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Contributor
sneeky253
Posts: 23
Registered: ‎09-01-2012
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How does CBOT work?

Hi all,

 

This is probably a silly question, but it has been playing on my mind for a little while. How many wheat, corn, bean, etc contracts are there? And does this number change along with how much grain is supposidly out there? For instance, if everyne held their contracts until delivery, would there be enough grain to cover all the contracts? As I said, probably a silly question but its making my head hurt thinking about.

 

Regards from Australia,

 

Pete.

Community Manager
marketeye
Posts: 3,147
Registered: ‎05-03-2010

Re: How does CBOT work?

sneeky253,

 

I received some help with your question. Here is the answer:

 

"Out of all the open interest in the futures markets only a fraction ever is held to delivery… I would guess less than 1%....but the contracts are used as a hedge and basis is derived from the difference between futures and cash.  So that the “threat” of delivery forces futures markets to converge with the cash market.  If the futures markets are fair to cash then there is no incentive to make or take delivery of the contracts.  If there is stubborn open interest that stays too long when there is no incentive then the market will tend to punish the holder into delivery because there interest creates the opportunity for the merchandiser to delivery grain at a profit.  Conversely if futures prices are too cheap to the prevailing cash bid then there is an opportunity to “take” for “stop” the futures contract and receive the cash grain there-fore punishing the shorts who have stayed to long… in these instances the market enforces convergence and with most opportunities arbitraged out of the delivery trade and so very few contracts go to delivery….the process however makes the futures(derivative contracts) perform as a viable hedge to the underlying cash transaction.. Most public held companies that use derivatives must prove an 85% correlation or they risk the auditors wrath of being speculative… the delivery process has done a good job in forcing convergence narrower than this benchmark.  
 
Another often pointed out topic is the notion that open interest in wheat or corn can often time exceed the physical crop by 3 or 4 times… This happens because the crop changes hands numerous times from the farm to the merchant, to the processor, to the end user, the exporter, the importer… and each of these points of transaction can have and often do hedge themselves at varying times throughout the marketing year… so their interest represents the same crop but the “velocity” of the crop is many times the actual crop size… and this turn-over is reflected in open interest larger than the actual crop.  Also much of the foreign production is being cross hedged with our markets particularly the wheat contract.  Also traders at other exchanges in other countries arbitrage price relationships between crops.  Such as Australian or French/FSU wheat with US SRW…"

 

Hope this helps,

 

Mike
 

Contributor
sneeky253
Posts: 23
Registered: ‎09-01-2012
0

Re: How does CBOT work?

Thanks Mike, I really appreciate the response........now I just have to think that one through!

Veteran Advisor
c-x-1
Posts: 3,231
Registered: ‎06-26-2012
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Re: How does CBOT work?

Mike, i was going to say -- like a fine tuned, silicone lubricated machine, but your answer is well informed, detailed, concise, scientific, effective and thoroughly comprehensive.

 

awesome:smileyhappy:

c-x-1

Senior Contributor
pritchh
Posts: 495
Registered: ‎10-18-2010
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Re: How does CBOT work?

CBT is often basis for worldwide pricing, not just US.  Price serves its purpose, if all LONG HELD out, as price rose, producers, specs etc would sell the  artifically high price.  Same downside if the shorts who make teh call btw, all delivered all and on teh same daym, price would plundge but  endusers and specs would but the artificalyy low price.

 

In bear mkts the CBT serves a big purpose, something to blame, see Paluouser. 

 

Meantime it is doing its best to reflect unfolding supply demand realities.

Imperfect, of course but its all there.

 

Sn D is negative for wheat vs these prices,     plus te biggie as mentioned below, in 13/14, SRW doesn't have 8$ corn to

help it up by 2$.

 

Could be wrong but since winter that seems  story.

Senior Contributor
ShelladyOptions
Posts: 905
Registered: ‎05-03-2010

Re: How does CBOT work?

There is technically no limit to the amount of contracts that can be open and trade and I am sure that the exchange would love for there to be as many as possible. If corn has an open interest of 571,490 as of today, that would be a total of 2.9 billion bushels which would be just under 25% of the crop. If there was an open interest spike I am sure the exchange would keep a keen eye on whom was amassing the long position so as to protect against an entity 'cornering' the market.

 

So, our corn crop is estimated this year to be 14 billion bushels. One contract is worth 5000 bushels. 14 billion divided by 5000 equals 2.8 million contracts. Currently corn's total open interst is 1,172,000 contracts. It will be hard to eclipse that and we trade around 200,000 contracts per day. That doesn't necessarily mean open interest goes up. Those could be day traders all going home flat. Volume is created but no open positions.

 

Hope that helps.

Senior Contributor
hanktbd
Posts: 236
Registered: ‎01-08-2013
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Re: How does CBOT work?

Spoiler
 

Mike, You say that (Most public held companies that use derivatives must prove an 85% correlation or they risk the auditors wrath of being speculative… the delivery process has done a good job in forcing convergence narrower than this benchmark).  Yet from where I stand (down on the farm) the convergence and correlation that I counted on in order to reduce my farm business risk by hedging, has completely broken down recently due to the wild and unpredictable basis swings. There seems to be little relationship between the cash price at my local co-op or river terminal and the prices on the CBOT. Until this year my goal has always been to price about 1/2 of my projected production before harvest due to lack of storage. From my perspective, this lack of correlation means I am adding risk by hedging due the wild and frequent basis swings and consequently, I have less than 25% of this years projected production hedged. Not sure if the correlation disconnect is due to an empty pipeline with too many air bubbles or the CBOT becoming more of a global market rather than a US market, but it has certainly made my job as a farmer seller more difficult.

Frequent Contributor
nutlug
Posts: 50
Registered: ‎07-04-2011
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Re: How does CBOT work?

It sure would be nice if we as farmers could deliver and it would force convergence !

Contributor
sneeky253
Posts: 23
Registered: ‎09-01-2012
0

Re: How does CBOT work?

[ Edited ]

Thanks for all the replys. I think I understand that part now. Something that Pritch wrote still bothers me a little. I understand  that the world looks to the US for pricing, we certainly do here in Australia, but if CBOT is so far removed from reallity, ie like recently with big positive basis in the US, then we are not really geting the right price signals from CBOT. Hope that made sense. Is this a valid point? 

 

So, when open interest starts the ball rolling at CBOT it basically starts as two people betting against each other where the price will go?