United States 

Department 

of Agriculture 

www.ers.usda.gov 

 A Report from the Economic Research Service

Abstract

The past 5 years have seen large increases in trading of corn, soybean, and wheat futures 

contracts by nontraditional traders, a trend that coincided with historic price increases 

for these commodities. These events have raised questions about whether changes in 

the composition of traders participating have contributed to movements in commodity 

prices beyond the effects of market fundamentals. Evidence suggests the link between 

futures and cash prices for some commodity markets may have weakened (poor convergence), making it more difficult for traditional traders to use futures markets to manage 

risk. This report discusses the role and objective of new futures traders compared with 

those of traditional futures traders and seeks to determine if the composition of traders 

in futures markets has contributed to convergence problems. Market activity is analyzed 

by focusing on positions of both traditional and new market traders, price levels, price 

volatility, and volume and open interest trends. Convergence of futures and cash prices 

is examined, along with implications and prospects for risk management by market 

participants. The report also discusses the implications for market performance and the 

regulatory response of the Commodity Futures Trading Commission.

Keywords: Corn, soybeans, wheat, futures, liquidity, volatility, speculators, index 

traders, hedgers, prices, basis, convergence, market performance

About the Authors

Nicole Aulerich is a Ph.D. candidate at the University of Illinois, Department of 

Agricultural and Consumer Economics. Linwood Hoffman and Gerald Plato are 

agricultural economists with the Economic Research Service, USDA.

Nicole Aulerich 

Linwood Hoffman, lhoffman@ers.usda.gov

Gerald Plato, gplato@ers.usda.gov

Issues and Prospects in 

Corn, Soybeans, and 

Wheat Futures Markets

New Entrants, Price Volatility, and 

Market Performance Implications

FDS-09G-01 

August 2009

Contents

Approved by USDA’s 

World Agricultural 

Outlook Board

Introduction. . . . . . . . . . . . . . . . 3

Traditional Role and Use 

of the Futures Market. . . . . . 6

Factors That Support Increased 

Trading of Agricultural 

Futures Contracts. . . . . . . . . . 9

Why Some Consider 

Commodities an 

Asset Class. . . . . . . . . . . . . . . 11

Role and Objectives of 

New Market Traders. . . . . . 14

Futures Market Structure: 

Volume-to-Open Interest 

Ratios, Price Volatility, and 

Net Trader Positions. . . . . . . 18

Problems Arising in 

Market Performance. . . . . . 28

Risk Management Challenges 

for Market Participants. . . . 33

Government’s Regulatory 

Response. . . . . . . . . . . . . . . . 35

Conclusion. . . . . . . . . . . . . . . . . 37

References. . . . . . . . . . . . . . . . . 38

Glossary. . . . . . . . . . . . . . . . . . . 42
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Acknowledgments 

The authors gratefully acknowledge the input and review comments of Paul 

Westcott, Andrea Woolverton, Greg Pompelli, Janet Perry, and Sarahelen 

Thompson of USDA’s Economic Research Service (ERS); David Stallings 

and Jerry Norton of USDA’s World Agricultural Outlook Board; Scott H. 

Irwin and Eugene Kunda of the University of Illinois at Urbana-Champaign; 

and Colin Carter of the University of California at Davis. Excellent editorial 

guidance was provided by Linda Hatcher of ERS.
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Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

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Although the traditional role of commodity futures markets is for risk management and price discovery, a new role appears to have emerged: Commodity 

futures are increasingly used as an asset class in various forms of investment 

vehicles. Significant amounts of capital have entered the futures market for 

this purpose.1 The influx of this new capital was partially responsible for the 

216-percent increase in average open interest for corn, soybeans, and wheat 

between January 2004 and June 17, 2008. Since then, the average open 

interest for the three commodities declined an average 35 percent between 

June 17, 2008, and April 30, 2009 (table 1 and fig. 1).2

Commodity futures markets and their accompanying derivatives markets have 

become appealing venues for investors due to widespread electronic trading, 

the financial integrity of a clearinghouse that alleviates transactions risks, and 

the ability to leverage investments by requiring only a margin as a performance 

bond. The costs of purchasing and selling futures contracts as investments in the 

futures markets are low compared with the costs of investing in other markets.

The large amount of investment capital flowing into agricultural futures 

markets has prompted increased scrutiny. Industry participants have accused 

the new traders and new capital of unduly affecting the level of prices and 

price volatility. Others allege that hundreds of billions of investors’ dollars are 

swamping the market, and it can no longer serve to assist commercial traders 

who use the physical commodities to hedge and smooth physical production 

and/or consumption (Cooper, 2008). These concerns initially arose in the 

energy markets but were later heard in the agricultural commodity markets. 

The counterargument to these allegations has rested on the dynamic nature 

of the commodity markets during recent years. For example, biofuel production, poor growing weather, export controls, emerging economy demand, 

and increased production costs caused demand growth to outstrip supply 

growth in various commodities. In addition, low real interest rates and a weak 

U.S. dollar further fueled higher prices. Because of these and a number of 

other factors affecting prices, many researchers suggest the need for further 

research to determine the role of speculative activity upon price levels. 

Abbott et al. (2008), for example, indicate the following:

While the effects of supply and demand on commodity prices are clear, 

the effects of changes in the structure of commodity markets, in particular 

increased speculative activity are not. There is no doubt that the amount of 

hedge fund and other new monies in the commodity markets has mushroomed. 

Price volatility has increased, partly due to increased trading volumes. Based 

on existing research, it is impossible to say whether price levels have been 

influenced by speculative activity.

Participants within the commodities industry question whether the goals 

and objectives of the new traders are compatible with the traditional functioning of the futures market. Some analysts suggest that large fund traders 

are similar to manipulative individual speculators of the past who artificially 

inflated futures prices and profited from the resulting higher levels. Yet, 

based on past research in futures markets, there is little evidence that the new 

traders reduce the quality of price predictions. Carlton (1984) states “Any 

deterioration in the accuracy of price predictions would attract informed 

Introduction

1This increase in capital was partially 

fueled by research touting returns from 

futures portfolios comparable with 

returns from equities (e.g., Gorton and 

Rouwenhorst, 2006); the investment 

community has embraced this idea and 

created vehicles for easy investment 

into commodity futures markets for 

large pension funds or for small investors. Domanski and Heath (2007) have 

deemed this the “financialization” of 

commodity markets, and others have 

referred to this phenomenon as the 

creation of commodity futures into a 

bonafide asset class. Earlier research by 

Fortenbery and Hauser (1990) found that 

the addition of futures contracts to the 

portfolio rarely increases the portfolio 

return. However, they found the investment benefits from agricultural futures 

are found in the form of a reduction in 

the portfolio’s nonsystematic risk.

2Corn, soybeans and wheat are the 

three largest agricultural contracts 

from the Chicago Mercantile Exchange 

(CME) Group/Chicago Board of Trade 

(CBOT). The CME Group/CBOT 

wheat contract is commonly used by 

traders for all wheat classes because 

of its liquidity and volume. It is used, 

therefore, to represent all classes of 

wheat in this analysis. The CME and 

CBOT merged in July 2007 to form the 

CME Group. In August 2008, the New 

York Mercantile Exchange (NYMEX) 

joined the CME Group.
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Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

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investors who would have an incentive to use their knowledge to earn higher 

profits and thereby drive the poorly informed from the market by inflicting 

losses on them.” In 1925, the “Wheat Scandal” was purported to involve 

speculators who manipulated prices, but upon further review, Petzel (1981) 

found no such evidence of manipulation: “Charges of manipulation and 

excessive speculation usually arise during periods of unusual market activity, 

but they should be subject to careful analysis before action is taken.” Questions 

have also been raised about the impact of speculators and nontraditional 

traders on selected performance issues, such as the decoupling (separating) 

of the futures and cash markets and increased difficulty in managing risk for 

traditional market players within the futures market.

The changing environment raises additional questions (not all of which are 

addressed here) about the evolving nature of the commodity futures markets. 

Figure 1

Open interest in CME Group/CBOT: Corn, soybeans, and wheat, weekly, January 4, 2000-April 30, 2009 

Number of contracts

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1/4/2000

5/23/2000

10/10/2000

2/27/2001

7/17/2001

12/4/2001

4/23/2002

9/10/2002

1/28/2003

6/17/2003

11/4/2003

3/23/2004

8/10/2004

12/28/2004

5/17/2005

10/4/2005

2/21/2006

7/11/2006

11/28/2006

4/17/2007

9/4/2007

1/22/2008

6/10/2008

10/28/2008

3/17/2009

Corn

Soybeans

Wheat

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Source: Commodity Futures Trading Commission, Commitments of Traders Reports, Futures-and-Options Combined Reports, 

http://www.cftc.gov/marketreports/commitmentsoftraders/cot_historical.html.

Table 1

Percentage change in open interest for selected 

CME Group/CBOT futures contracts

Contracts

Period Corn Soybeans Wheat

Percent

1//2/2000-1/6/2004 17.8 94.2 -3.6

1/6/2004-6/17/2008 297.7 125.2 226.2

6/17/2008-4/30/2009 -50.2 -31.3 -24.1

CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade. 

Source: Commodity Futures Trading Commission, Commitments of Traders Reports, Futuresand-Options Combined Reports, http://www.cftc.gov/marketreports/commitmentsoftraders/ 

cot_historical.html.
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Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

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If the link between futures prices and cash prices weakens, will futures prices 

continue to be a useful price discovery or hedging mechanism? Will risk 

managers be able to offset their cash market price exposures as effectively as 

they have traditionally done? If not, what alternatives exist for market participants? Can the agricultural futures markets continue to function and serve 

the objectives of each of its market traders? Are changes in trading rules or 

contract specifications needed?

This report examines the role and objectives of new futures traders compared 

with those of traditional futures traders and how new traders may affect 

market metrics. We will assess changes in market activity by focusing on 

liquidity, volatility, and the relationship between positions of selected traders’ 

categories and price levels. Convergence of futures and cash prices will be 

further examined, along with the implications and prospects for risk management by market participants. We will also highlight the initial regulatory 

response by the Commodity Futures Trading Commission (CFTC). A glossary 

is provided at the end of the document for interested readers.
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Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

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The traditional role for futures markets is risk management and price 

discovery (Peck, 1985, pp. 1–73). Since the start of U.S. futures markets 

in the mid-1800s, they have been used for these purposes by producers, 

processors, manufacturers, and merchants who handle commodities and 

commodity products. As the markets developed, speculators, willing to risk 

their own resources for a chance to gain, entered the markets and provided 

much needed liquidity. Speculators’ willingness to accept risks from others is 

essential for a well-functioning market.

Grain futures markets are viable risk management tools when futures prices 

and underlying cash grain prices generally move in the same direction within 

the same time frames. The most widely traded crop contracts (CME Group/

CBOT corn, soybeans, and wheat) are settled physically, meaning that sellers 

have the option of making delivery of the grain to the buyer.3 The relationship between physically settled futures contracts and cash prices depends 

on various factors, including the “cost of carry” (expenses incurred while 

holding a physical commodity or financial instrument) and ability to conduct 

arbitrage (practice of taking advantage of a price differential between two or 

more markets) (see glossary for definition of terms).

