Recent Convergence Performance of CBOT Corn, Soybean, and Wheat Futures Contracts

Abstract

Futures markets play a key role in price discovery and risk transfer in many agricultural markets. Concerns have been raised about the performance of Chicago Board of Trade (CBOT) grain futures contracts in a number of recent forums, most prominently at the Agricultural Forum hosted by the Commodities Futures Trading Commission (CFTC) on April 22nd, 2008. Market participants have expressed concern that futures prices have been artificially inflated since the Fall of 2006, contributing to weak and erratic basis levels and a lack of convergence of cash and futures prices during delivery. In this article, we focus on the nature and consequences of recent convergence problems in CBOT (now CME Group, Inc.) corn, soybean and wheat futures contracts. We also briefly comment on proposals for changing the contracts to address the problems that have surfaced recently. Convergence problems at delivery locations are not necessarily identical to nondelivery basis performance issues, which are not addressed in this article. Basis in some nondelivery markets may be influenced by lack of convergence, but that is not uniformly the case. Corn basis at interior processing markets, for example, is less influenced by the Illinois River basis (delivery location) than cash markets close to the River. Basis at nondelivery locations is influenced by transportation costs, storage and ownership costs, supply of and demand for storage in the local market and merchandising risk (margin risk). All of these factors have likely contributed to weaker basis at many nondelivery markets.