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Economists question future of CBOT futures market

By Caroline Scott-Thomas , 16-Apr-2009

The Chicago Board of Trade’s wheat futures market is in danger of losing its relevance as the gap between future prices and cash prices has widened, say the authors of a new University of Illinois study.

The CBOT commodities market has long been used as a pricing reference point for wheat, allowing growers and processors to make long-term decisions about planting and costs. However, the disparity emerged in 2005 and the futures price has since landed above the cash price by as much as $2 a bushel, undermining the market’s value as a hedging tool, the study said.

Scott Irwin, one of four economists who examined the market over the past three years and co-author of the study said: “Typically, the market provides a benchmark because cash prices generally land within a few cents of futures prices by the time futures contracts are due for delivery. But the current price gap has left farmers and processors unsure about which price is accurate.”

Speculation on the futures market can perform an important function, helping the price discovery mechanism by highlighting any emerging imbalances between supply and demand – in this case, encouraging planting when supply is tight and prices are high and discouraging it when supply is good and prices are low. Recently, however, grain traders have stopped using it in this way, complaining that a flood of Wall Street money has inflated futures beyond cash values.

One delivery point

The study’s authors recommend a central delivery point for wheat in New Orleans, as delivering to Chicago and Toledo, Ohio is more expensive and therefore pushes up the price of grain. They said that these peripheral delivery points are outdated, as they no longer reflect the commercial flow of grain. It would make more sense, they argued, to have centralized wheat deliveries in New Orleans, which currently receives approximately 206m bushels of wheat a year, compared to about 30m that go through Chicago and Toledo combined.

The authors said that the CBOT and Commodity Futures Trading Commission (CFTC) are considering their proposal, but it was too early to tell whether it would be taken on.

“We hope so because if this persists another market could spring up that works better,” said Irwin. “That’s not necessarily a bad thing, but it’s better to fix the one that’s here, one that’s large and well established.”

Other strategies

However, the CFTC has already moved to strengthen the infrastructure serving Toledo, with increased train and barge loading facilities in northwest Ohio and along the Ohio and Mississippi Rivers due to be established in July 2009.

Irwin told FoodNavigator-USA.com: “These were largely cosmetic changes and do not address the underlying problem…On the surface it would make sense to add those locations to address congestion issues, but the devil is in the details. For those additional delivery locations, they must be available at competitive price differentials.”

An earlier move saw the CBOT boost available commercial storage for soybeans and corn, which worked to bring futures and cash prices back in line, the study said. Soybean futures had been as much as $1 over cash prices, while corn futures were 60 to 70 cents over.

“Often, economists are the first to defend markets and are the voice of caution when it comes to changes,” Irwin said. “This is an unusual case where we are very concerned about the long-term viability of a market that is very important to US agriculture.”

Source: Marketing and Outlook Research Report 2009-02,

Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign, March 2009.

“Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts: Causes and Solutions."

Authors: S.H. Irwin, P. Garcia, D.L. Good, E.L. Kunda

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