The value of a futures contract is related to or derived from the value of the 

underlying asset. A current futures contract price is typically equivalent to the 

current cash price of the commodity underlying the futures contract plus the 

cost of carrying that asset until the expiration of the futures contract, at which 

time it can be delivered.4 For example, the cost of carry for a corn futures 

contract is the storage, insurance, and finance charges incurred by holding the 

corn from today until the futures contract expires. As long as this relationship 

holds, supply and demand factors affecting corn prices in the cash market 

will affect corn prices in the futures contract. Similarly, supply and demand 

factors affecting corn prices in the futures contract will affect corn prices in 

the cash market.5

The ability of market participants to conduct arbitrage also forces the cash 

price to converge to the futures price when the futures contract enters the 

delivery period; this process is called “convergence.” If the cash price is 

above the futures price, a profit can be made by buying futures, taking 

delivery of the physical commodity, and selling that commodity at the 

higher cash price.6 If the cash price is below the futures price, profitable 

arbitrage may also be possible. The traditional approach is to buy the underlying physical commodity, sell the futures contract, and make delivery of 

the commodity at the higher futures price. In reality, the process is much 

more complicated because the short (seller) must provide a delivery instrument (shipping certificate or warehouse receipt), as opposed to the actual 

commodity, to the long (buyer). A delivery certificate can be issued only by a 

firm that has been declared by the exchange as “regular for delivery,” which 

poses no concern for arbitrage if the short is a regular firm. But, if the short is 

not regular for delivery, it must acquire a shipping certificate, which is bought 

Traditional Role and Use 

of the Futures Market

3Rather than delivering or taking 

delivery of the physical commodity, 

most participants cancel out their sales 

with equal offsetting purchases or their 

purchases with equal offsetting sales.

4In a low inventory situation, futures 

prices can be less than cash prices, 

reflecting the value of having immediate 

access to the commodity. This situation 

is known as the convenience yield. 

Holbrook Working was the first to 

analyze this phenomenon (Peck, 1985, 

p. 41).

5The storage component of the costof-carry is capped by the exchange. The 

spreads may not reveal the true cost of 

carry when the forward structure of the 

futures market approaches “full carry.” 

The full carry effect is to then weaken 

the basis since only the cash price 

component of the basis is not restricted 

by exchange-determined storage costs.

6If a trader buys futures, delivery is 

not necessarily immediate (since the 

short futures position controls delivery), 

and therefore the cash price may move 

adversely before delivery commences.
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Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

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in the market at the value of the current futures market.7 The long receives 

the certificate from the short and can present it to the issuing elevator. The 

elevator then delivers the commodity. The arbitrage process is thus subject 

to various transaction costs, but theoretically, arbitrage ensures that futures 

prices are close approximates of cash prices and keeps the futures markets in 

line with market fundamentals.

Futures markets typically have had two types of traders: commercial traders 

and noncommercial traders. Commercial traders, commonly referred to as 

hedgers, use futures markets to manage price risk resulting from activity 

in the underlying cash market. A hedger is a trader who purchases or sells 

futures contracts as a temporary substitute for a cash transaction that will 

occur at a later date, generally to minimize the risk of financial loss from 

an adverse price change (CFTC, 2008e, p. 67). For commercial traders, the 

initial margins, as of April 23, 2009, were $1,500, $3,500, and $2,500 per 

contract for corn, soybeans, and wheat, respectively.8 This initial margin 

must be deposited as a performance bond when a buy or sell position is 

opened by a trader to help ensure the financial integrity of brokers, clearing 

members, and the exchange as a whole. For example, on April 23, 2009, the 

initial margin was 8 percent of the nearby corn contract price, 7 percent of 

the nearby soybean contract price, and 9 percent of the nearby wheat contract 

price (all are 5,000-bushel contracts).

Noncommercial traders, commonly called speculators, do not hedge, but 

trade with the objective of achieving profits through the successful anticipation of movements in price levels or through price movements in spread or 

basis trades (CFTC, 2008e, p. 69). The potential effects of speculation on 

price has caused much debate in the past. (See box, “Growing Pains of the 

Agricultural Futures Markets.”) Speculators have limits on the number of 

contracts they can hold at any given time.9 The limits have been increased in 

the past as trading volumes have increased. As of April 23, 2009, the limits 

were 22,000 contracts for corn, 10,000 for soybeans, and 6,500 for wheat. 

The intent of position limits on noncommercial traders is to keep them from 

obtaining a large nonhedging position that will distort prices. Speculators are 

subject to higher initial margins than commercial traders are. As of April 23, 

2009, the margins per contract were $2,025 for corn, $4,725 for soybeans, 

and $3,375 for wheat.10 On April 23, 2009, the initial margin for a 5,000-

bushel contract was 11 percent of the nearby corn contract price (the price of 

the contract with the closest settlement date), 9 percent of the nearby soybean 

contract price, and 12 percent of the nearby wheat contract price.

Over time, the line between hedgers and speculators or commercial and 

noncommercial traders has been blurred. The behavior of hedgers and speculators is better described as a continuum between pure risk avoidance and 

pure speculation (Irwin et al., 2009a). The CFTC also acknowledges that the 

commercial and noncommercial trader classifications have grown less precise 

over time as both groups may be engaging in hedging and speculative activity 

(CFTC, 2008e).

The commodity funds that began in the 1980s operated as large speculators, 

where managers of speculative money pools used technical trading theories 

and programs in futures markets (Kohlmeyer, 2008). Technical traders are 

more concerned about using price patterns over time as an indicator of the 

8Margins do change periodically.

9Limits are set by the CFTC or by the 

exchange itself.

10Maintenance margins are not different for commercial and noncommercial 

traders. A maintenance margin is the 

minimum equity that must be maintained 

for each contract in a customer’s account 

after deposit of the initial margin.

7The regular firm has an advantage 

to capture arbitrage opportunities when 

the cash price is below the futures 

price, but the regular firm is also a cash 

grain merchandiser that is in the market 

to buy cash grain and therefore does 

not necessarily have the incentive to 

see cash grain rise to meet futures and 

bring about convergence.
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Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

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direction that prices are heading than they are about the fundamental determinants of why prices are heading in that direction. By the late 1990s, these 

technically trading commodity funds became an important component of 

futures markets. For the first time, commodity futures markets were used in 

a large way by traders who were less interested in supply or demand fundamentals of underlying commodities than in technical trading patterns. Generally, their trading followed market momentum patterns, by attempting to buy 

in a period of rising prices and sell in a period of falling prices.

Growing Pains of the Agricultural Futures Markets

The history of futures markets is marked by growing pains throughout its more 

than 150-year history in the United States. Much of the controversy surrounding 

futures trading in the past relates to the effects of speculation on price (Hieronymus, 1971). The recurring argument is made that speculation causes greater 

price variability than would otherwise exist, and the counterargument states 

that high-volume futures markets accompanied by a significant amount of 

speculation have a stabilizing influence on markets and create less variability 

than would otherwise exist in markets with less speculation. In 1925, after an 

increase in the price of wheat, the public found a villain in large speculators. 

In the 1940s and 1950s, the general view of speculation was not positive, but 

speculators were tolerated because their function was necessary for proper functioning of futures markets by adding liquidity and accepting risk from hedgers. 

Excess speculation was viewed to cause erratic price fluctuations, and after 

much debate, the trading of onion futures was abolished in 1958.1

In the 1960s, the balance appeared to shift to a more favorable view of futures 

market speculation and no further bans were enacted, yet futures trading 

continued to be carefully monitored. Speculative behavior was again blamed 

for the increase in commodity prices in 1972-75 (Cooper and Lawrence, 1975). 

But Labys and Thomas (1975) found only a weak relationship between speculative activity and price volatility. Since 2007, the price discovery value of 

futures markets has again come into question as prices soared and the difference 

between futures and cash prices for grains failed to converge smoothly after 

accounting for normal differences, such as transportation and handling, quality, 

storage, and other market factors (Irwin et al., 2007).2

1In earlier years, the view was typified in a statement by J.M. Mehl, Administrator, Commodity 

Exchange Authority, before the Joint Committee of Economic Report on 1947, “It is recognized that 

in the commodity futures markets there is need for some speculation. It is not believed that speculation is a basic factor determining the general level of prices in the long run. It is believed, however, 

that an undue amount of speculation tends to make price fluctuations more erratic and at times 

accentuate price trends.” Similar comments were made by the U.S. Futures Association in 1957.

2A more detailed history of futures markets development may be found at Futures Industry 

Magazine, http://www.futuresindustry.org/fi-magazine-home.asp?a=607.
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Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

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Overall trading levels for agricultural commodities have increased sharply 

in recent years partly due to increased open interest (outstanding contracts) 

of traditional investors, along with new participants, such as index fund and 

hedge fund investors. Since the beginning of 2004, open interest in CME 

Group/CBOT corn, soybeans, and wheat has approached or achieved new 

record levels (see fig. 1). Electronic trading, increased access to the global 

market, and new product innovation may help explain the rise in open interest 

and new market participants. In addition, when price uncertainty increases 

(as seen in recent years), the use of futures markets increases.

Electronic Trading Brings Ease 

of Access and the Global Market

Electronic trading has made trading on the latest information or using more 

sophisticated trading strategies easier and less expensive for fund managers and 

speculators, particularly spread traders (investors who buy one futures contract 

and sell another related one to profit from the change in the price difference 

between the two). Managed funds can trade from almost any location, and 

the volume and liquidity of the markets have increased to allow a trader to have a 

larger position size in the futures market (greater number of contracts). The time 

lag associated with pit trading was a bottleneck for increased trading volume, but 

with the advent of electronic trading between the pit and screen, the bottleneck 

was eliminated. Since the introduction in July 2006 of daytime and side-by-side 

electronic trading, a critical mass of electronic volume was quickly established.

The trading share between electronic and pit has changed dramatically between 

2005 and 2009. For example, in the beginning of 2005, the average trading 

share of corn, soybeans, and wheat futures contracts at the CME Group/

CBOT was 98 percent pit and 2 percent electronic. In contrast, in April 2009, 

pit trading accounted for an average of 12 percent of total trading and electronic trading the remaining 88 percent. Figure 2 displays the share of pit and 

electronic trading from January 2003 through April 2009 for corn, soybeans, 

and wheat futures contracts. Around the beginning of 2007, electronic trading 

became the dominate futures trading platform for these commodities.

New Products and Participants

Commodity futures and options exchanges have provided new products and 

market instruments in response to the growing need for risk management and 

investment alternatives. These new derivative products (such as swaps based on 

futures and options and interest rate and foreign exchange market instruments) 

have attracted a new set of participants that are using the markets in different 

ways. Furthermore, investors are finding new uses for the traditional agricultural 

futures products and are directing large sums of money into these markets. For 

example, the number of futures contract maturities simultaneously traded 

per commodity has increased between 2000 and 2008, as participants, such as 

spread traders, have found a need to trade further into the future (table 2).11

Exchanges add additional maturities based on participant activity and demand.

Factors That Support Increased Trading 

of Agricultural Futures Contracts

11Contracts for corn, soybeans, and 

wheat have five, seven, and five contract maturities per year, respectively.
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Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

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Figure 2

Share of volume in pit trading versus electronic trading 

for CME Group/CBOT corn, soybeans, and wheat futures,

January 2003-April 2009

Percent

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Notes: All volume represents futures contracts only traded on the CME Group/CBOT. Volume 

percentage represents all maturities trading. Data starts in 2003 due to availability.

