Should Delivery Terms for Grain Futures Change

By Schap, Keith | Futures (Cedar Falls, IA), September 1991 | Go to article overview
Save to active project

Should Delivery Terms for Grain Futures Change

Schap, Keith, Futures (Cedar Falls, IA)

After the 1989 soybean market disruption involving the grain trade branches of Ferruzzi Finanziaria, the Chicago Board of Trade (CBOT) along with the grain trade and regulators decided to study how effectively grain futures contracts served their economic and regulatory functions.

The CBOT sought answers from The MidAmerica Institute for Public Policy Research. The National Grain and Feed Association appealed to Anne E. Peck and Jeffrey C. Williams of the Stanford University Food Research Institute. Congress asked the U.S. General Accounting Office (GAO).

The MidAmerica study funds "the existing system has worked well."

Peck and Williams say, "The evidence here leads to the conclusion both short-term adjustments are needed and the search for long-term solutions should begin."

Taking a middle view, the GAO says, "Current research supports the need for CBOT and CFTC (Commodity Futures Trading Commission) to assess alternatives for improving how delivery points for grain and soybean futures contracts meet the economic purposes and anti-manipulation goals of the Commodity Exchange Act. However, the studies did not provide . . . answers to questions about how best to select delivery points."

Glenn Hollander, CBOT agricultural executive committee chairman, says, "These studies mark the beginning of the learning curve." As yet, he sees in them no mandate to act.

Federal law imposes two duties on commodities exchanges: to provide economic benefit in the form of price discovery and hedging facilities and to prevent or diminish market manipulation. The CBOT sees the former as more crucial, the CFTC the latter. But the GAO says the dual focus helps ensure both goals are considered when delivery points are chosen.

Key to these deliberations is the delivery mechanism and the adequacy of deliverable grain supplies.

Echoing physicals

To work, the delivery process must echo the dynamics of the physical market. And the supply of grain must be large enough to facilitate effective arbitrade that forces prices into alignment and contributes to price discovery and effective hedging.

Also, ample deliverable stocks forestall manipulation. In a typical long squeeze, the GAO says, "Traders might try to manipulate prices by purchasing a large number of futures contracts and most or all of the commodity at every delivery point, making it unavailable to futures contract sellers for delivery. The resulting artificial shortage could push futures and cash market prices at all delivery points to unjustifiably high levels, resulting in profits for buyers of futures contracts and losses for sellers."

Short squeezes, less talked about, could be a problem if the terminal space concentrates in too few hands.

The studies find the decentralization of grain markets and the diminished importance of the terminal markets (especially Chicago, the primary CBOT delivery location) could threaten the system. An important result is a "paucity of deliverable stocks," say Peck and Williams which may threaten the function of the market, making it more manipulable.

To assess the depth of the problem this trend may pose, the studies consider just how much delivery takes place, cash-futures price convergence

            Deliveries as percent of
           open interest and stocks
(Wheat, corn and soybean deliveries from 1964-65 to 1986-87)
                      Wheat    Corn   Soybeans
Peak open interest
 1964-65 to 1972-73    18.6    14.7      18.5
 1973-74 to 1978-79     17.2   10.6      18.2
 1979-80 to 1986-87    17.8     7.2      20.1
 1987-88 to 1988-89    13.8     7.8      14.0
Open interest at beginning
 of delivery month (*)
 1964-65 to 1972-73    47.1    36.7      41.0
 1973-74 to 1978-79    60.2    31.8      43.1
 1979-80 to 1986-87    63.0    23.4      59.8
 1987-88 to 1988-89    55.7    31.5      44. 

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Should Delivery Terms for Grain Futures Change


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?