Grain elevators use futures contracts to manage sales and get good deals throughout the year, allowing them to pay farmers a more consistent price and protect them from big drops.
According to KUNC, large market players can use the futures market to participate as both grain buyers and sellers. Their actions in the futures market are the opposite of what they do in the cash, or physical, market. One key thing is that it brings some stability to the market, which elevators pass onto the farmers who supply the crop.
This system works as long as the cash price gets close to the price in the futures contract as the expiration date approaches.
University of Illinois agricultural economist Scott Irwin said when the narrowing of the gap between the futures and cash prices, which is called convergence, isn’t on pace, a problem is created.
Economists could see this problem coming for months; in September, one called the soybean futures contract “precarious.”
Read the full report here.
