Corn futures are traded electronically on the Globex platform at 5,000 bushels per contract from 8:00 p.m. U.S. ET to 2:20 p.m. U.S. ET the next day. To trade corn futures, you’ll need a futures account that has been approved.
How much does a single futures contract cost?
1 The contract’s notional value is $75,000 at $75 per barrel. A trader, on the other hand, is not obligated to deposit this sum into an account. The initial margin for a crude oil contract, as defined by the exchange, might be roughly $5,000 per contract.
The Asset on the CME
Corn futures are traded on the Chicago Board of Trade in the United States (CBOT). Corn is denoted by the symbol ZC, and one contract of corn is worth 5,000 bushels. Ticks with a minimum size of 1/4 cent per bushel are worth $12.50 per contract.
Corn futures, as previously stated, are a favorite investment choice for speculators and aggressive traders due to their proclivity for large price swings. Now consider how these price changes might be reflected in a trading position.
Corn Futures Contract Specs Calculation
Assume the front-month corn contract is now trading at $4.50/bushel and moves up five cents. In terms of a single normal corn futures contract, the value of the price shift is as follows:
- A one-cent change in a full-size corn futures contract (5,000 bushels) is equal to $50.
- 20% of the complete contract (or $10) for a micro-size corn futures contract (1,000 bushels).
0.05 cents per bushel multiplied by 5,000 bushels is $250 As a result, a five-cent change in maize is equivalent to a $250 change in a single conventional futures contract.
$600 = $0.12 5,000 bushels In terms of a single typical futures contract, a twelve-cent shift in corn would amount to a $600 move.
We can see that a one-cent change in corn is comparable to $50 if we break this estimate down further. You can calculate how much the value of a futures contract has increased or reduced by multiplying $50 per contract by the price change in cents. Furthermore, you should now be able to determine the profit or loss associated with your position.
Mini Corn Contracts
There are also corn micro contracts that can be traded. A single micro corn contract is worth $1,000 bushels, or 20% of the total contract value.
It stands to reason that the tick value of the small corn contract would be 1/5 that of the standardized contract. In the mini-corn contract, a one-cent price change would be equivalent to $10 in the conventional one.
Contract Values
The real contract value in your portfolio is equally as significant as the tick values. With a few easy calculations, here’s a quick way to figure it out:
Let’s take the previous example of corn trading at $4.50 a bushel and see what a standard futures contract would be worth in this situation.
To figure it out, multiply the market price of corn per bushel by the number of bushels in the contract. At the very least, when we have many contracts.
We would multiply $4.50 (price per bushel) * 5,000 (bushels per contract) 1 in our example (number of contracts). As a result, the contract is worth $22,500. In other words, a single regular corn futures contract worth $4.50 is worth $22 500.
Mini Corn Futures
So, how much is a single tiny corn futures contract worth? We know it’s worth 20% of the standard one’s value, and since it’s trading at the same $4.50/bushel price, we can calculate it using the following formula:
Market Price per bushel 1,000 x the number of contracts = Mini Corn Contract Value
Using the above inputs, a single small corn contract has a value of $4,500 for $4.50. (4.50 x 1,000 x 1).
1 corn futures contract equals how many bushels?
SPECIFICATIONS FOR CONTRACTS Each futures contract shall be for 5,000 bushels of No. 2 yellow corn at par, No. 1 yellow corn at 11/2 cents per bushel over contract price, or No. 2 yellow corn at par plus 1 1/2 cents per bushel over contract price.
What is the value of a corn contract?
- Corn futures are standardized, exchange-traded contracts in which the contract buyer promises to buy a particular quantity of corn (e.g. 50 tonnes) from the seller at a predetermined price on a future delivery date.
- The Chicago Board of Trade (CBOT), NYSE Euronext (Euronext), and Tokyo Grain Exchange all trade corn futures (TGE).
- Margin is used to trade commodities, and it varies depending on market volatility and the current face value of the contract. To trade a maize contract on the CBOT, for example, a trader may be required to maintain a margin of $1,350, or about 4.5 percent of the commodity’s face value.
- Several key reports on corn are published by the United States Department of Agriculture (USDA). Every year in the second half of March, the USDA releases its Prospective Plantings report, which details how much and what crops farmers will plant for the coming season. The Monthly Crop Production report predicts supply and demand for soybeans every month after then.
How are futures prices calculated?
To figure out how much a futures contract is worth, multiply the price by the number of units in the contract. To convert to dollars and cents, multiply by 100. Assume the price of coffee futures in May 2014 is 190.5 cents. 37,500 pounds equals one coffee futures contract, therefore multiply 37,500 by 190.5 and divide by 100. The coffee futures contract has a value of $71,437.50.
What is the cost of an S&P 500 futures contract?
The base market contract for S&P 500 futures trading is the standard-sized contract. It is valued by increasing the value of the S&P 500 by $250. For example, if the S&P 500 is at 2,500, a futures contract’s market value is 2,500 x $250 (or $625,000).
