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Kai Allen
Kai Allen

Buying Corn Futures

Corn futures are one of the most widely-traded commodities futures products in the world. The corn product is the first domesticated and largest crop in the United States. Like other investments, corn futures prices fluctuate with supply, demand and speculation.

buying corn futures

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For example, if Farmer Sam sells a December corn futures contract at a price of $4.50 per bushel, the contract buyer is purchasing this December corn contract at a price of $4.50 per bushel. As the seller, Sam is locking-in a $4.50 selling price for 5,000 bushels of his corn that he agrees to deliver in December, while the buyer is locking-in a $4.50 purchase price for 5,000 bushels of corn that she agrees to receive in December.

Futures contracts are standardized, which means that the terms of the contract do not change. This makes it easy to trade. For instance, one standard contract of corn will always equal 5,000 bushels and one contract of feeder cattle will always equal 50,000 lbs. Futures contracts for agricultural commodities are standardized with respect to:

Notice that the only aspect of the futures contract that is not standardized is the price at which the contract is bought or sold. The prevailing market price is determined in a futures exchange and changes as contracts are traded and expectations about supply and demand shift.

Alternatively, a futures contract is standardized and facilitated through a futures exchange, such as the Chicago Mercantile Exchange (CME) and a commodities broker. In a futures contract, the buyer and seller of the contract could live hundreds of miles apart, and the buyer and seller do not know who sold or bought their contract!

Hedgers use futures contracts to as protection from price changes. Hedgers are producers or users of the underlying commodity. Farmers, ranchers, feedlots, ethanol plants, meat packers, and grain processers are a few examples of hedgers. Those who are hedgers will, at some point, own the physical commodity being traded. Hedgers use the futures market to reduce price risk.

Speculators use the futures market with the hope of making a profit. Speculators generally do not produce or use the underlying commodity being traded. Rather, they buy or sell futures contracts in hopes of profiting from price movements in the market by buying a contract at a lower price and selling at a higher price. Speculators accept risk in the futures market.

A long position is when an individual buys a futures contract. A hedger uses a long position when he or she plans to buy a commodity in the future. For example, an ethanol plant plans to buy corn throughout the year. This plant will take a long position on corn to protect against an increase in the commodity price. By locking in a purchasing price for the corn, the plant is able to manage and stabilize expenses.

Futures contracts normally open for trade for 18-36 months in advance of the actual delivery date. Commodities are traded on a futures exchange with various contract months, and each month is assigned a symbol. Below is a table of commodities traded on a futures exchange and their contract months.

The contract value is calculated by multiplying the size of the contract by the current price. For example, if December corn is trading for $4.00 per bushel and one contract is 5,000 bushels, the contract value is $20,000 ($4.00 price * 5,000 bushels = $20,000 contract value).

Futures contracts generally do not result in physical delivery of the commodity. Instead, futures contracts are most frequently settled by offsetting the position, which eliminates the requirement to make or take delivery of the commodity. Offsetting a contract means taking the opposite position on the same futures contract at the new market price.

Example 1On May 1st, Richard went short a November Soybean futures contract at a price of $10.00. On November 1st, Richard offset his position by going long a November soybean futures contract at a price of $9.50. This removes his obligation to deliver beans to the futures contract buyer.

Example 2On March 1st, Jenny went long an October Feeder Cattle Contract at a price of $135/cwt. On October 1st, Jenny offset her position by shorting an October Feeder Cattle Contract at a price of $150/cwt. This removes her obligation of receiving cattle from the futures contract seller.

Futures contracts expire on the business day prior to the 15th calendar day of the contract month. If a contract is not offset by expiration, it requires the individual to make or receive delivery of the commodity. The reason futures contracts rarely result in delivery is because as the contract expiration date approaches, the futures price converges to the cash price.

Producers and users of the commodity will still sell or purchase the physical product locally in the cash market. This saves the producer time and money by not needing to haul their commodity long distances to deliver on the futures contract. This also allows speculators to trade contracts.

