Growers will soon have access to a new exchange-traded alternative for pricing corn and soybeans that could save them up to 10% on options premium costs, according to one university researcher.
The Minneapolis Grain Exchange (MGEX) has announced that its National Corn Index and National Soybean Index futures and options will begin trading Dec. 15 on the Chicago Board of Trade's e-cbot electronic trading platform. These contracts were originally introduced three years ago, but traded on an MGEX electronic platform that was shut down earlier this year in favor of the e-cbot system.
The contracts are based on an index of country elevator prices calculated by DTN, and tend to closely track prices received by growers. Because of this tendency, a recently-released study demonstrates that MGEX options have a built-in price advantage compared to traditional options contracts.
The study, completed by Dwight Sanders, assistant professor of agricultural economics at Southern Illinois University, shows that MGEX index-based options can provide a premium savings of 1-4¢ (or around 10%) over comparable traditional options. This pricing advantage, coupled with operational advantages, make MGEX options a preferred hedging vehicle in many instances, the study concludes.
There are a few reasons why MGEX options premiums are lower, Sanders says, primarily traditional corn and soybean futures prices include a component in their price to transport the product from the country elevator to the terminal market.
“Options premiums are based in large part on the price of the futures contract,” he explains. “Traditional futures contracts include a transportation component (known as the basis), which inflates the price.” Because MGEX futures do not include this transportation component, the futures price is lower and the option premium is lower as well.
Sanders further points out that because these options expire monthly and since there is no delivery period (because the contracts are settled financially rather than through deliveries) growers can more closely match an option expiration with cash sales dates, obtaining a better hedge and avoiding purchase of unneeded time value. They also don't need to worry about deliveries.
“For example, assume on May 15 that a grower looks to hedge a cash corn transaction expected to occur on Sept. 30,” he says. “If the grower used the traditional corn contract, the hedge would be placed in December options because the September options contract expires in August. With NCI options, the September contract is used.”
This grower saves money by using the NCI September option because time value is an important component of an option's price, and the further an option is from its expiration, the more it costs.
A link to Sanders' complete study is available online at www.mgex.com.