What is the purpose of futures contracts?
A futures contract is a legally enforceable agreement to acquire or sell a standardized asset at a defined price at a future date. Futures contracts are exchanged electronically on exchanges like the CME Group, which is the world’s largest futures exchange.
What is the best way to hedge a futures contract?
Corporations typically participate in the futures market in order to lock in a better price ahead of a transaction. A company may elect to take a long position in a futures contract if it thinks it will need to purchase a specific item in the future. A long position is when you acquire a stock, commodity, or currency with the hopes of seeing its value rise in the future.
How can you protect yourself against corn futures?
Crop producers are in the business of raising and selling grain for a profit. As with any business, some years are profitable while others are not. Crop farmers face profit uncertainty due to both variation in the cost of production per bushel (particularly due to yield fluctuation) and crop price uncertainty.
Producers employ a variety of ways to mitigate the risk of production loss. Appropriate machinery size, rotating crops, diversification of operations, planting multiple distinct hybrids, crop insurance, and many other factors may be considered.
Crop growers can also use marketing methods to mitigate the financial risk of fluctuating prices. Producers benefit financially from rising prices, while consumers benefit financially from lowering prices. However, it is impossible to predict whether prices will rise or decline. Hedging with futures can assist create a price before or after harvest. The manufacturer safeguards against price drops by setting a price, but it also eliminates any possible profit if prices rise. As a result, manufacturers can considerably limit the financial impact of shifting prices by hedging with futures.
How Prices are Established
Corn and soybean prices are determined in two different but related markets. The futures market deals in contracts for delivery in the future. These future contracts are for a certain period (contract delivery month), place (mainly Chicago, Illinois), grade (#2 yellow shelled corn), and quantity, and are traded on a commodity market (1,000or 5,000 bushel contract sizes). The physical grain is handled in the cash market by companies including country elevators, processors, and terminals.
The difference in price between the local cash price and the futures price is referred to as the basis. At different marketing locations, the premise is different. As a result, knowing the local basis at rural elevators, as well as neighboring processors or terminals, is critical for effective marketing.
The futures price and the local basis are thus reflected in local cash prices. This is seen in Figure 1. A local cash bid of $5.50 per bushel for maize, for example, can be calculated using a futures price of $5.70 and a local basis of $-.20. When considering marketing options, it’s helpful to think of local cash prices in terms of the futures component and the base component.
The Hedging Concept
Selling corn futures contracts as a temporary substitute for selling corn in the local cash market is known as producer hedging. Because the maize will eventually be sold on the cash market, hedging is only a temporary solution.
In the cash and futures markets, hedging is defined as taking equal but opposite positions. Consider the case of a farmer who has harvested 10,000 bushels of corn and stored it in a grain bin. The producer has hedged his position by selling 10,000 bushels of corn futures. The producer is long (owns) 10,000 bushels of cash corn and short (sells) 10,000 bushels of futures corn in this scenario.
Price has been set on the principal component of the local cash price since the producer sold futures. This is seen in Figure 1, which shows that the futures component makes up the majority of the local cash price.
In a hedge, selling futures leaves the local basis unpriced. As a result, the final value of maize is still affected by variations in the local market. The basis risk (variation) is, nevertheless, substantially lower than the futures price risk (variation). The producer has avoided the financial loss that would result from a futures price fall on the cash grain by selling futures.
When the producer is ready to sell the corn in the cash market, the hedge position is eliminated or lifted. It is raised in two steps at the same time. The farmer sells 10,000 bushels of corn to a nearby grain elevator and promptly repurchases the futures contract. The purchase of futures cancels out the previous short (sold) position in futures, while the sale of cash grain turns the position to cash.
Producer Hedging Illustrations
In the cash and futures markets, hedging entails taking opposing but equal positions. You are long cash corn if you own 10,000 bushels of corn, as described above. You are short corn futures if you sell 10,000 bushels of corn on the futures market.
When the price of corn rises, as illustrated in Figure 2, the value of cash corn rises as well. However, because you sold (short) corn futures and now have to buy corn futures at a higher price to close out the futures position, the futures contract loses money. If both cash and futures prices rise by the same amount, the increase in corn value will precisely match the loss in the futures market. The net price obtained from the hedge is identical to the cash price at the time the hedge was established (not including trading cost, interest on margin money, or storage costs).
When the price of corn falls, as shown in Figure 3, the value of cash corn falls as well. However, because you sold (short) corn futures and may now buy corn futures at a cheaper price to close out the futures position, the futures contract results in a profit. If the cash and futures prices both fall by the same amount, the loss in corn value will exactly equal the gain in the futures market. The net price obtained from the hedge is identical to the cash price at the time the hedge was established (not including trading cost, interest on margin money, and storage costs.)