 Source: CME Group/CBOT, CME Group FTP DATA, http://www.cmegroup.com/CmeWeb/ftp.

wrap/webmthly.

1/20036/2003

11/2003

4/2004

9/20042/2005

7/2005

12/2005

5/2006

10/2006

3/2007

8/2007

1/20086/2008

11/2008

4/2009

Corn, pit

Soybeans, electronic

Corn, electronic

Soybeans, pit

Wheat, electronic

Wheat, pit

0

10

20

30

40

50

60

70

80

90

100

Table 2

Average daily number of CME Group/CBOT 

maturity contracts traded per commodity

Year Corn Soybeans Wheat

Number

2000 9.0 9.3 8.3

2001 9.2 9.9 8.3

2002 10.6 10.4 8.1

2003 9.6 9.3 7.2

2004 9.8 9.6 7.4

2005 10.5 10.7 7.8

2006 11.1 11.1 8.9

2007 11.5 10.3 8.0

2008 11.4 13.7 9.7

CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade. 

Source: CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/ 

datamine-historical-data/datamine.html.
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Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

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Commodities have been considered a sensible investment alternative during 

periods of inflation, economic uncertainty, and weak U.S. currency. Investments in commodities are used to balance a portfolio of traditional assets and 

to reduce volatility because they are not usually highly correlated with other 

investments in a portfolio. At the CFTC’s Agricultural Forum held on April 

22, 2008, Doug Hepworth of Gresham Investment Management described the 

benefit as follows, “Starting with a portfolio consisting of 40 percent debt and 

60 percent equities, a 5-percent commodity exposure was added and subsequently decreased volatility by 5 percent of the portfolio based on 196 rolling 

5-year periods beginning in 1987 (Hepworth, 2008).”

The nearby futures contract prices and the Standard & Poors (S&P) 500 share 

prices are shown in figures 3, 4, and 5 for corn, soybeans, and wheat, January 

2000 through April 2009. These figures reveal a weak correlation between 

the futures prices and share prices. Table 3 similarly reflects weak correlation between returns for the 10-year period 1/2000-4/2009 and the recent 

3-year period 1/2006-12/2008.12 The weak correlation between agricultural 

commodity prices and large capitalization stock values explains how diversification can be achieved by using commodities as an asset class thereby 

reducing overall risk of a portfolio. While the correlations were higher for 

corn and wheat in the most recent period 1/2009-4/2009, one may not want 

to rely on such a short period to make any definitive statements or change 

investment strategies.

Why Some Consider Commodities 

an Asset Class

12Returns for futures contracts are 

based on price changes and returns 

for the S&P 500 are based on price 

changes plus dividends. 

Table 3

Correlations between S&P 500 and CME Group/CBOT 

futures returns on weekly data

Commodity 1/2000-4/2009 1/2006-12/2008 1/2009-4/2009

Correlation coefficient1

Corn -0.020 0.095 -0.439

Soybeans .062 .112 -.038

Wheat .106 .189 .683

1The correlation coefficient represents the degree of linear relationship betwen two variables. 

A perfect positive linear relationship would be represented by a 1, and a perfect negative linear 

relationship would be represented by a -1. Values in between 1 and -1 represent differing 

degress of linear relationship. 

S&P = Standard and Poors; CME = Chicago Mercantile Exchange; 

CBOT = Chicago Board of Trade. 

Note: Futures prices are nearby contract CME Group/CBOT prices. 

Source: CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/ 

datamine-historical-data/datamine.html; Yahoo Finance, http://www.finance.yahoo.com.
12

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

Figure 4

Weekly prices of nearby CME Group/CBOT soybean futures and S&P 500 shares, 

January 4, 2000-April 28, 2009

Dollars/share

 S&P = Standard and Poors; CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Notes: Nearby prices are the nearby futures contract on the date specified on the x-axis. The nearby futures price is rolled to the next deferred 

contract on the last day of the month before the expiration month of the nearby contract.

 Source: CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/datamine-historical-data/datamine.html; 

Yahoo Finance, http://www.finance.yahoo.com.

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Dollars/bushel

S&P 500 (left axis)

Nearby futures price (right axis)

1/4/2000

5/23/2000

10/10/2000

2/27/20017/17/200112/4/2001

4/23/2002

9/10/2002

1/28/2003

6/17/2003

11/4/20033/23/20048/10/2004

12/28/2004

5/17/2005

10/4/20051/24/2006

6/13/2006

10/31/2006

3/20/2007

8/7/2007

12/24/2007

5/13/2008

9/30/2008

2/17/2009

0

4

6

8

10

12

14

16

18

2

Figure 3

Weekly prices of nearby CME Group/CBOT corn futures and S&P 500 shares, January 4, 2000-April 28, 2009

Dollars/share

 S&P = Standard and Poors; CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Notes: Nearby prices are the nearby futures contract on the date specified on the x-axis. The nearby futures price is rolled to the next deferred 

contract on the last day of the month before the expiration month of the nearby contract.

 Source: CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/datamine-historical-data/datamine.html; 

Yahoo Finance, http://www.finance.yahoo.com.

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

0

1

2

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4

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6

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8

Dollars/bushel

S&P 500 (left axis)

Nearby futures price (right axis)

1/4/2000

5/23/2000

10/10/2000

2/27/2001

7/17/200112/4/2001

4/23/2002

9/10/20021/28/20036/17/200311/4/20033/23/20048/10/2004

12/28/2004

5/17/2005

10/4/20051/24/20066/13/2006

10/31/2006

3/20/2007

8/7/2007

12/24/2007

5/13/20089/30/20082/17/2009
13 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

Figure 5

Weekly prices of nearby CME Group/CBOTwheat futures and S&P 500 shares, January 4, 2000-April 28, 2009

Dollars/share

 S&P = Standard and Poors; CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Notes: Nearby prices are the nearby futures contract on the date specified on the x-axis. The nearby futures price is rolled to the next deferred 

contract on the last day of the month before the expiration month of the nearby contract.

 Source: CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/datamine-historical-data/datamine.html; 

Yahoo Finance, http://www.finance.yahoo.com.

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

Dollars/bushel

1/4/2000

5/23/2000

10/10/2000

2/27/20017/17/200112/4/2001

4/23/2002

9/10/20021/28/20036/17/200311/4/20033/23/20048/10/2004

12/28/2004

5/17/200510/4/20051/24/20066/13/2006

10/31/2006

3/20/2007

8/7/2007

12/24/2007

5/13/20089/30/20082/17/2009

0

2

4

6

8

10

12

14

S&P 500 (left axis)

Nearby futures price (right axis)
14

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

The new participants who are the focus of controversy in the commodities 

world are index funds and selected speculative funds traders, such as swap 

dealers and managed funds traders. Commodity index funds made a significant appearance around 2004. Although index fund traders look like speculators, unlike speculators, their investment style is not based on a view about 

current or expected individual commodity prices, but rather on gaining longside exposure to a broad index of commodity prices in an unleveraged and 

passively managed manner. Their goal is to gain diversification in their investment portfolio.13 They usually do not reduce their position unless forced to by 

client withdrawals from their money pool. Fund managers use this strategy for 

assets in an entire fund, or as part of a larger fund, and are commonly called 

“long-only” or “perma-long” investors because they consistently hold a 

long position.14

In many cases, the index funds are sold in shares to investors, with the fund 

manager charging fees for the service of providing the investment vehicle. To 

hedge the risks of selling a basket of commodity market prices to consumers, 

index funds buy futures contracts of the commodities in proportion to the 

fund’s weighted index. Index funds are used by investors to reduce their portfolio risk via diversification or as a hedge against inflation.

The index funds commonly invest and rebalance by following a broad index 

of commodities; the two most popular indices are the Standard and PoorsGoldman Sachs Commodity Index (S&P GSCI) and the Dow Jones-AIG 

Commodity Index (DJAIGCI). The S&P GSCI is more heavily invested in 

energy, and the DJAIGCI is less invested in energy because of its stipulation 

that one group of commodities cannot account for over 33 percent of the 

index and no single commodity can be less than 2 percent or greater than 15 

percent of the index (table 4).

Index funds generally are not involved in the physical commodity markets and 

so have no physical market transactions to hedge in futures contracts. Index 

funds are entitled to a hedge exemption that classifies them as commercial 

traders and subjects them to lower initial margin deposits than it does speculators.15 The large index funds sell a commodity index to customers and then 

take long futures positions in each of the specified market basket commodities. 

The selling and buying transactions are construed as a hedge by the CFTC, just 

as the offsetting position that commercial producers, merchants, and users of 

commodities take to manage their own risks in the futures market is considered 

a hedge. But unlike traditional hedgers, index funds are selling a market basket 

of futures prices to investors, not a market basket of physical commodities.

The swap dealer is an old player with a new purpose. The swap dealer sells 

an over-the-counter (OTC) swap contract to customers (such as a corn grower 

who wants to fix a price to sell corn at a future date) and in turn hedges his 

or her price exposure with futures positions in corn or other commodities. 

In essence, the two parties are “swapping” payment streams. The benefit to 

the commercial grower of using a swap dealer is commodity price protection 

through a fixed price, customized transaction amount, and pricing dates; cash 

Role and Objectives of 

New Market Traders

13Prior to the CFTC’s new commodity 

index trading report, these traders were 

mostly classified in the commercial category. Many of the trades that compose 

an index are conducted through swap 

dealers who are classified as commercial traders because they use the futures 

market for risk management. For more 

information, see (CFTC, 2006).

14See glossary for definitions of 

trading terms.

15See CFTC, 2008e, pp. 13 and 14, 

for additional details.
15 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

settlement (typically); and no complex exchange-traded brokerage or margin 

calls. In exchange for these benefits, the swap dealer collects a fee for the 

service. Customers assume the risk of a swap dealer not upholding its end of 

the contract. Swap dealers are considered commercial traders because they 

hedge financial risk and therefore are granted a hedge exemption that allows 

them to hold larger positions than noncommercial traders can. The traditional 

swap dealer provides “short” exposure to the futures markets for growers or 

other commodity handlers. The nontraditional swap dealer provides “long” 

exposure to the futures markets for institutional traders, such as large pension 

funds, commonly to facilitate the investment in a commodity index fund. 

The traditional commercial swap trader predominantly hedges long swap 

positions with short futures contracts; nontraditional swap dealers frequently 

hedge short swap positions with long futures contracts.

Figure 6 illustrates how index funds interact with swap dealers. An index 

fund has 10 investors with $1,000 dollars invested each, giving the index 

fund a total of $10,000 dollars. The swap dealer is hired by the index fund for 

a fee to invest the $10,000 in a specific basket of commodity futures contracts 

in the proportions desired. Typically, the fund will pay the appropriate initial 

margin—for instance, 6 percent—leaving $9,400 for the index fund to invest 

in a low-risk money market account to be used for any maintenance margins 

or fees and to accumulate a small return on interest payments. The investors taking the opposite side of the swap dealers are commonly commercial 

hedgers or speculators using the futures market for their own purposes.

