Recent Delivery Performance of CME Corn, Soybean, and Wheat Futures - PowerPoint PPT Presentation

Recent Delivery Performance of CME Corn, Soybean, and Wheat Futures Contracts Scott H. I rwin, Philip Garcia, Darrel L. Good, and Eugene L. Kunda

Delivery Location Basis on the First Day of Expiration for CME Corn Futures, I llinois River North of Peoria, Decem ber 2 0 0 1 -Septem ber 2 0 0 8 10 0 Basis (cents/bu.) -10 -20 -30 -40 -50 -60 Jul-03 Mar-07 Dec-01 May-02 Sep-02 Mar-03 Dec-03 May-04 Sep-04 Mar-05 Jul-05 Dec-05 May-06 Sep-06 Jul-07 Dec-07 May-08 Sep-08 Contract Expiration Month

Delivery Location Basis on the First Day of Expiration for CME Soybean Futures, I llinois River North of Peoria, Novem ber 2 0 0 1 -Septem ber 2 0 0 8 20 0 Basis (cents/bu.) -20 -40 -60 -80 -100 Nov-03 Nov-01 Mar-02 Jan-03 Aug-03 Mar-04 Jul-04 May-05 Aug-05 Nov-05 Aug-07 Nov-07 Mar-08 Jul-02 Sep-02 May-03 Sep-04 Jan-05 Mar-06 Jul-06 Sep-06 Jan-07 May-07 Jul-08 Sep-08 Contract Expiration Month

Delivery Location Basis on the First Day of Expiration for CME W heat Futures, Toledo, Decem ber 2 0 0 1 -Septem ber 2 0 0 8 20 0 -20 Basis (cents/bu.) -40 -60 -80 -100 -120 -140 -160 -180 -200 May-06 Dec-01 May-02 Sep-02 Mar-03 Dec-03 May-04 Sep-04 Sep-06 Mar-07 Jul-07 Dec-07 May-08 Sep-08 Jul-03 Mar-05 Jul-05 Dec-05 Contract Expiration Month

Perfect Basis Predictability y = Change in Basis (cents/bu.) 100 80 60 40 20 0 -100 -80 -60 -40 -20 0 20 40 60 80 100 -20 -40 -60 -80 -100 x = Initial Basis (cents/bu.)

Predictability of CBOT Corn Basis Change to First Day of Delivery, All Delivery Locations Pooled, Decem ber 2 0 0 1 - Septem ber 2 0 0 8 70 60 y = Change in Basis (cents/bu.) Dec 2001 - Dec 2005 y = -0.87x - 0.61 50 R 2 = 0.87 40 30 20 10 0 -70 -60 -50 -40 -30 -20 -10 0 10 20 -10 -20 Mar 2006 - Sep 2008 y = -0.28x + 1.02 -30 R 2 = 0.07 x = Initial Basis (cents/bu.) Note: September 2005 observations omitted

Predictability of CBOT Soybean Basis Change to First Day of Delivery, All Delivery Locations Pooled, Novem ber 2 0 0 1 -Septem ber 2 0 0 8 y = Change in Basis (cents/bu.) 80 Nov 2001 - Nov 2005 y = -0.87x - 9.03 60 R 2 = 0.78 40 20 0 -120 -100 -80 -60 -40 -20 0 20 40 60 80 100 -20 -40 -60 Jan 2006 - Sep 2008 y = -0.48x - 10.99 -80 R 2 = 0.31 -100 x = Initial Basis (cents/bu.) Note: September 2005 observations omitted

Predictability of CBOT W heat Basis Change to First Day of Delivery, All Delivery Locations Pooled, Decem ber 2 0 0 1 -Septem ber 2 0 0 8 100 Dec 2001- Dec 2005 y = Change in Basis (cents/bu.) y = -0.76x + 2.65 80 R 2 = 0.48 60 40 20 0 -300 -250 -200 -150 -100 -50 0 50 -20 -40 Mar 2006 - Sep 2008 -60 y = 0.003x + 4.02 R 2 = 0.00 -80 x = Initial Basis (cents/bu.)

