Grain Belt Bubble?

Institutional holdings of grain commodities are up 29 percent in the past year, as grain contracts have offered better returns than stocks or bonds. Investors’ appetite for corn, for example, was such recently that institutions paid 55 cents a bushel more on futures contracts than the simultaneous price in the cash market. Indeed, that might not have been a bad bet: Since early 2006, commodity prices have been on a rail, with rice up 217 percent, wheat 126 percent, corn 125 percent, and soybeans 107 percent, according to one report.

But when the gap widens between futures and cash prices for grain, growers, elevator managers, and others who use futures contracts to hedge their positions and manage risk can’t afford to hold futures positions. Here’s where the Minneapolis Grain Exchange has a longer answer to the question of what to do about jacked-up futures prices: Buy our futures contracts.

A few years ago, the exchange introduced five innovative futures products—three for wheats, one each for corn and soybeans. The contracts can never settle in delivery of a commodity. Instead, open positions are financially settled, marked to market by averaging hundreds or even thousands of cash-market bids for that commodity made around the country in the preceding three days. That ensures convergence between futures and cash prices.

“There’s no other contract market out there in the United States that has financially settled ag contracts like we do,” Carlson says. Most rely on the mechanism of commodity delivery at the end of the contract to force price convergence. But that mechanism failed this spring with contracts on the Chicago Board, for instance, where a gap persisted between futures and cash prices. It gave hedgers a chill. Carlson says, “I think we have the remedy for the common cold.”