Another trader in the futures market receiving increased scrutiny is the 

managed fund. Although managed funds trading in futures markets and their 

Table 4

Commodity index components for the Standard and Poors-Goldman Sachs Commodity Index (S&P GSCI) 

and Dow Jones-AIG Commodity Index (DJAIGCI)

S&P S&P S&P 

Commodity GSCI DJAIGCI Commodity GSCI DJAIGCI Commodity GSCI DJAIGCI

----Percent---- ----Percent---- ----Percent----

Energy 77.28 33.00 Industrial metals 5.97 19.97 Precious metals 1.72 10.12

Crude oil 39.96 13.16 Aluminum 2.17 7.11 Gold 1.50 7.40

Brent crude oil 14.50 — Copper 2.63 7.04 Silver .22 2.72

Unleaded gas 4.52 3.78 Lead .25 —

Heating oil 5.27 3.82 Nickel .54 2.79

Gas oil 5.40 — Zinc .38 3.03

Natural gas 7.63 12.24

Agriculture and softs 12.10 29.47 Livestock 2.94 7.44

Wheat 3.22 4.70 Live cattle 1.70 4.89

Red wheat .77 — Feeder cattle .31 —

Corn 3.78 5.66 Lean hogs .93 2.55

Soybeans 2.08 7.63

Cotton .73 2.48

Sugar .83 3.19

Coffee .47 3.00

Cocoa .22 —

Soybean oil — 2.81

— = Not applicable. 

Note: S&P GSCI components as of 6/19/2008. DJAIGCI as of 6/19/2008. 

Sources: S&P GSCI, http://www2.goldmansachs.com/services/securities/products/sp-gsci-commodity-index/tables.html; 

DJAIGCI, http://www.djindexes.com/aig/index.cfm?go=home.
16

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

effect on price discovery has been an issue for several decades, one change 

in the managed money investment category is the increasing ease with which 

retail investors can gain access to basic agricultural commodities. Thus, 

while index funds have been receiving most of the scrutiny in recent years, 

managed money funds’ greater ability to access basic agricultural commodities has also brought them under renewed scrutiny. Managed money includes 

commodity funds, investment funds, hedge funds, and sovereign wealth 

funds. To roughly define each group, the commodity fund is a managed portfolio made up strictly of commodities; the investment fund is a portfolio with 

commodities in addition to traditional assets, such as equities and bonds; and 

the hedge fund has a position in a variety of assets and can invest in more 

complex and riskier investments than other investment funds can. Hedge 

funds are private investment funds that typically require larger overall net 

wealth for investors to participate than do other investment funds. Finally, 

a sovereign wealth fund (SWF) is owned by the sovereign State or government as the key shareholder. The fund is managed separately from traditional 

reserves and is composed of financial assets, such as stocks, bonds, property, 

or other financial instruments. SWFs grew 24 percent per year since 2002 to 

around $3.5 trillion by the end of 2007. The wide-ranging group of managed 

funds functions as speculators and is different from index funds because 

managed funds are actively managed in that futures contracts are bought and 

sold in anticipation of favorable price moves in contrast with the passively 

managed index funds.

These new participants, including nontraditional swap dealers, commodity 

funds, index funds, managed funds, and other speculators, have altered 

the mix of investors in the futures markets. Traditional commercial traders 

are hedgers interested in the underlying cash market and are normally 

commodity producers, commodity merchants, manufacturers, and processors who use futures markets to reduce risk and maximize profits.16 The 

dual purpose of risk reduction and profit maximization explains the role of 

hedgers in moving prices toward fundamental value. A concern is that index 

funds are less interested in fundamentals and more interested in investor 

demand for diversification. The question then becomes: What is dominating 

the market movement of agricultural futures prices, asset fundamentals, or 

other objectives to futures trading? This important question is currently 

Figure 6

Schematic showing how an index fund works

Index

funds

Swap

dealers

Futures

market

Buy or sell

contracts based

on risk reduction

need for physical

commodity

Commercial

hedgersfarmers

Sell exposure

for a fee

Offset risk

with long

futures

Buy 

exposure

Receive

or pay cash

based on

positions

Speculators

Buy or sell based

on expected

movement in

futures prices

16If an existing or expected cash 

position is compensated for via an 

opposite future, the market participant 

is classified as a hedger. 
17 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

unresolved. Widespread skepticism about the impact of nontraditional 

investors on futures market performance is exemplified by a Wall Street 

Journal article:

Enterprises like Exxon and Newmont Mining are profit-making because they 

create value. The purchase of shares in such enterprises reflects the investment 

manager’s analysis of that value creating process and the resultant profitmaking potential. In contrast, commodities such as crude oil and gold do not, 

in and of themselves, create value. The purchase of crude oil by Exxon from 

an independent driller represents a business expense. Purchase of crude oil 

futures by Calpers represents speculation. Over time, stock prices go up in real 

terms because of the value-creation process, commodity prices do not 

(Riley, 2008).

The bottom line here is not speculation versus value creation, but whether 

or not speculators and other nontraditional traders are harming (or adding 

value to) futures markets. A U.S. Senate study argues that the activities of 

long-only index funds increase wheat futures prices above what would be 

explained by supply and demand fundamentals, leading to convergence 

problems between cash and futures prices (U.S. Senate, 2009). Alternative 

arguments abound that futures markets function well. For example, “The 

presence of the well-established forward and cash market protects the futures 

market. If the futures market were temporarily or systematically manipulated, arbitrageurs would rush in to eliminate the abnormality” (Carlton, 

1984). In addition, Irwin et al. (2009a) provide evidence that defends the 

role and effect of speculators, including index traders, by presenting logical 

flaws, inconsistent facts, and historical research. Sanders et al. (2008) show 

that speculation compared with hedging is not misaligned in agricultural 

futures markets, which contradicts the hypothesis of excess speculation. An 

Informa study (2008) found very little evidence that trader groups, index 

funds, and managed money were routinely detrimental to any of their studied 

commodity markets.
18

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

What changes have occurred within the futures market as a result of the 

influx of new entrants into futures markets? The variables that we examine 

to answer this question include the volume-to-open interest ratio (a measure 

of liquidity), price volatility, price levels, and aggregate net trader positions. Although we did not isolate whether a particular type of trader, such 

as an index trader, is responsible for changes in liquidity, price volatility, or 

price levels, we did document what happened to the general level of these 

variables. Where possible, we examine how these data for corn, wheat, and 

soybean futures contracts change between three periods: 1/2000-12/2005, a 

time with less trading in index and managed funds and more stable prices; 

1/2006-12/2008, a time with increasing prices and large amounts of trading 

in index and managed funds; and 1/2009-4/2009, a more recent time with 

decreasing prices and somewhat less trading in index and managed funds.

Volume-to-Open Interest Ratio

The ratio of volume to open interest is referred to as the “turnover ratio,” a 

measure of liquidity.17 Higher ratios indicate a greater turnover in futures 

contract ownership, or an increase in liquidity. One would expect the turnover ratio to decline as the number of index traders increases relative to other 

market participants. We found that the average ratio for soybean and wheat 

contracts declined in 1/2006-12/2008 relative to 1/2000-12/2005, whereas the 

average ratio for corn contracts increased.18 However, the difference between 

the average ratios of the two periods for corn, soybeans, and wheat was 

statistically insignificant (table 5).

The monthly ratio for corn, soybeans, and wheat futures contracts for January 

2000 to April 2009 is shown in figure 7. The volume and open interest ratios 

in figure 7 contain all trader categories for all contract maturities; thus, index 

traders who buy and hold futures are adding to open interest but creating very 

minimal trading volume. Volume is the number of purchases and sales of 

futures contracts for a given commodity during a month. Open interest is 

Futures Markets Structure: 

Volume-to-Open Interest Ratios, Price 

Volatility, and Net Trader Positions

17Volume must be twice open interest 

to turn over all ownership because each 

contract has a buyer and a seller. When 

a contract is both sold and bought by 

different people, it creates a volume of 

two but only an open interest of one. 

Thus, to completely turnover a contract’s ownership, the ratio of volume to 

open interest must be 2 to 1.

18An Informa study (2008) found 

increased liquidity for CME Group/

CBOT corn and wheat contracts but 

over a much shorter period between 

2005 and 2008.

Table 5

Comparison of average monthly ratio of volume to open interest for 

CME Group/CBOT corn, soybeans, and wheat, futures contracts

Average ratios, calendar years Statistical test for means comparison

1/2000-12/2005 vs. 1/2006-12/2008 vs. 

1/2006-12/2008 1/2009-4/2009

Commodity 1/2000-12/2005 1/2006-12/2008 1/2009-4/2009 T-test P-value1 T-test P-value2

---------------------------Percent---------------------------

Corn 3.40 3.68 5.05 -0.31 0.756 1.36 0.181

Soybeans 6.47 6.09 9.14 .22 .826 2.02 .050

Wheat 4.51 4.03 4.67 .38 .708 .51 .614

CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade. 

1Mean ratios do not differ at a significant statistical level. 

2Mean ratios do not differ at a significant statistical level, except for soybeans. 

Source: CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/datamine-historical-data/datamine.html.
19 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

Figure 7

Monthly volume-to-open interest ratios for CME Group/CBOT corn, 

soybeans, and wheat futures, January 2000-April 2009

Panel A: Corn 

Ratio of volume to open interest

1

2

3

4

5

6

7

8

9

10

0

Panel B: Soybeans

Ratio of volume to open interest

1

2

3

4

5

6

7

8

9

10

0

Panel C: Wheat 

Ratio of volume to open interest

1

2

3

4

5

6

7

8

9

10

0

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Notes: Open interest is the open interest on the last day of the month. Volume is the total 

volume traded in all contracts for that commodity for the specified month.

 Source: CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/

datamine-historical-data/datamine.html.

1/2000

6/2000

11/2000

4/2001

9/20012/20027/2002

12/2002

5/2003

10/2003

3/20048/2004

1/2005

6/2005

11/2005

4/2006

9/20062/20077/2007

12/2007

5/2008

10/2008 3/2009

1/20006/2000

11/2000

4/2001

9/20012/20027/2002

12/2002

5/2003

10/2003

3/20048/20041/2005

6/2005

11/2005

4/2006

9/20062/20077/2007

12/2007

5/2008

10/2008

3/2009

1/20006/2000 11/2000

4/2001

9/2001

2/2002

7/2002

12/2002

5/2003

10/2003

3/20048/20041/2005

6/2005

11/2005

4/2006

9/20062/20077/2007

12/2007

5/2008

10/2008

3/2009
20

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

the number of either long or short outstanding futures contracts of a given 

commodity that have neither been offset by opposite futures or options 

transactions nor fulfilled by delivery of the commodity. For example, the 

wheat volume-to-open interest ratio in February 2000 was 5.67, volume was 

691,068 contracts, and open interest was 121,916 contracts (fig. 7, panel C). 

In May 2008, this ratio was 5.23, volume was 1,857,866 contracts, and open 

interest was 355,198 contracts. Each contract has a buyer and a seller, but for 

calculation of open interest, only one side of the contract is counted.

When examining the period 1/2009-4/2009, we find that each commodity’s 

ratio has increased compared with the 1/2006-12/2008 period. However, this 

more recent period contains only four observations, and the average ratio for 

each commodity may be viewed as having too few observations to form any 

meaningful conclusions, including the statistical tests for the mean differences.

Price Volatility

A major concern regarding the participation of noncommercial traders in 

futures markets is whether their participation has led to increased price 

volatility. Three common explanations of how volatility may be influenced 

include (1) information flows that commonly occur on a seasonal basis due 

to crop conditions or to the changing information available as time to maturity decreases in futures contracts, (2) economic variables based on supply 

and demand conditions, and (3) market structure, which refers to the relative positions of speculators and hedgers and the role of traders in futures 

markets (Streeter and Tomek, 1992). Recently, much attention has been given 

to the influence of market structure on volatility, with speculators blamed for 

creating excessive volatility through their trading. Although the average level 

of volatility was found to have increased, the differences between periods 

was found to be statistically insignificant.