Maine Potato Futures

"If improvements are not made in the Maine futures contract, then the banning of trading in this contract might be considered. But specific prohibitions of economic activity are usually unwise, and if the market continues to behave badly, the question likely will become mute. Few traders are likely to use a bad market, and the market could very well die of natural causes." (p. 177) Committee on Agriculture, Nutrition, and Forestry, United States Senate, "Potato Futures Study", 96th Congress, 1st session, U.S. Government Printing Office, November 5, 1979

A Perplexing Econom ic Problem • Persistence of non-convergence • Magnitude of non-convergence • Inconsistencies among commodities and over time • Seasonality • Most serious for wheat

Key Role of the Carry • When carry (spread) is large: – Incentive to hold delivery instrument and earn carry by hedging in the next contract – Futures delivery does not lead to load out (movement) in the cash market – Basis widens due to asymmetry in ability to force convergence • Bottom line: Arbitrage link between cash and futures broken

% Full Cost of Carry Calculation • % = [ (F2 – F1)/ (Storage + Interest Costs)] * 100 • F2 = Price of next nearest to expiration futures contract • F1 = Price of nearest to expiration futures contract • Storage = CME contract rate x # days • Interest = (3 mo. T-bill rate)/ 365 x # days

Daily Spread betw een Nearest and Next Nearest to Expiration Contracts for CME Corn Futures, Septem ber 2 0 0 1 -Septem ber 2 0 0 8 ( 3 m o. T-bills) 160% 140% Percent of Fully Carry 120% 100% 80% 60% 40% 20% 0% 01-Sep-01 01-Sep-02 01-Sep-03 01-Sep-04 01-Sep-05 01-Sep-06 01-Sep-07 01-Sep-08 01-Mar-02 01-Mar-03 01-Mar-04 01-Mar-05 01-Mar-06 01-Mar-07 01-Mar-08 Date

Daily Spread betw een Nearest and Next Nearest to Expiration Contracts for CME Soybean Futures, Septem ber 2 0 0 1 - Septem ber 2 0 0 8 ( 3 m o. T-bills) 160% 140% Percent of Full Carry 120% 100% 80% 60% 40% 20% 0% 01-Sep-01 01-Sep-02 01-Sep-03 01-Sep-04 01-Sep-05 01-Sep-06 01-Sep-07 01-Sep-08 01-Mar-02 01-Mar-03 01-Mar-04 01-Mar-05 01-Mar-06 01-Mar-07 01-Mar-08 Date

Daily Spread betw een Nearest and Next Nearest to Expiration Contracts for CME W heat Futures, Septem ber 2 0 0 1 -Septem ber 2 0 0 8 ( 3 m o. T-bills) 160% 140% Percent of Full Carry 120% 100% 80% 60% 40% 20% 0% 01-Sep-01 01-Sep-02 01-Sep-03 01-Sep-04 01-Sep-05 01-Sep-06 01-Sep-07 01-Sep-08 01-Mar-02 01-Mar-03 01-Mar-04 01-Mar-05 01-Mar-06 01-Mar-07 01-Mar-08 Date

Total Deliveries of CME Corn Futures, Decem ber 2 0 0 1 - Septem ber 2 0 0 8 160 140 120 Deliveries (mil. bu.) 100 80 60 40 20 0 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Dec-01 Dec-03 Dec-04 Jun-08 Dec-02 Dec-05 Dec-06 Dec-07 Contract Expiration Month

Total Deliveries of CME Soybean Futures, Decem ber 2 0 0 1 - Septem ber 2 0 0 8 160 140 120 Deliveries (mil. bu.) 100 80 60 40 20 0 Nov-01 May-02 Nov-02 May-03 Nov-03 May-04 May-05 Nov-05 May-06 Nov-06 May-07 Nov-07 May-08 Nov-04 Contract Expiration Month

Total Deliveries of CME W heat Futures, Decem ber 2 0 0 1 - Septem ber 2 0 0 8 160 140 120 Deliveries (mil. bu.) 100 80 60 40 20 0 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Contract Expiration Month