The basis is the difference between the cash and futures prices. When the hedge is raised, the basis in Figures 2 and 3 is the same as when it was originally placed. If the basis is lower when the hedge is lifted, as shown in Figure 4, the gain in the cash market will be greater than the loss in the futures market, resulting in a somewhat higher net price obtained from the hedge. If prices fall, the result is the same (Figure 5). The decrease in cash grain value will be smaller than the increase in the futures market, resulting in a higher net price.
From harvest to winter, spring, and summer, the basis frequently narrows, resulting in a higher price. However, due to the difficulty of storing grain after harvest, a greater price is required. Until the hedge is lifted, no one knows if and how much the basis narrows. Hedgers can lock in the futures price when they hedge, but they are exposed to fluctuations in the basis.
Hedging can be used to set a price for a crop before it is harvested. Assume the hedge is planted prior to harvest but is pulled thereafter. The futures price at the time the hedge is put, less the estimated harvest basis, is the net price (not including trading costs or interest on margin money). The increased cash price is offset by the futures loss if prices are higher at harvest. The futures gain is added to the reduced cash price if prices are lower.
Processor Hedging Illustrations
Hedging can be utilized to safeguard against rising grain prices if you’re a grain processor or livestock producer who needs grain for processing or feed. Hedging entails taking opposing but equal positions in the cash and futures markets once more. However, in this scenario, you do not have grain to sell and instead plan to buy grain in the future to meet your processing or feed needs. You buy futures instead of selling them when you place the hedge. So you’re long grain in the futures market but short grain in the cash market (you’ll need grain but don’t have any).
If grain prices rise, as illustrated in Figure 6, you profit in the futures market since you bought futures and can now sell them for more money. However, grain for processing or feed is now more expensive. As a result, the increase in the grain purchase price is countered by the gain in the futures market.
If grain prices fall as indicated in Figure 7, you’ll have to sell the futures you bought at the start of the period at a lower price. Grain for your processing or feed needs, on the other hand, is currently less expensive. As a result, the loss in the futures market compensates for the lower grain purchase price.
If the price difference between cash and futures remains constant throughout the hedging period, the loss in one market will exactly offset the gain in the other (not considering transaction andinterest costs).
Mechanics of Placing a Hedge
Once the fundamentals of hedging have been grasped, the next step in the hedging process is to choose the best method for carrying out the trades. This could be a hedging program offered by a brokerage business, elevator, processor, or internet trading platform. A producer should expect the firm to execute orders reliably and quickly, as well as to provide market information on a regular basis. Most companies have daily market data as well as quarterly in-depth research studies on the market outlook, which can help with marketing plan formulation. A broker or merchandiser who is familiar with the local cash market has some specific benefits.
It’s critical that the company understands how hedging and pricing risk management fit into the producer’s marketing strategy. Hedging is a tool for reducing price risk that both the producer and the broker or merchandiser must understand. Producers, on the other hand, occasionally use futures markets to bet on price fluctuations, exposing them to increased price risk. Generally, speculative and hedging accounts should be kept separate. Inexperienced hedgers should look for a broker or merchandiser who is prepared to help them learn more about market dynamics.
The producer is ready to make trading orders after choosing a broker or merchandiser, developing a marketing strategy, and opening a hedge account. The broker or merchandiser can provide details on the different types of orders that can be placed. The order will be placed with the commodities exchange once the broker or merchandiser receives it. The order will be made electronically, and if it is within the current market range, it will be executed. The executed order is then confirmed and forwarded to the local broker or merchandiser.
Producers must deposit margin money with the trading firm to retain a position in the futures market. Initial margin requirements give financial protection by ensuring futures commitment performance. When a producer sells (buys) a futures contract and the price of the futures contract rises (declines), the producer loses equity in the futures position. To maintain the hedge position, these higher (lower) prices may necessitate additional capital. If the price of futures falls (rises), futures profits will be credited to the producer who sold (purchased) futures. The producer (processor) has the right to demand that the excess margin be paid to them. The margin position in the futures market is updated every day.
Margin calls should not be regarded as a loss, but rather as a cost of protecting against a significant price drop (increase). Losses on futures contracts are compensated by the increased value of the physical grain inventory in a producer hedged position. Losses on futures contracts are compensated by lower-cost cash grain purchases in a processor (livestock producer) hedged position.
Margin calls are not a loss, but they do make a producer’s cash flow more difficult. If prices rise, the futures loss must be paid as it accrues (more margin). The added value of the grain, on the other hand, is not appreciated until the grain is sold after the hedge is removed. Falling grain prices might cause margin calls for grain processors and livestock producers before the benefits of lower-cost cash grain purchases are recognized. As a result, a cash flow crisis could arise.
The producer is no longer obligated to keep a margin account once the trade is closed out (for that transaction). As a result, the producer (processor) can get their margin deposits back, plus (minus) futures gains (losses), less brokerage fees.