Futures price volatility is measured by comparing the absolute value of the 

daily percentage change in the natural logarithm of closing prices between 

three periods: 1/2000-12/2005, 1/2006-12/2008, and 1/2009-4/2009.19, 20 

Corn, wheat, and soybean price volatility appears to increase over time 

(table 6). However, the difference in means between the periods 1/2000-

12/2005 versus 1/2006-12/2008 and 1/2006-12/2008 versus 1/2009-4/2009 

was not statistically different from the comparison period 1/2006-12/2008. 

Figures 8, 9, and 10 show the absolute percentage price changes for corn, 

soybeans, and wheat futures prices. The figures are consistent with the results 

in table 6 and show a general increase in corn, soybeans, and wheat price 

volatility. The volatility spike in soybeans around the end of June 2004 was 

due to wet weather, tight stocks, and fewer than expected acres planted (Ash 

and Dohlman). An Informa study (2008) found increased volatility for grains 

and soybeans during their study period 2005-08. They found no persuasive 

evidence that index traders or money managers caused increased volatility.

19Price change is calculated as the 

natural logarithm from one future’s 

closing price minus the natural logarithm of the next closing price. This 

measure of price change has become 

the standard since its use in the BlackScholes option pricing model (Black 

Scholes, 1973).

20The three periods were selected to 

capture a historical period as previously 

defined.
21 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

Figure 8

Absolute daily natural logarithm percentage change in nearby 

CME Group/CBOT corn futures closing prices, January 2000-April 2009

Percentage change

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Source: CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/datamine-historical-data/datamine.html.

0

2

4

6

8

10

12

14

16

1/3/2000

5/3/20009/3/20001/3/20015/3/20019/3/20011/3/20025/3/20029/3/20021/3/20035/3/20039/3/20031/3/20045/3/20049/3/20041/3/20055/3/2005

9/3/20051/3/20065/3/20069/3/20061/3/20075/3/20079/3/20071/3/20085/3/2008

9/3/2008

1/3/2009

Table 6

Comparison of average absolute daily percentage changes of the natural logarithm 

of closing CME Group/CBOT futures prices for corn, soybeans, and wheat

Average absolute price change, Statistical test for means comparison

calendar years 1/2000-12/2005 vs. 1/2006-12/2008 vs. 

1/2006-12/2008 1/2009-4/2009

Commodity 1/2000-12/2005 1/2006-12/2008 1/2009-4/2009 T-test P-value1 T-test P-value1

---------------------------Percent---------------------------

Corn 1.10 1.74 1.91 -0.50 0.614 0.09 0.929

Soybeans 1.14 1.35 1.67 -.18 .858 .24 .807

Wheat 1.29 1.89 2.12 -.44 .657 .14 .890

CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade. 

1The mean percentage change increased from one period to the next, but statistically, the means are not different when compared with the 

1/2006-12/2008 period. 

Source: CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/datamine-historical-data/datamine.html.
22

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

Figure 10

Absolute daily natural logarithm percentage change in nearby 

CME Group/CBOT wheat futures closing prices, January 2000-April 2009

Percentage change

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Source: CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/datamine-historical-data/datamine.html.

1/3/2000

5/3/20009/3/20001/3/20015/3/20019/3/20011/3/20025/3/20029/3/20021/3/20035/3/20039/3/20031/3/20045/3/20049/3/20041/3/20055/3/20059/3/20051/3/20065/3/20069/3/20061/3/20075/3/20079/3/20071/3/2008

5/3/20089/3/20081/3/2009

2

4

6

8

10

12

0

Figure 9

Absolute daily natural logarithm percentage change in nearby 

CME Group/CBOT soybean futures closing prices, January 2000-April 2009

Percentage change

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Source: CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/datamine-historical-data/datamine.html.

1/3/2000

5/3/20009/3/20001/3/20015/3/20019/3/20011/3/20025/3/20029/3/20021/3/20035/3/20039/3/20031/3/20045/3/20049/3/20041/3/20055/3/20059/3/20051/3/20065/3/20069/3/20061/3/20075/3/20079/3/20071/3/20085/3/20089/3/20081/3/2009

2

4

6

8

10

12

0
23 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

Net Positions of Traders 

and Price Levels

Another concern regarding the participation of new traders and new capital 

in futures markets is that they are affecting the level of prices. The weekly 

net positions of trader groups and the nearby futures price from 1/3/2006 to 

4/30/2009 are shown in figures 11, 12, and 13. Here, commercial traders are 

defined as hedgers, noncommercials are speculators, index traders are passive 

investors, and nonreporting traders are those whose positions are too small to 

require reports to be filed. Correlations between the changes in net positions of 

these traders and the changes in nearby price were examined for the periods 

1/2006-12/2008 and 1/2009-4/2009. As expected, index traders were found to 

be less correlated than noncommercial traders or commercial traders.

The Commitments of Traders Report (COT) is published weekly by the CFTC 

and reports, among other items, open interest for commodities, as well as the 

long and short positions of this open interest. In January 2007, the Commitments of Traders Supplement Report (CIT) was created. This report separates 

index traders from commercial and noncommercial traders, with the separation computed retroactively starting in January 2006 (CFTC, 2006).21

The net index positions for corn, soybeans, and wheat have generally risen 

and then declined somewhat for the period 1/2006-12/2008, and have 

remained more stable during 1/2009-4/30/2009, as have their nearby futures 

prices (figs. 11, 12, and 13). Index funds control a somewhat fixed amount of 

the open interest that is essentially “tied up” because index funds generally 

21The CIT numbers used here include 

both futures and delta-adjusted options. 

“Delta” is measured as the change in 

price of an option for every 1-point 

move in the price of the underlying 

security. Delta-adjusted indicates that a 

mathematical alteration is made to the 

options positions to make them equivalent to futures positions.

Figure 11

Net trader positions and nearby prices for CME Group/CBOT corn 

futures, January 3, 2006-April 28, 2009

Number of contracts1

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Notes: Net commercial = Commercial longs minus commerical shorts. Net noncommercial = 

Noncommerial longs minus noncommerial shorts. Net index = Index longs minus index shorts. 

Net nonreporting = Nonreporting longs minus nonreporting shorts. 1

Net shorts are shown in the negative quadrant; net longs are shown in the positive quadrant.

 Sources: Commodity Futures Trading Commission, Commitments of Traders Reports, 

Commodity Index Trader Supplement, http://www.cftc.gov/marketreports/commitmentsoftraders/

cot_historical.html; CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/

datamine-historical-data/datamine.html.

1/3/2006

4/18/2006

8/1/2006

11/14/2006

2/27/20076/12/2007

9/25/2007

1/8/2008

4/22/2008

8/5/2008

11/18/2008

Net commercial

Nearby prices

Net index

Net nonreporting

Net noncommercial

Dollars/bushel

Week

-700,000

-600,000

-500,000

-400,000

-300,000

-200,000

-100,000

0

100,000

200,000

300,000

400,000

500,000

0

1

2

3

4

5

6

7

8

3/3/2009
24

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

Figure 13

Net trader positions and nearby prices for CME Group/CBOT wheat

futures, January 3, 2006-April 28, 2009

Number of contracts1

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Notes: Net commercial = Commercial longs minus commerical shorts. Net noncommercial = 

Noncommerial longs minus noncommerial shorts. Net index = Index longs minus index shorts. 

Net nonreporting = Nonreporting longs minus nonreporting shorts. 1

Net shorts are shown in the negative quadrant; net longs are shown in the positive quadrant.

 Sources: Commodity Futures Trading Commission, Commitments of Traders Reports, 

Commodity Index Trader Supplement, http://www.cftc.gov/marketreports/commitmentsoftraders/

cot_historical.html; CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/

datamine-historical-data/datamine.html.

Dollars/bushel

Week

1/3/2006

4/18/2006

8/1/2006

2/27/20076/12/20079/25/2007

1/8/2008

4/22/2008

8/5/2008

11/18/2008

Net commercial

Net noncommercial

Net index

Net nonreporting

Nearby prices

11/14/2007

3/3/2009

-300,000

-200,000

-100,000

0

100,000

200,000

300,000

0

2

4

6

8

10

12

14

Figure 12

Net trader positions and nearby prices for CME Group/CBOT soybean

futures, January 3, 2006-April 28, 2009

Number of contracts1

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade.

 Notes: Net commercial = Commercial longs minus commerical shorts. Net noncommercial = 

Noncommerial longs minus noncommerial shorts. Net index = Index longs minus index shorts. 

Net nonreporting = Nonreporting longs minus nonreporting shorts. 1

Net shorts are shown in the negative quadrant; net longs are shown in the positive quadrant.

 Sources: Commodity Futures Trading Commission, Commitments of Traders Reports, 

Commodity Index Trader Supplement, http://www.cftc.gov/marketreports/commitmentsoftraders/

cot_historical.html; CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/

datamine-historical-data/datamine.html.

Dollars/bushel

Week

1/3/2006

4/18/2006

8/1/2006

2/27/20076/12/2007

9/25/2007

1/8/2008

4/22/2008

8/5/2008

11/18/2008

Net commercial

Net noncommercial

Net index

Net nonreporting

Nearby prices

-400,000

-300,000

-200,000

-100,000

0

100,000

200,000

300,000

0

2

4

6

8

10

12

14

16

18

11/14/2007

3/3/2009
25 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

buy and hold, although these funds also have to reduce their position if 

investors withdraw their funds. While net index positions changed somewhat, 

this change was more gradual compared with the change in net positions for 

the noncommercial or commercial traders. Index funds were in a net long 

position during the period 1/2006-12/2008 and have remained so for the 

1/2009-4/30/2009 period. Index funds’ share of long open interest averaged 

23, 25, and 41 percent for corn, soybeans, and wheat, respectively, during the 

1/2006-12/2008 period. The share of long open interest for corn index funds 

during 1/2006-4/30/2009 remained the same, whereas soybeans and wheat 

each gained 1 percentage point. For the CME Group/CBOT wheat contract, 

index traders net long positions were about 200,000 contracts in early crop 

year 2007, or 1 billion bushels, which is about half of the size of the 2007 

crop of 2 billion bushels of all wheat types in the United States, or about 2.8 

times the size of the annual 2007 crop of soft winter wheat.22

Noncommercials consist of many trader types. For example, momentum 

traders seek out assets that are rallying and follow the price trend or investment funds. Investment funds are created in “boom” times for various 

markets—that is, when prices are on an upward swing, investors of all sizes 

want a vehicle by which to include these assets in their broader portfolio. 

Table 7 displays yearly changes from January 2006 to April 30, 2009 for 

corn, soybeans, and wheat nearby futures prices and net trader positions. 

