCI and NSI futures and options will trade exclusively on an electronic trading platform at the MGE. This method of trading is a departure from the open outcry trading method that is used for such contracts as hard red spring wheat.

Producers should place hedges in the NCI and NSI contracts through a broker as usual. The broker can address trading volume or other issues and provide assistance in determining the appropriate offer price when placing an order. The Sparks study indicated that liquidity of the new contracts will be more of a concern than hedging effectiveness.

The following is an example of how an expected cash price would be calculated from a hedge in the NCI futures contract: On Feb. 19, the December NCI futures closed at $2.11 per bushel. The Hunter corn basis (January 1997 - September 2001 average) relative to the NCI is a negative 35 cents for December. The expected cash price at Hunter would be $1.76 (2.11 - .35) in December as a result of hedging in the December NCI futures. The risk in this transaction is the basis, since the expected basis for December is an estimate derived from four years of history.

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Source: George Flaskerud, (701) 231-7377, gflasker@ndsuext.nodak.edu
Editor: Tom Jirik, (701) 231-9629, tjirik@ndsuext.nodak.edu