Market Matters Blog

Mom, the Mini-Wheats!

I know what you're thinking after reading that headline: Katie's hungry. It's not safe for Katie to write when she's hungry. She takes too much liberty with those movie references.

Perhaps I am hungry this afternoon, but no, I'm not going to write about sugar-coated shredded wheat cereal or the latest exploits of the Wedding Crashers (note: the original blog post said Anchorman, which several readers pointed out was incorrect. This is what happens when I write when I'm hungry, folks). This afternoon's topic is a new Kansas City hard red winter mini-sized wheat contract that will be available for trading on March 24.

CME Group has released a lot of new trading tools for hard red winter wheat since it acquired the Kansas City Board of Trade in late 2012. Short-dated new crop options and calendar spread options came first, but perhaps the mini-contract will become the most popular.

"All I can say is it's about time," DTN Senior Analyst Darin Newsom said. "The HRW market has been needing these contracts for the last 20 years."

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HRW mini-contracts are one-fifth the size of regular future contracts, or 1,000 bushels per contract. They can be offset against the standard-sized KC contract on a 5 to 1 basis. It comes with a smaller tick size and lower margin requirements. There's a 15-minute extended trading window to help adjust positions at the end of the trading day.

The smaller contract will likely fit the needs of HRW producers better than standard contracts, Newsom said, explaining that wheat yields tend to be more variable than corn and soybean yields. That makes using 5,000 bushels contracts to hedge a little burdensome.

"What one thinks should be 25% of expected production could easily turn out to be 50% to 75%," he said.

It'll also be a helpful tool for grain elevators, said Newsom, a former wheat merchandiser in Kansas. Many merchandisers require 5,000 bushel allotments for forward contracts.

"Say a producer wanted to cover 7,000 bushels but was forced to do 10,000 bushels," Newsom said. "Then he saw yield drop due to weather to the point he only produced 7,500 bushels, and all of a sudden the producer is short on his forward contracted crop and has to buy back at the market. The 1,000 bushel increments will allow for better forward contracting."

One of the unknowns when creating a new contract product like the KC HRW mini-contract is whether or not it can attract enough interest to be a true vehicle of price discovery and a solid hedging tool.

"It will be interesting to see if noncommercial traders can get interested in these contracts. It shouldn’t take too much given HRW is the largest wheat crop the U.S. grows," Newsom said. "By introducing HRW minis, the CME is possibly creating new customers that for all the above reasons (and some I’ve likely forgotten) had stayed away from hedging/forward contracting."

What do you think: will this be an advantageous tool for you on your farm or at your elevator?

Here's a link to contract specifications for more information:…


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