Generally, the noncommercial traders have the largest variation in net open 

interest, especially for corn, for which the net noncommercial category 

went from net short to net long and back to net short. Net positions for corn, 

soybean, and wheat index traders increased during 2006 and 2009, but only 

Table 7

Category comparision for CME Group/CBOT corn, soybeans, and wheat contracts, January 2006-April 2009

Levels Percent change in positions and prices

Item 1/3/06 1/3/07 1/8/08 1/6/09 4/28/09 1/06-1/07 1/07-1/08 1/08-1/09 1/09-4/09

------------------Number of contracts------------------ ---------------Percent---------------

Corn:

Net commerical (OI) -206,650 -566,561 -514,003 -177,664 -135,988 174 -9 -65 -23

Net noncommerical (OI) -746 247,646 244,620 -12,302 -38,083 333 -1 -105 210

Net index (OI) 264,624 421,579 367,720 246,609 261,785 59 -13 -33 6

Net nonreporting (OI) -57,229 -102,664 -98,338 -56,643 -87,714 79 -4 -42 55

Nearby price ($/bushel) 2.18 3.71 4.79 4.12 3.75 70 29 -14 -9

Soybeans:

Net commerical (OI) -72,404 -152,630 -274,157 -98,723 -146,999 111 80 -64 49

Net noncommerical (OI) 17,050 47,071 116,086 17,357 57,094 176 147 -85 229

Net index (OI) 86,617 129,727 187,368 96,219 115,921 50 44 -49 20

Net nonreporting (OI) -31,263 -24,168 -29,297 -14,853 -26,016 -23 21 -49 75

Nearby price ($/bushel) 6.29 6.82 12.67 9.77 9.90 9 86 -23 1

Wheat:

Net commerical (OI) -121,682 -172,589 -165,193 -101,454 -81,098 42 -4 -39 -20

Net noncommerical (OI) -32,721 -1,094 -8,731 -15,891 -43,351 -97 698 82 173

Net index (OI) 167,666 201,104 197,178 136,417 142,289 20 -2 -31 4

Net nonreporting (OI) -13,263 -27,423 -23,255 -19,072 -17,839 107 -15 -18 -6

Nearby price ($/bushel) 3.46 4.77 9.08 6.11 5.11 38 90 -33 -16

OI = Open interest. CME = Chicago Mercantile Exchange. CBOT = Chicago Board of Trade. 

Sources: Commodity Futures Trading Commission, Commitments of Traders Reports, Commodity Index Trader Supplement, http://www.

cftc.gov/marketreports/commitmentsoftraders/cot_historical.html; CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/

datamine-historical-data/datamine.html.

22The CME Group/CBOT wheat contract is technically designed to allow 

for delivery of No. 2 Soft Red Winter, 

No. 2 Hard Red Winter, No. 2 Dark 

Northern Spring, and No. 2 Northern 

Spring at par and No. 1 Soft Red Winter, No. 1 Hard Red Winter, No. 1 Dark 

Northern Spring, and No. 1 Northern 

Spring at 3 cents per bushel over the 

contract price. The CBOT wheat contract is commonly used by traders for 

all wheat classes because of its liquidity 

and volume. However, the higher cash 

market prices for the other classes of 

wheat relative to Soft Red Winter make 

delivery against the CME Group/CBOT 

contract impractical for other classes.
26

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

soybeans showed an increase in net index positions in 2007. The number of 

net index positions generally declined in all three markets in 2008.

Index traders are considered more passive investors than noncommercials or 

commercials are. As expected, we found less correlation between the changes 

in net trader positions and changes in nearby futures prices for index traders 

than for noncommercials or commercials (table 8). This finding applied to 

both periods—1/2006-12/2008, when index and managed funds increased, 

and 1/2009-4/2009, when index and managed funds decreased. However, 

because of aggregate trader data and a lack of causality, we cannot make any 

conclusive statement about these new traders affecting price levels.

Furthermore, analytical evidence to date does not indicate that the positions 

of index funds or speculators cause prices to change (Sanders et al., 2007; 

CFTC, 2008c, and Informa, 2008) or that speculation is excessive (Irwin 

et al., 2008). Although a recent U.S. Senate report claims that the activities 

of long-only index funds increase wheat futures prices above what would 

be explained by supply and demand fundamentals (U.S. Senate), further 

research is required to establish causal relationships between these trader 

positions and changes in futures price levels.

Table 8

Correlations between changes in traders’ net positions and changes in nearby 

CME Group/CBOT futures price by commodity, January 2006-April 2009

Corn Soybeans Wheat

1/2006-12/2008 1/2009-4/30/09 1/2006-12/2008 1/2009-4/30/09 1/2006-12/2008 1/2009-4/30/09

Unit

Commercials -0.74 -0.72 -0.70 -0.84 -0.56 -0.67

Noncommercials .61 .58 .57 .74 .52 .55

Index .26 .39 .41 .52 .20 .20

Nonreporting .55 .56 .45 .43 -.03 .44

1The correlation coefficient represents the degree of linear relationship betwen two variables. A perfect positive linear relationship would be 

represented by a 1, and a perfect negative linear relationship would be represented by a -1. Values in between 1 and -1 represent differing 

degress of linear relationship. 

Sources: Commodity Futures Trading Commission, Commitments of Traders Reports, Commodity Index Trader Supplement, http://www.cftc.

gov/marketreports/commitmentsoftraders/ cot_historical.html; CME Group/CBOT, Historical Data, http://www.cmegroup.com/market-data/ 

datamine-historical-data/datamine.html.
27 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

If speculative and index traders are not the cause of the increasing prices, 

then who or what is? Alternative explanations for price increases point to a 

culmination of many demand and supply fundamentals as outlined in Trostle 

(2008). An increase in ethanol mandates, foreign demand and purchasing 

power, number of potential customers in the market, and prices of substitutes 

has boosted demand for agricultural commodities. Supply has varied because 

of changes in the weather and increases in prices for crop production inputs, 

especially those for crude oil, which substantially increased costs of tractor 

fuel, fertilizer, and transportation.23 23Following Trostle’s (2008) argument, prices have since declined substantially after deterioration in demand 

both domestically and abroad. 
28

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

In addition to concerns about the level and volatility of prices, questions 

have been raised about other futures market performance issues, such as the 

relationship between futures and cash markets and the ability of traditional 

market players to manage risk. Some evidence shows that the link between 

futures and the underlying cash price has weakened, resulting in unpredictable and erratic basis levels and lack of normal convergence of cash and 

futures prices.

Some have alleged that the trading activities of institutional investors are 

responsible for at least some part of the weakening in the relationship 

between cash and futures prices (Stallman, 2008). As mentioned earlier 

and outlined in Irwin et al. (2007), failure of convergence between futures 

and cash markets affects the risk transfer and price discovery functions of 

the futures markets (see box, “Effects of a Lack of Convergence Upon a 

Grain Elevator’s Gross Hedging Returns”). Convergence is defined as the 

cash and futures prices coming together at contract expiration and hence the 

basis (cash minus futures price) approaching zero.24 Transaction costs, such 

as trading, barge load out, storage, and interest opportunity costs, have an 

impact on each arbitrage transaction designed to take advantage of a basis 

relationship. Therefore, convergence is not defined as a basis of zero, but 

rather, typically, a basis less than 10 cents per bushel.

Arbitrage has recently not insured normal convergence in cash and futures 

prices for grains. The basis for selected expirations of the December corn 

contract, November soybeans contract, and July wheat contract are shown in 

figures 14, 15, and 16. Each figure shows, to varying degrees, the severity of 

the lack of convergence. Reasons for this lack of convergence include insufficient load-out capacity at delivery locations, lack of incentives to engage in 

arbitrage, and an outdated delivery system. A higher cost of meeting margin 

requirements on futures positions has also contributed to increased costs of 

hedging.25 Some have asserted that the large long positions held by index 

funds have had an impact on the cash-futures price link (Coyle, 2008).

Proposed solutions to assure convergence, as outlined by Irwin et al. (2008), 

include the following:

1. Altering delivery rules to force longs who stand for delivery to take load 

out within a certain amount of time, which could theoretically force all 

other longs out before the delivery month and drive down the nearby 

contract.

2. Changing the futures contract to cash settlement tied to some cash price 

index instead of physical delivery.

3. Forcing groups with no interest in the underlying commodity to adhere to 

stricter speculative limits and pay larger margins when trading.

4. Expanding the delivery system to make arbitrage activities easier and less 

costly.

Problems Arising in Market Performance

24In a costless transaction and 

delivery market, the cash price would 

exactly equal the futures price at 

contract expiration. If the cash price is 

less than the futures, the commodity 

could be bought in the cash market and, 

simultaneously, a futures contract could 

be sold short and delivery made. Conversely, if the cash price is greater than 

the futures price, then a futures contract 

could be bought and delivery accepted 

at expiration. These arbitrage opportunities should theoretically keep the cash 

and futures prices closely related.

25Grain merchandisers offer contracts 

to growers who want to sell grains 

before harvest to lock in prices. When 

a merchandiser makes an agreement 

with a grower to buy his/her grain in 

the future, the merchandiser then takes 

a short position in the futures market to 

offset the risk of the agreement (called 

a forward contract). If prices increase 

substantially in the futures markets, the 

merchandiser must finance margin calls 

on those positions until the forward 

contract is fulfilled by the grower and 

futures positions are closed. A producer 

desiring to hedge directly on futures 

markets would likewise face increased 

trading costs. 
29 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

Effects of a Lack of Convergence Upon a Grain Elevator’s Gross Hedging Returns

Examples of a grain elevator’s storage hedge are used to illustrate the effects from a lack of convergence on a grain elevator’s gross hedging returns (see table). Three convergence alternatives are shown in the table, column 1, ranging from full 

convergence to divergence. The elevator in our example is expecting to earn a storage return when the hedge is terminated 

(March 1) that is equal to the basis when the hedge is initiated (November 1) for each alternative. That is, the elevator is 

expecting full convergence.

Full convergence is illustrated in the table, alternative 1, line 1. When the elevator initiates a hedge, two transactions are 

conducted (column 4, line 1). On November 1, the elevator buys 5,000 bushels of cash corn from a farmer for $3.50 per 

bushel and simultaneously sells a March corn futures contract (short position in the futures market, 5,000 bushels) for 

$3.65 per bushel. Note that the difference between the cash and futures prices (the basis) is -$0.15 per bushel (cash price 

less futures price shown in column 2).

When the elevator terminates the hedge on March 1, it sells 5,000 bushels of cash corn for $3.75 per bushel and purchases 

(long) a March corn futures contract for $3.75 per bushel (column 4). Note on March 1, the difference between the cash 

and futures prices (the basis) is $0.00 per bushel (column 3). Thus, the elevator earns a storage return equal to $0.15 per 

bushel. The hedging gross return per bushel is $.015 per bushel, the sum of the cash and futures transactions (alternative 1, 

column 4). For simplicity, we assume that the basis is expected to be zero when the hedge is terminated and the prices are 

expected to converge and their difference is zero. (The elevator is assumed to be located at the contract delivery point.)

Partial convergence is shown in alternative 2. The cash and futures prices have not quite converged when the hedge is 

terminated; thus, the gross returns, while still positive, are $0.10 per bushel, or $0.05 per bushel less than the full convergence alternative. In this case, the basis at the time of terminating the hedge, while not zero, is still less than the basis at the 

time of initiating the hedge. Thus, there is still a storage return, although it is less than anticipated.

Divergence is shown in alternative 3. Since the basis at the time of terminating the hedge (March 1) is greater than the basis 

at the time of initiating the hedge (November 1), the gross return becomes negative (alternative 3, column 4). Thus, the 

anticipated storage return turns into a loss instead of the anticipated gain. The grain elevator loses $0.10 per bushel, or 

5,000 bushels x $0.10 per bushel = $500 on the transaction, because cash and futures prices have not converged as expected.

