Still leery of using futures after such debacles as MF Global and Peregrine Financial? Are you unsure of how futures contracts truly function? A mini-corn or mini-soybean contract can provide some real-life futures trading lessons without manufacturing a major margin call.
Ag economists and analysts project 2013 will resemble 2012 in commodity price volatility. With uncertainties on drought, oil prices, the world economy and other issues that may impact corn and soybean prices, market swings up and down are likely.
With high input costs, using futures or other marketing tools on top of federal revenue protection insurance may be inevitable.
There can be less sting when test-driving a mini. If the market takes a sharp turn North or South, there is less risk involved.
The MidAmerican Commodities Exchange (MidAm) was absorbed by the Chicago Board of Trade (CBOT) in 2003. The MidAm corn, soybean and wheat and other contracts became known as the CBOT mini contracts. After CBOT merged with Chicago Mercantile Exchange, they became part of CME Group contracts listed under CBOT.
Most corn and soybean farmers who seek price protection through hedging use conventional 5,000-bu. futures contracts. But minis have trade specs at 1,000 bu./contract. Mini margin calls are normally one-fifth of what a conventional futures contract would require.
Ed Usset, University of Minnesota grain marketing specialist, says most farms are too large for the use of minis in their marketing program. “I don't think there is anything they can learn with the minis that they couldn't learn from the regular contracts,” he says. “However, if the hedge is wrong, the lesson will be one-fifth as painful.”
For example, a conventional CBOT corn futures contract has a margin requirement of about $2,000 per 5,000-bu. contract, according to the CME website www.cmegroup.com/trading/agricultural/. But the 1,000-bu. mini margin requirement is $400.
A conventional 5,000-bu. soybean contract margin requirement is about $5,000, while the 1,000-bu. mini contract margin requirement is about $1,000. And like with the mini-corn and corn contracts, the mini-soybean contracts tracks the conventional contract’s prices.
Dan O’Brien, Kansas State University Extension grain marketing economist, says that experimenting with mini-contracts can be taken a step further by growers. “An ideal situation may be for the farmer to meet with a local grain marketing advisory service,” he says. “The farmer could learn how the hedging position works using minis and learn how to work with a commodity broker.
Like with the main corn contracts, mini-corn trades in March, May, July, September and December. The mini-soybeans also follow the main bean contracts in trading: January, March, May, July, August, September and November.
For those still uneasy about investing in any size futures position, there are various Extension marketing programs online that can tutor you through how to use them.
“The University of Minnesota Center for Farm Financial Management operates a website called Commodity Challenge http://commoditychallenge.com/,” Usset says. “It allows anyone to practice executing a marketing plan and try out different pricing tools in real time. This is good stuff and producers should check it out.”