Barge Lineup for Load Out through CME Corn and Soybean Futures Delivery System , January 2 0 0 3 - Septem ber 2 0 0 8 Number of Barges 10 20 30 40 50 60 70 80 0 1-Jan-03 1-Apr-03 1-Jul-03 1-Oct-03 1-Jan-04 1-Apr-04 1-Jul-04 1-Oct-04 1-Jan-05 1-Apr-05 1-Jul-05 Date 1-Oct-05 1-Jan-06 1-Apr-06 1-Jul-06 1-Oct-06 1-Jan-07 1-Apr-07 1-Jul-07 1-Oct-07 1-Jan-08 1-Apr-08 1-Jul-08

Outstanding Shipping Certificate Registrations for CME Corn Registrations (mil. bu.) Futures, July 2 0 0 3 - Septem ber 2 0 0 8 10 15 20 25 30 35 40 0 5 11-Jul-03 11-Oct-03 11-Jan-04 11-Apr-04 11-Jul-04 11-Oct-04 11-Jan-05 11-Apr-05 11-Jul-05 11-Oct-05 Date 11-Jan-06 11-Apr-06 11-Jul-06 11-Oct-06 11-Jan-07 11-Apr-07 11-Jul-07 11-Oct-07 11-Jan-08 11-Apr-08 11-Jul-08

Outstanding Shipping Certificate Registrations for CME Soybean Futures, July 2 0 0 3 - Septem ber 2 0 0 8 Registrations (mil. bu.) 10 15 20 25 30 35 40 0 5 01-Jul-03 01-Oct-03 01-Jan-04 01-Apr-04 01-Jul-04 01-Oct-04 01-Jan-05 01-Apr-05 01-Jul-05 01-Oct-05 Date 01-Jan-06 01-Apr-06 01-Jul-06 01-Oct-06 01-Jan-07 01-Apr-07 01-Jul-07 01-Oct-07 01-Jan-08 01-Apr-08 01-Jul-08

Stocks or Shipping Certificates Registered for Delivery of CME W heat Futures, July 2 0 0 3 - Septem ber 2 0 0 8 Registrations (mil. bu.) 10 15 20 25 30 35 40 0 5 01-Jul-03 01-Oct-03 01-Jan-04 01-Apr-04 01-Jul-04 01-Oct-04 01-Jan-05 01-Apr-05 01-Jul-05 01-Oct-05 Date 01-Jan-06 01-Apr-06 01-Jul-06 01-Oct-06 01-Jan-07 01-Apr-07 01-Jul-07 Chicago 01-Oct-07 01-Jan-08 01-Apr-08 St.L 01-Jul-08

Percent of Full Carry on FPD,FND,FDD vs Basis for CME W heat Futures, Toledo, March 2 0 0 0 -Decem ber 2 0 0 8

Regression Model for Basis on First Day of Delivery Basis 1. Contract dummy variables to represent seasonal effects + 100 % 2. Open interest variable to represent congestion effects (long or short squeezes) 3. Piecewise linear variable to represent cost of carry - effects

Regression Model Estim ation Results for Delivery Location Basis on the First Day of Delivery for CME Corn Futures, I llinois River North of Peoria, Decem ber 2 0 0 1 - Septem ber 2 0 0 8 Dependent Variable: I LRVN Method: Least Squares Date: 09/ 29/ 08 Tim e: 21:07 Sam ple: 1 35 10 I ncluded observations: 35 New ey- W est HAC Standard Errors & Covariance ( lag truncation= 3) 0 Coefficient Std. Erro t-Statistic Prob. -10 C - 6.77 7.10 - 0.95 0.35 Z 16.78 10.17 1.65 0.11 -20 H 13.67 8.74 1.56 0.13 K 13.83 8.01 1.73 0.10 ESTLINE -30 N 4.87 7.64 0.64 0.53 ILRVN OI 0.00 0.00 - 1.67 0.11 -40 CARRY - 7.06 2.95 - 2.39 0.02 I NT80 - 94.83 18.58 - 5.10 0.00 -50 R- squared 0.67 Mean dependent - 13.44 Adjusted R- squared 0.59 S.D. dependent 16.52 -60 S.E. of regression 10.59 Akaike info crite 7.76 Sum squared resid 3028.73 Schw arz criterio 8.11 -70 Log likelihood - 127.72 Hannan- Quinn c 7.88 -0.8 -0.4 0.0 0.4 0.8 1.2 F- statistic 7.96 Durbin- W atson 2.37 Prob( F- statistic) 0.00 CARRY