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What Is the Issue?

From 2005 to 2010, many corn, soybean, and wheat futures contracts repeatedly expired at prices 

much higher than corresponding delivery market cash prices. In principle, these futures contracts 

can be exchanged for the physical commodity at expiration, so their prices should converge with 

the price of the underlying cash commodity. This sustained period of non-convergence, as well as 

its magnitude, was unprecedented in domestic commodity markets. This was a cause of concern 

for many market participants, policymakers, and economists, who worried that those convergence 

failures signaled a weakening of the traditional price discovery and risk management roles of 

these futures markets, and ultimately, a less effi cient allocation of agricultural resources.

What Did the Study Find?

Market observers offered several explanations for the non-convergence puzzle, but none was 

tested rigorously and shown to explain the problem. One theory is that “excessive speculation” by 

nontraditional fi nancial fi rms, like Commodity Index Traders (CITs), overpowered the ability of 

arbitrageurs to balance derivative and cash prices, leading to non-convergence in wheat markets. 

While it is true that CIT trading increased substantially during the time when non-convergence 

became a problem, this theory suffers from several theoretical limitations. For example, if 

purchasing behavior by these fi rms drove up the derivative price relative to the cash price, their 

equally sizable selling behavior before contract expiration should serve to force those prices 

together, leading to convergence. To maintain portfolio exposure, CITs enter one contract and 

then roll to the next, buying at fi rst and holding it until it almost expires, then selling it to buy the 

next expiration. 

In another account, production and trade patterns for these commodities shifted away from longestablished delivery markets, limiting the ability of fi rms to arbitrage away the price difference 

between the two markets by engaging in the delivery process. On the other hand, the commercial 

fl ow for wheat in particular has bypassed these delivery markets for decades, so this theory does 

not adequately explain convergence problems observed since 2005.

United States Department of Agriculture

A report summary from the Economic Research Service August 2013

ERS is a primary source 

of economic research and 

analysis from the U.S. 

Department of Agriculture, 

providing timely information on economic and policy 

issues related to agriculture, 

food, the environment,and 

rural America.

Find the full report at 

www.ers.usda.gov/

publications/eib-economic-informationbulletin/eib-115.aspx

Michael K. Adjemian, Philip Garcia, Scott Irwin, 

and Aaron Smith

Non-Convergence in Domestic 

Commodity Futures Markets: Causes, 

Consequences, and Remedies
We conclude that recent convergence failures in grain markets are attributable to inconsistent storage rates for 

the physical commodity and its derivative, a delivery instrument. Specifi cally, the exchange-set storage rate of 

the delivery instrument was too low relative to the true price of storage. The resulting wedge between the costs 

of holding delivery instruments and storing physical grain led to an expansion of the delivery month basis, 

preventing convergence even in a competitive market. The available empirical evidence fi ts this storage rate argument: inventories, which drive the wedge, are the most important factor in explaining the change in the expiring 

basis. In contrast, no empirical support was found for the CIT theory: trading activities by these fi rms are not 

found to affect the change in the basis over time, at any acceptable level of statistical signifi cance. 

How Was the Study Conducted?

This report summarizes the basic theory of how the storage-rate problem caused expiring futures to diverge from 

cash prices and shows how the wedge explains the large magnitudes of recent non-convergence. We also discuss 

prominent alternative explanations for non-convergence and show why they are not supported theoretically or 

empirically. Based on these fi ndings, we discuss the likely impact of various proposed policy options on the prospect of achieving convergence in grain and soybean markets.

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