The critical unknown variable that determines gross hedging returns when entering a hedge is the basis when the hedge is 

terminated. Partial convergence reflects a smaller basis when the hedge is terminated than when it is entered, but the basis 

is larger than expected. This results in positive gross hedging returns but smaller than expected. Divergence results in a 

larger basis when the hedge is terminated than when initiated and results in negative gross returns.

Effects of alternative futures: Cash convergence patterns on the gross returns of a grain elevator’s corn storage hedge

Column 1 Column 2 Column 3 Column 4

Alternative 

convergence 

patterns

Basis at hedge initiation 

November 1 

(Cash less futures price)

Basis at hedge termination 

March 1 

(Cash less futures price) Gross returns from storage hedge

Cash transactions Futures transactions

(1) Full convergence ($3.50 - $3.65) = 

-$0.15/bu

($3.75 - $3.75) = 

$0.00/bu

November 1 purchased cash 

 -$3.50/bu 

March 1 sold cash +$ 3.75/bu

November 1 sold short 

 March contract $3.65/bu 

March 1 bought long 

 March contract -$3.75/bu

Gross return = $0.15/bu = (+.$0.25/bu cash - $0.10/bu futures)

(2) Partial convergence ($3.50 - $3.65) = 

-$0.15/bu

($3.70 - $3.75) = 

-$0.05/bu

November 1 purchased cash 

 -$3.50/bu 

March 1 sold cash +$3.70/bu

November 1 sold short 

 March contract $3.65/bu 

March 1 bought long 

 March contract -$3.75/bu

Gross return = $0.10/bu = (+$0.20/bu cash - $0.10/bu futures)

(3) Divergence ($3.50 - $3.65) = 

-$0.15/bu

($3.50 - $3.75) = 

-$0.25/ bu

November 1 purchased cash 

 -$3.50/bu 

March 1 sold cash +$3.50/bu

November 1 sold short 

 March contract $3.65/bu 

March 1 bought long 

 March contract -$3.75/bu

Gross return = -$0.10/bu = (+$0.00/bu cash -$0.10/bu futures)
30

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

Figure 14

December corn basis (Illinois River, Peoria North cash less 

corn CME Group/CBOT futures) 

Cents/bushel

-110

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

Contract year

2001 2002 2003 2004 2005 2006 2007 2008

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade. 

 Notes: Basis is plotted daily and computed as cash minus futures. The first observation for 

each contract year is the day after the preceding contract expires, around the 15th of the month. 

The last observation for each contract year is the expiration day for the given contract, again 

around the 15th of the month. 

 Sources: Cash prices, USDA, Agricultural Marketing Service, http://marketnews.usda.gov/

portal/lg/; futures prices, CME Group/CBOT, Historical Data, http://www.cmegroup.com/

market-data/datamine-historical-data/datamine.html.

Figure 15

November soybean basis (Illinois River, Peoria North cash less 

soybean CME Group/CBOT futures) 

Cents/bushel

Contract year

2001 2002 2003 2004 2005 2006 2007 2008

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade. 

 Notes: Basis is plotted daily and computed as cash minus futures. The first observation for 

each contract year is the day after the preceding contract expires, around the 15th of the month. 

The last observation for each contract year is the expiration day for the given contract, again 

around the 15th of the month. 

 Sources: Cash prices, USDA, Agricultural Marketing Service, http://marketnews.usda.gov/

portal/lg/; futures prices, CME Group/CBOT, Historical Data, http://www.cmegroup.com/

market-data/datamine-historical-data/datamine.html.

-110

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20
31 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

Poor convergence may also suggest that futures markets are poor proxies 

for the underlying commodity cash price (Coyle, 2008). Futures prices that 

are higher than historically typical relative to cash prices, or a weaker basis, 

suggest that futures prices are biased upwards of true market value. Some 

commercial market participants have suggested that this phenomenon indicates a classic market “bubble,” in that futures prices no longer reflect market 

fundamentals and that price levels will eventually collapse, leading to major 

losses for traders with long positions (Irwin et al., 2009a).

Some actions approved by the CFTC may improve the convergence of 

cash and futures prices. First, on December 4, 2008, the CFTC released a 

general press release saying that it had approved amendments to the CME 

Group/CBOT’s wheat futures contract (see CFTC, 2008d for more information). This action has the potential to increase deliverable supplies, delivery 

capacity, and the number of shipping certificate issuers for the futures 

contract, thereby strengthening the relationship between cash and futures 

prices for wheat. Second, on February 13, 2009, the CFTC announced that it 

approved a request by the CME Group/CBOT to limit the number of delivery 

instruments an entity can hold for noncommercial purposes. This limit 

applies to the corn, soybean, wheat, and other CME Group/CBOT contracts 

and limits the number of certificates/receipts anyone can hold to an amount 

equal to the spot month speculative position limit (CFTC, 2009). The amendments are intended to reduce the potential for significant accumulation of 

delivery instruments by participants employing strategies not directly related 

to commercial activities and that negatively impact contract performance. 

Implementation was scheduled to begin on February 17, 2009, with a final 

Figure 16

March wheat basis (Toledo, OH, cash less 

wheat CME Group/CBOT futures) 

Cents/bushel

Contract year

2001 2002 2003 2004 2005 2006 2007 2008

 CME = Chicago Mercantile Exchange; CBOT = Chicago Board of Trade. 

 Notes: Basis is plotted daily and computed as cash minus futures. The first observation for 

each contract year is the day after the preceding contract expires, around the 15th of the month. 

The last observation for each contract year is the expiration day for the given contract, again 

around the 15th of the month. 

 Sources: Cash prices, USDA, Agricultural Marketing Service, http://marketnews.usda.gov/

portal/lg/; futures prices, CME Group/CBOT, Historical Data, http://www.cmegroup.com/

market-data/datamine-historical-data/datamine.html.

-150

-140

-130

-120

-110

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

10

20

30
32

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

date of May 31, 2009, for those affected parties to come into full compliance of the amendment. Whether these actions will actually improve future 

convergence will require continued analysis.

A recent study by Irwin et al. (2009b, p. 8) found convergence of the futures 

and cash price to perform well for the January and March 2009 soybean 

contracts and March 2009 corn contract. Reasons for this improved performance were not fully known but the increase in CBOT storage rates on 

delivery certificates was thought to be at least one possible reason. Whether 

this improved performance continues remains to be seen. However, they 

also found poor convergence to continue for the March 2009 wheat contract, 

despite an increase in CBOT storage rates on delivery certificates. Future 

storage rate increases are planned, but whether future convergence performance will improve is uncertain.

Another perceived performance problem in futures markets is the purported 

increase in volatility. As discussed earlier, an increase in price volatility was 

found for corn, soybeans, and wheat, but this increase was not found to be 

statistically significant. However, the Informa study (2008) found increased 

volatility in corn, wheat, and cotton by using a different methodology than 

presented here. The argument that increased volatility is harmful to the market 

stems from the reasoning that higher volatility leads to higher margins and 

larger directional price moves, which require significant continuing margin 

payments. To exacerbate the situation, the increase in margin payments 

occurred at a time when the credit markets were tight. High volatility also presents resource allocation challenges for firms and policymakers. Volatility is not 

in and of itself detrimental to the market if prices are reacting to fundamentals, 

such as increased uncertainty about production, stocks, and use, but volatility 

is detrimental if prices fluctuate without regard to fundamental factors.
33 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

In an environment with increased price volatility and changing price levels 

across corn, soybeans, and wheat, how do market participants manage price 

risk? What are the prospects for new risk management products? Commercial 

traders (merchants/elevators) have difficulty hedging when convergence fails. 

They must also cope with large margin calls on short hedges that quickly 

absorb working capital.

Commercials who have long positions in the cash market hedge their risk 

in the futures market by taking opposite positions (short). Ideally, if prices 

decline, merchants make money in the futures market to compensate for 

the lower price received in the cash market. If the futures price increases, 

the merchant with the short futures position still realizes the same hedge 

return because the losses in the futures market are offset by gains in the cash 

market. However, during the first half of 2008, the margin calls on short 

positions could have quickly depleted a firm’s working capital, making it 

difficult for firms to hold short positions in futures. Firms unable to meet 

margin requirements must liquidate their future positions, negating their risk 

management efforts and exposing them to even greater risk than had they not 

hedged in the first place. A survey conducted by the Federal Reserve Bank of 

Kansas City in 2008 found that 76.5 percent of commercial traders indicated 

that they have enough cash to manage current margin calls or ample cash and 

reserves to manage future margin calls; 23.5 percent indicated that they were 

struggling to acquire cash needed to manage margin calls (George, 2008).

Commercials have navigated these turbulent waters by requesting additional lines of credit and offering a limited array of forward price options to 

producers. In 2008, some elevators quit offering forward contracts altogether. 

More recently, others have offered forward contracts for the current crop year 

only. Still other elevators have created new forward contracts that pass the 

futures margin and transportation costs to the producer; the result is a quoted 

basis that may be adjusted downward depending on the circumstances (Mark 

et al., 2008).

Cash-settled futures contracts and swap contracts for corn, soybeans, and 

wheat offer additional options to manage price risk. Cash-settled futures 

contracts for corn, soybeans, and wheat that trade on the Minneapolis 

Grain Exchange (MGE) are settled to a national spot price index for each 

commodity calculated by the Data Transmission Network (DTN). The 

contract is designed to reflect first-handler or elevator-level pricing and therefore may provide a more predictable and stable basis for producers and local 

elevators than the existing terminal-level futures contract. These contracts 

have been shown to theoretically reduce nearby basis variability and increase 

hedging effectiveness (Sanders and Manfredo, 2002). The downside to the 

MGE contracts is that they are not attractive to commercials, as demonstrated 

by their much lower volume and, therefore, lower liquidity than the corresponding deliverable contracts that trade on the CME Group/CBOT.

New derivative designs, such as basis swaps, or calendar swaps can also be 

employed. Corn basis swaps and corn, soybeans, and wheat calendar swaps 

Risk Management Challenges 

for Market Participants
34

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

have recently been approved by the CFTC and can be cleared by the the CME 

Group/CBOT. Basis swaps are cash-settled contracts based on the difference 

between a local price index and a futures price. They are designed to reduce 

basis risk at nondelivery locations for farmers, elevators, and processors. 

Calendar swaps are also cash-settled contracts based on the average futures 

price in the month before contract delivery. The basis swaps and calendar 

swaps would be negotiated privately off-exchange between trading partners, 

but cleared by the CME Group/CBOT clearinghouse, which reduces counterparty risk by daily marking-to-market. (See glossary for definition of terms.)

Farmers must also reevaluate their pricing and risk management strategies in light of changes in risk management and pricing alternatives offered 

by merchants and elevators. During periods of price volatility, merchants 

and elevators may discount contracts by widening the basis (cash-futures), 

resulting in lower-than-normal cash prices relative to futures prices. One 

alternative for producers is to hedge directly in futures markets and bypass 

the forward contracts offered by merchants and elevators. However, farmers 

would still be left with margin costs and basis risk. Farmers could also enter 

into a basis contract with a grain merchant to alleviate basis risk, although 

these contracts may be as limited as forward contracts. Another tool available to farmers is to buy options on futures contracts, although options do not 

protect against adverse basis moves and require a paid premium.26 Options 

are also not heavily traded in deferred months, so it may be difficult to secure 

options months or years in advance of the cash market transaction. Crop 

revenue insurance is yet another risk management alternative that, for a cost, 

may guarantee minimum revenue (Mark et al., 2008).

