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Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts: Causes and Solutions

Author

Listed:
  • Irwin, Scott H.
  • Garcia, Philip
  • Good, Darrel L.
  • Kunda, Eugene L.

Abstract

The lack of consistently acceptable convergence performance for Chicago Board of Trade (CBOT) corn, soybean, and wheat contracts since late 2005 has been widely discussed (e.g., Henriques, 2008).1 Convergence performance is summarized in Figure 1, depicting delivery location basis levels on the first delivery date of each contract for the three commodities over January or March 2000 through March 2009. Extended periods of lack of convergence since late 2005 are obvious, although variable over time and by commodity. Performance has been consistently weakest in wheat, with futures prices at times exceeding delivery location cash prices by $1.00/bu., a level of disconnect between cash and futures not previously experienced in grain markets.

Suggested Citation

  • Irwin, Scott H. & Garcia, Philip & Good, Darrel L. & Kunda, Eugene L., 2009. "Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts: Causes and Solutions," Marketing and Outlook Research Reports 183475, University of Illinois at Urbana-Champaign, Department of Agricultural and Consumer Economics.
    • Handle: RePEc:ags:uiucmr:183475
    DOI: 10.22004/ag.econ.183475
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    References listed on IDEAS

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    1. B. L. Gardner & G. C. Rausser (ed.), 2001. "Handbook of Agricultural Economics," Handbook of Agricultural Economics, Elsevier, edition 1, volume 1, number 2.
    2. Dwight R. Sanders & Scott H. Irwin & Robert P. Merrin, 2010. "The Adequacy of Speculation in Agricultural Futures Markets: Too Much of a Good Thing?," Applied Economic Perspectives and Policy, Agricultural and Applied Economics Association, vol. 32(1), pages 77-94.
    3. B. L. Gardner & G. C. Rausser (ed.), 2001. "Handbook of Agricultural Economics," Handbook of Agricultural Economics, Elsevier, edition 1, volume 1, number 1.
    4. Paul, Allen B., 1976. "Treatment of Hedging in Commodity Market Regulation," Technical Bulletins 158109, United States Department of Agriculture, Economic Research Service.
    5. Irwin, Scott H. & Garcia, Philip & Good, Darrel L. & Kunda, Eugene L., 2008. "Recent Convergence Performance of CBOT Corn, Soybean, and Wheat Futures Contracts," Choices: The Magazine of Food, Farm, and Resource Issues, Agricultural and Applied Economics Association, vol. 23(2), pages 1-6.
    6. Gray, Roger W. & Peck, Anne E., 1981. "The Chicago Wheat Futures Market: Recent Problems in Historical Perspective," Food Research Institute Studies, Stanford University, Food Research Institute, vol. 18(01), pages 1-28.
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    Cited by:

    1. Guo, Kevin & Leung, Tim, 2017. "Understanding the non-convergence of agricultural futures via stochastic storage costs and timing options," Journal of Commodity Markets, Elsevier, vol. 6(C), pages 32-49.
    2. Nonelelo Vuba & Thobekile Qabhobho, 2024. "The Risk Transfer among Exchange Rates, Energy Commodities, and Agricultural Commodity Prices in SADC Countries," International Journal of Energy Economics and Policy, Econjournals, vol. 14(2), pages 287-298, March.
    3. Troester, Bernhard & Staritz, Cornelia, 2013. "Fundamentals or financialisation of commodity markets: What determines recent wheat prices?," Working Papers 43, Austrian Foundation for Development Research (ÖFSE).
    4. Horváth, Lajos & Liu, Zhenya & Rice, Gregory & Wang, Shixuan, 2020. "A functional time series analysis of forward curves derived from commodity futures," International Journal of Forecasting, Elsevier, vol. 36(2), pages 646-665.
    5. Revoredo-Giha, Cesar & Zuppiroli, Marco, 2013. "Commodity futures markets: are they an effective price risk management tool for the European wheat supply chain?," Bio-based and Applied Economics Journal, Italian Association of Agricultural and Applied Economics (AIEAA), vol. 2(3), pages 1-19, December.
    6. Gilbert, Christopher L., "undated". "Speculative impacts on grains price volatility," 123rd Seminar, February 23-24, 2012, Dublin, Ireland 122540, European Association of Agricultural Economists.
    7. Gutierrez, L. & Piras, F., 2013. "A Global Wheat Market Model (GLOWMM) for the Analysis of Wheat Export Prices," 2013 Second Congress, June 6-7, 2013, Parma, Italy 149760, Italian Association of Agricultural and Applied Economics (AIEAA).
    8. Payne, Nicholas D. & Karali, Berna & Dorfman, Jeffrey H., 2019. "Can Cattle Basis Forecasts Be Improved? A Bayesian Model Averaging Approach," Journal of Agricultural and Applied Economics, Cambridge University Press, vol. 51(2), pages 249-266, May.
    9. Adjemian, Michael K. & Kuethe, Todd H. & Kunda, Eugene L., 2010. "The Inconvenience Cost: A Portfolio Approach to Non-Convergence Between Cash and Futures Prices," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado 61040, Agricultural and Applied Economics Association.
    10. Dark, Jonathan, 2012. "Will tighter futures price limits decrease hedge effectiveness?," Journal of Banking & Finance, Elsevier, vol. 36(10), pages 2717-2728.
    11. Hatchett, Robert B. & Brorsen, B. Wade & Anderson, Kim B., 2010. "Optimal Length of Moving Average to Forecast Futures Basis," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 35(01), pages 1-16.
    12. Irwin, Scott H., 2020. "Trilogy for troubleshooting convergence: Manipulation, structural imbalance, and storage rates," Journal of Commodity Markets, Elsevier, vol. 17(C).

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