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Aug 26, 2013 ||
Tim Andriesen ||
As farmers prepare for harvest this fall, they will reach the culmination of what has been a strange production cycle. The year began with concern that the 2012 drought had left the ground without adequate moisture in many crop producing regions. That was followed by the spring’s heavy rains and worry of a lost planting season. And finally, a dry summer looked like it could again damage final production. If a weather risk exists, grain producers have probably felt it in 2013.
A year with a lot of risk also means it has been a good year for increased risk management tools for producers. Primary among these has been short-dated new crop options (SNDCOs), a product that has helped manage the short term risk associated with events like a USDA report or sudden heavy rain. And whether or not 2014 will be the roller coaster that 2013 has been, we expect producers and other ag market participants to continue their adoption of these products. Here are five reasons why:
Corn and soybean SDNCOs were launched in June 2012 with contracts expiring in July and September against the December corn futures contract. Users of the contract quickly realized the low cost of a shorter-dated option was attractive, especially in the face of a severe weather event like last year’s drought. We saw growing volumes, and on January 1, 2013, launched trading for the 2013 crop year. With the growing popularity of SDNCOs for corn and soybeans, we have now reached over one million in total volume for these contracts. It is now a very liquid market, and one that market participants should feel confident adding to their risk management portfolio.
As I’ve written before about the CME Group acquisition of the Kansas City Board of Trade, the combination of Hard Red Winter Wheat and Soft Red Winter Wheat products under the same umbrella will present new opportunities for grain market participants. This is one of those ways.
Starting today, participants will be able to hedge HRW and SRW wheat in the short term, at a lower cost, the same way those in the corn and soybean markets have done since 2012. For the first time, hedgers of the two most traded wheat contracts in the world will be able to manage the inherent short-term risks in their business in a more targeted way.
The idea behind short-dated new crop options has always been the flexibility of managing event-based risk that might only present itself for just a couple of months or weeks or days. When we introduced them last year, we set expirations for May, July and September against the December corn and November soybean futures contracts. This means that in between each of these points, hedgers could buy protection against events that might move the market temporarily, like a USDA report projecting lower production, for example.
We’re now adding a March expiry for our corn and soybeans products, which will increase this flexibility even more.
A lot of times when a new product succeeds, it’s because there are a few market-makers who adopt the product early and slowly, the rest of the market follows. This is a product made for, and adopted by, hedgers like farmers and country grain elevators, who have been attracted to the lower premiums of a short-dated contract. We talk with one of them in this video:
Market participants could begin trading short-dated new crop corn and soybean options for 2013 on January 2. Based on customer demand, we’ve moved up the date to enable participants to begin managing risk using the2014 contracts today. We’re now adding a March expiry for our corn and soybeans products, which will increase this flexibility even more. This will allow participants to take advantage of this liquid market sooner, and better aligns with the production cycle for corn and soybeans. For those looking to use revenue based crop insurance this help you manage price risk before the price is set in February on your revenue coverage.
Tim Andriesen is managing director of commodity products at CME Group.
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The Pit liquidity in the SDNCO’s is impressive. As a broker, we execute for farmers/specs/users and all have interest in the short dated options. For size, liquidity, and the tight bid/asks – call your floor broker.
As one of the largest advocates of this newer contract since inception, I have the utmost confidence in the success of this very valuable product launch. Quickstrike option tool has also been a tremendous help in getting the information out there about how to price the contracts and follow its growth in trading volumes and open interest. Our group will continue to be strong supporters of this contract going forward and would be happy to help anyone else interested in its success gain access to market color or strategy ideas. firstname.lastname@example.org
Love the product, but sorry, the liquidity isn’t where it should be when you want to get out of these options.
will probably take another year.
[...] Since their launch in mid-2011, SDNCOs on corn, soybeans and wheat have surpassed more than 1.2 million contracts traded. The 2014 short-dated new crop corn, soybean and wheat options are now available for trading, so here are five reasons to watch their continued progress: http://openmarkets.cmegroup.com/6659/top-5-reasons-to-watch-short-dated-new-crop-options. [...]
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