Corn and soybean producers can now buy and sell futures and options contracts on their crops through the Minneapolis Grain Exchange. These new contracts may provide opportunities for new corn and soybean marketing strategies, according to Paul Carr, Faribault County educator with the University of Minnesota extension service.
The new futures and options contracts are known as the National Corn Index (NCI) and the National Soybean Index (NSI). The contracts are "cash settled" to the average cash corn and soybean prices in the U.S. as reported by DTN, a company that reports commodity price information. "Cash settled" means there is no delivery of the physical commodity.
NCI is made up of the simple average of daily bids from about 1,630 locations across the U.S. NSI is comprised of about 1,500 daily bids. Carr says the bids represent over 90% of U.S. grain elevators.
"Many people believe these new contracts have the potential to offer producers more and better hedging opportunities by enabling them to hedge cash values instead of just futures values," says Carr. "Although the NCI and NSI prices are an average of many locations, they should move closer to local cash prices than today's Chicago Board of Trade futures prices."
Carr says the contracts might offer producers an opportunity to lock in higher loan deficiency payments (LDPs) through the federal farm program.
"In the last five years of low prices and high LDPs, some of the highest LDPs have been offered just before farmers could harvest and take the LDP," says Carr. "Since both the LDP system and the new NCI and NSI contracts reflect cash prices, a producer may be able to buy a NCI or NSI futures contract and lock in that LDP, although not perfectly, in a closer way than simply buying futures.
"If the producer buys NCI or NSI futures and cash prices rise, the producer would be more likely to gain from the rising market to offset a shrinking LDP. If cash prices drop, the LDP payment would rise to offset a loss on the futures contract."
The new contracts also have the potential to allow farmers to capture basis and futures price gains after selling their crops on the cash market, according to Carr. This could be particularly beneficial for growers with limited storage.
"By reowning the grain with a NCI contract, the grower can participate in a rise in the cash price, which includes both futures and basis, at a time when cash prices tend to rise from their seasonal low," says Carr. "On the flip side, the producer is exposed to both basis and futures risk by reowning NCI futures."
Carr says trading in NCI and NSI contracts began in February of this year. He says several factors will determine whether they realize their potential, including the volume of trading they generate.
Further information on trading NCI and NSI contracts is available on the Minneapolis Grain Exchange Web site at mgex.com.