Noncommercials and speculators are also exposed to rapid price swings and 

increased volatility. During upward movement in prices, they build long positions, and in periods of decreasing prices, including the recent period, they 

reduce their positions. Index funds, although concerned with maintaining a 

long-term perspective and providing exposure to commodities for clients, 

have also reduced their long positions during the recent period of declining 

prices, although their share of the long positions have generally stayed the 

same. Generally, investors reduce investments in commodity funds as prices 

decline and profits disappear.

26Option buyers are not required to 

make margin payments.
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In response to market concerns about commodity futures market performance, the CFTC held an Agriculture Forum on April 22, 2008, to begin 

addressing concerns expressed by industry participants (CFTC, 2008a). 

The forum covered issues that included convergence, or the lack thereof, in 

futures and cash prices, the impact of higher margin requirements, and the 

role of speculators and commodity index traders in the marketplace.

As a result of this forum, the CFTC announced several policy initiatives on 

June 3, 2008, to address issues raised at the forum. The initiatives include the 

following (CFTC, 2008b):

1. A review of trader reporting and classifications (index traders and swaps 

dealers in the futures markets) to determine if classifications accurately 

reflect trading patterns of participants.

2. Withdrawal of proposals to increase the Federal speculative position 

limits on certain agricultural futures contracts and for a risk management 

hedge exemption from the Federal speculative position limits for agricultural futures and option contracts.

3. A review and improvement of agricultural trade options to provide 

producers with an alternative to hedge price risk.

4. An initiative to clear agricultural swaps to provide farmers and merchants 

with another alternative for managing price risk.

5. Creation of a new report to increase greater transparency of trader 

information.

6. Continuation of the cotton market investigation of the February/March 

2008 price increase in the cotton futures markets. Commission enforcement inquiries are focused on ensuring that the markets are properly 

policed for manipulative and abusive practices.

7. An investigation of agricultural lending to ensure that adequate credit is 

available to maintain futures positions.

An additional discussion on convergence and basis, settlement prices, margin 

requirements, credit, agricultural swaps, and ongoing CFTC research was 

held at a CFTC Agricultural Advisory Committee Meeting on July 29, 2008. 

Legislation was introduced to place further regulations on the commodity 

market, the Commodity Markets Transparency and Accountability Act of 

2008; it failed to pass in the House of Representatives on July 30, 2008. This 

Act aimed to curb speculative trading and create greater transparency in the 

markets, including offshore trading, over-the-counter transactions, and index 

fund investment.

As mentioned earlier, On December 4, 2008, the CFTC released a general 

press release saying that it had approved amendments to the CME Group/

CBOT’s wheat futures contract (see CFTC 2008d for more information). This 

action has the potential to increase deliverable supplies, delivery capacity, 

Government’s Regulatory Response
36

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

and the number of shipping certificate issuers for the futures contract, thereby 

strengthening the relationship between cash and futures prices for wheat.

Also mentioned earlier, the CFTC announced on February 13, 2009, that it 

approved a request by the CME Group/CBOT to limit the number of delivery 

instruments an entity can hold for noncommercial purposes. This limit 

applies to the corn, soybean, wheat, and other CME Group/CBOT contracts 

(CFTC, 2009). The amendments are intended to reduce the potential for the 

significant accumulation of delivery instruments by participants that employ 

strategies not directly related to commercial activities and that might negatively impact contract performance. Implementation was scheduled to begin 

on February 17, 2009, with a final date of May 31, 2009, for those affected 

parties to come into full compliance of the amendment.

On April 24, 2009, the CFTC announced the selection of members to the 

Subcommittee on Convergence in Agricultural Commodity Markets, a new 

subcommittee of the CFTC’s Agricultural Advisory Committee. The subcommittee will identify the causes of poor cash-futures convergence in select agricultural commodity markets and advise on actions to remedy the situation.
37 

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

The emergence of commodities as an asset class has caused a structural 

change in the level of open interest and composition in futures markets. New 

players, such as commodity funds, index funds, managed funds, and swap 

dealers trading with commercial funds have altered the mix of participants 

in commodity futures markets. The performance of futures markets in their 

traditional roles of risk transfer and price discovery has been called into question as cash and futures markets have experienced convergence problems in 

recent years. Issues surrounding price levels, price convergence, and price 

volatility have caused commercial users of futures markets, such as elevators, 

merchandisers, and producers, to re-evaluate their pricing and risk management strategies.

The question remains: Are the recent changes in futures market participation and price performance transitory or permanent? The managed and index 

funds built long positions as prices increased, but their long positions have 

declined in recent months as prices have declined and become less volatile. These traders do not typically have positions in the underlying cash 

commodity market, although this too could change. Evidence does show that 

the link between futures and cash prices has weakened, but market participants continue to use futures markets as a price discovery mechanism.27 Risk 

managers have encountered difficulties in managing their price risk due to 

changing market conditions, but elevators and merchandisers have adapted 

to the new conditions and have resumed providing risk management products. Regulatory agencies and exchanges have implemented modifications 

to contract specifications and have acted swiftly to identify the performance 

problems and discuss or enact solutions. Time and further research are 

needed to assess whether performance concerns will continue or dissipate 

in futures markets and whether further modifications in contract design and 

market regulation are warranted.

Conclusion

27While convergence for the wheat 

contract continues to have problems, 

convergence for the March 2009 corn 

and soybean contracts is reported to 

have performed well (Irwin et al., 

2009b). Continued monitoring of 

this performance will be required to 

determine whether this improvement is 

temporary or permanent.
38

Issues and Prospects in Corn, Soybeans, and Wheat Futures Markets / FDS-09G-01 

Economic Research Service/USDA

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Arbitrage: A strategy involving the simultaneous purchase and sale of identical or equivalent commodity futures contracts or other instruments across 

two or more markets in order to benefit from a discrepancy in their price 

relationship. A theoretically efficient market has no opportunity for profitable 

arbitrage.

Basis: Difference between the cash price and the futures contract price.

Carrying charges: The cost of storing a commodity over time, including 

costs of storage space, insurance, and finance charges incurred by holding the 

commodity. Also referred to as cost of carry.

Cash market: A market in which commodities, such as grain, gold, or crude 

oil, are bought and sold for cash and delivered immediately. Also called spot 

market.

Cash-settled futures contract: (1) A settlement method used, instead 

of physical delivery, for certain futures contracts where, upon expiration, 

the buyer does not receive the underlying commodity but pays or receives 

funds depending on whether the futures price changes were favorable 

or unfavorable. (2) Where the settlement at maturity is based on a price 

index constructed from prices at several locations. The futures price prior 

to contract maturity is the forecast of the price index at contract maturity. 

Payment at settlement is based on the difference between the futures price 

forecast of the price index when selling or buying the futures contract and the 

actual price index at contract maturity.

Commercial trader: Commonly referred to as a “hedger.” A person or 

organization that uses futures markets to manage price risk resulting from 

activity in the underlying cash futures market.

Commodity fund: Managed portfolio composed strictly of commodities.

Convergence: A term referring to cash and futures prices tending to come 

together as the futures contract nears expiration (i.e., the basis approaches 

zero).

Exchange: Public marketplace where commodities in predetermined units 

are bought and sold at an agreed-upon price for delivery at a specified date 

in the future. In this case, the exchange refers to CME Group—Chicago 

Mercantile Exchange, the Chicago Board of Trade (CBOT), and the New 

York Mercantile Exchange (NYMEX).

Grain elevator: Facility at which bulk grain is unloaded, weighed, cleaned, 

blended, graded, stored, and loaded. These services may vary by type of 

elevator.

Hedge: An equal and opposite buying or selling investment position taken in 

order to protect oneself from the risk of an unfavorable price move in a security or commodity.

Glossary
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Hedge fund: Private investment funds that typically require larger overall 

net wealth for investors to participate. Fund managers take buying or selling 

positions in a variety of assets and can typically invest in more complex and 

riskier investments than other investment funds.

Index fund: Index fund traders gain long-side exposure to a broad index of 

commodity prices in an unleveraged and passively managed manner. Their 

goal is to gain diversification in their investment portfolio.

Initial margin: Funds that must be deposited when a futures position is initially 

entered as a performance bond by a customer to help ensure the financial 

integrity of brokers, clearing members, and the exchange as a whole.

Investment fund: A portfolio with commodities in addition to traditional 

assets, such as equities and bonds.

Liquidity: A condition that describes the ability to execute orders of any size 

quickly and efficiently without a substantial effect on the price. Institutional 

investors are inclined to seek out liquid investments so that their trading 

activity will not influence the market price.

Load out: The act of loading a transport vehicle with the commodity.

Long: A position that an investor takes when he/she buys futures or call 

options contracts. Synonymous with buyer.

Maintenance margin: Minimum equity that must be maintained for each 

contract in a customer’s account after deposit of the initial margin.

Mark-to-market: Part of the daily cash flow system used by U.S. futures 

exchanges to maintain a minimum level of margin equity for a given futures 

or option contract position by calculating the gain or loss in each contract 

position resulting from changes in the price of the futures or option contracts 

at the end of each trading session. These amounts are added or subtracted to 

each account balance. Thus, buyers and sellers are protected against contract 

default by additional required margin payments when margin accounts fall 

below a predetermined level.

Nearby futures price: The price of the futures contract with the closest 

settlement date.

Noncommercial trader: Commonly called “speculators.” A person or 

organization that uses futures markets to speculate on future price movements 

and are generally sensitive to fundamental and/or technical factors that 

influence prices.

Open interest: The total number of futures contracts, long or short, in a 

delivery month, or a market contract that has been entered into but not yet 

offset or fulfilled by delivery. Also known as open contracts or open commitments. Each open transaction has a buyer and a seller, but to determine total 

open interest, only the totals from one side of the contract or the other is 

counted, not both.
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Performance bond: A deposit to assure that the customer has enough cash 

or other acceptable collateral in his or her account to cover any losses that 

could result from ensuing market transactions.

Regular for delivery: Warehouses or shipping stations may be declared 

regular for delivery with the approval of the exchange. The firms must meet 

several financial and operational requirements to be approved as regular. 

Regular firms are allowed to issue shipping certificates, become a delivery 

point, and load out as specified by a commodity contract.

Short: A position that an investor takes when he/she sells futures or writes 

call options contracts. Synonymous with seller.

Sovereign wealth fund: Fund owned by the sovereign state or government 

as the key shareholder. 

Spread: The price difference between two contracts.

Spread trade: Holding a long and a short position in two or more related 

futures or options on futures contracts, with the objective of profiting from a 

change in the price difference between the two.

Swap: Transaction in which a dealer sells an over-the-counter (OTC) swap 

contract to customers (such as a corn grower who wants to fix a price to sell 

corn at a future date) and in turn hedges his/her price exposure with short 

future positions in corn or other commodities. In essence, the two parties are 

“swapping” payment streams.

Turnover ratio: Volume required to change the ownership of a given number 

of contracts.

Volume: Number of purchases and sales of a commodity futures contract.