The Chicago Mercantile Exchange (CME) offers a contract on corn that settles into 5,000 bushels or about 127 metric tons of #2 yellow corn. Traders can also deliver #1 yellow corn at a 1.5 cent per bushel premium or #3 yellow corn at a 1.5 cent per bushel discount.

Futures are a derivative instrument through which traders make leveraged bets on commodity prices. If prices decline, traders must deposit additional margin in order to maintain their positions. At expiration, the contracts are physically settled by delivery of corn.

Options are also a derivative instrument that employ leverage to trade in commodities. As with futures, options have an expiration date. However, options also have a strike price, which is the price above which the option finishes in the money.

Options buyers pay a price known as a premium to purchase contracts. An options bet succeeds only if the price of corn futures rises above the strike price by an amount greater than the premium paid for the contract.

There are no public companies that are a pure-play investment in corn. However, traders that want exposure to corn prices may want to consider buying shares in large agribusinesses that provide seeds, fertilizers and pesticides to farmers:

One way to trade in corn is through the use of a contract for difference (CFD) derivative instrument. CFDs allow traders to speculate on the price of corn without owning the underlying asset. The value of a CFD is the difference between the price of corn at the time of purchase and its current price.

Many regulated brokers worldwide offer CFDs on corn. Customers deposit funds with the broker, which serve as margin. The advantage of CFDs is that traders can have exposure to corn prices without having to purchase shares, ETFs, futures or options.

Experts see reasons for both optimism and pessimism about corn prices in the future. On the one hand, there is a massive supply of the commodity, which is creating a serious overhang on the market:

However, despite the oversupply, there may be reasons for optimism. Jason Ward, director of grains and energy at Northstar Commodity, believes corn prices have room to move lower as excess supply gets absorbed by the market. However, he sees a silver lining in the ethanol market:

China is importing more corn than ever before; actual monthly corn imports surged in March 2021 (chart below) reflecting the fulfillment of prior purchases made, a good amount of which was purchased from the United States.

Full-sized CME corn (ZC) is one of the most popular grain and oilseed contracts in the world. For 2021, the ZC contract posted an average daily volume (ADV) upward of 350,000 and a peak open interest (OI) in the neighborhood of 1.7 million. Given these robust stats, full-sized corn is an exceedingly liquid market.

For traders looking for a way to secure reduced corn market exposure, the CME offers the mini corn contract. At one-fifth the size of full-sized corn, mini corn futures provide the retail sector with enhanced granularity and a vastly reduced risk profile.

Monday-Friday 9:30 a.m. to 2:45 p.m. EST.Corn Market DriversLike all other commodities, corn futures feature a collection of unique underpinnings. In fact, most corn traders and producers scrutinize the two following market drivers when seeking their financial objectives.

Given a constant demand for food and energy (ethanol), corn supplies have a major impact on pricing. Thus, adverse weather events such as flooding or drought can severely reduce planted acres and output. Annual crop carryover levels can also send corn prices up or down.

Like all other commodities, corn prices exhibit sensitivity and a strong negative correlation to the USD. Generally speaking, when the USD strengthens, the price of corn falls. In contrast, when the greenback weakens, corn prices tend to rally.

Not only could water-starved corn and soybean crops produce smaller yields and cut into farmers' revenues, but they also could force some growers who signed future delivery contracts with grain buyers to buy back some bushels they are unable to supply, Hurt said.

With some parts of Indiana now nearing a month without significant rainfall and the critical pollination phase of corn either already started or about to begin, large crop losses appear likely for some farmers. Those losses would be especially painful for farmers who sold a large percentage of their anticipated corn crop this spring in forward cash contracts.

Hurt gave the example of a farmer who agreed to sell corn at $5 a bushel based on an anticipated production of 150 bushels per acre, for $750 in revenue per acre. If drought reduced the farmer's production to 120 bushels per acre and pushed cash prices to $6 a bushel, the farmer would deliver that smaller crop at the price agreed upon but then have to pay the buyer for the 30 bushels per acre the farmer was unable to supply. That undeliverable charge would be $30 per acre, based on the $1 per bushel more than the contract price the grain is now worth. 041b061a72


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