Agriculture Reference
In-Depth Information
sell subscriptions to public users. Commercially
distributed commodity exchange prices may
occur either in “real time” or by 10-minute delay.
The exchanges also release price information
on their websites. Exchange-released prices for
the public use normally are 10-minute delayed
prices.
Sometimes during the wheat marketing year
(June 1 through May 31), more wheat may be sold
than is demanded by end users. An example
would be at harvest. At other times, end users
may want to buy more wheat than producers are
selling. When these conditions occur, the specu-
lators become the sellers and buyers.
Speculators provide market liquidity, which
allows wheat to be sold or bought anytime
throughout the marketing year. Speculators buy
when more wheat is being sold than is demanded,
because when supply is greater than demand,
prices are relatively low. Speculators sell when
demand is greater than supply, as prices are rela-
tively high. Speculators convert a static market
into a dynamic market.
Market players who sell and buy wheat will
use the appropriate commodity exchange to
establish the cash price. The futures contract
price is only part of the price determination
process. The futures contract price is quoted for
a specifi ed class, quantity, and quality of wheat
that must be delivered to a specifi c location
during a designated time period. The futures
contract price must be adjusted for quality, time,
and location.
A central Oklahoma elevator buying wheat
during harvest (June) may use the KCBT
July wheat contract price as the basis for the
cash purchase price. The KCBT July wheat
contract price would be adjusted for location
(Kansas City to central Oklahoma), time (July vs.
June), and any quality differences between the
futures contract specifi cations and the quality of
the purchased wheat. The price difference
between any cash price and the KCBT futures
contract price is called the basis (basis = cash
price − futures contract price). Wheat prices
at each level in the marketing system may be
established “basis” (based on) a futures contract
price.
Hedges
Nearly all wheat that is bought or sold after the
farm level (after producers sell the wheat) is
hedged with a commodity exchange contract. A
hedge is established by taking equal and opposite
positions in two markets (the cash market and the
futures market). A storage hedge is established by
buying the physical commodity (wheat) and
selling an equal amount of wheat using wheat
futures contracts.
Local elevators normally “back-to-back” wheat
purchased from producers to a subterminal eleva-
tor, a terminal elevator, or a fl our miller. Wheat
that is sold back-to-back by a local elevator is then
sold by the purchaser using commodity futures
contracts (storage hedge). If the local elevator
does not back-to-back the wheat, the local eleva-
tor normally hedges the wheat by selling an equal
amount of wheat futures contracts as a temporary
substitute for selling the wheat.
Elevators that sell wheat to end users (fl our
mills or foreign buyers) may sell (forward con-
tract) more wheat than they own. In this case they
buy wheat futures contracts to cover the amount
of wheat that was sold. As wheat is purchased, the
wheat futures contracts are sold to offset the cash
wheat purchases. Any change in the cash wheat
price is mostly offset by changes in the futures
contract price; thus the price at which the wheat
was forward contracted to the end user is
protected.
Wheat is rarely delivered against sold futures
contracts, nor is delivery taken for bought futures
contracts. Rather than delivering or taking deliv-
ery of the physical commodity, a hedge is reversed
by buying the futures contracts back and selling
the physical commodity on the cash market or
conversely buying the physical commodity and
selling futures contracts. Profi t or loss from the
futures contract sell or buy is offset by the loss or
profi t from the cash purchase and cash sale of the
physical commodity. Cash and futures contract
prices tend to follow the same price pattern.
Without the futures market, elevators would have
to accept more risk and would have to offer pro-
ducers lower prices in order to be compensated
for the cost of taking greater risk.
