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Using Cash Settlement in Agricultural Contracts

Owain Johnson, Global Head of Research & Product Development, CME Group

Agricultural Advisory Committee, 10 June 2021
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1 A Brief History of Agricultural Pricing

2 Use of Cash Settlement in Agricultural Contracts

3 Conclusion

Agenda
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Section One

A Brief History of Agricultural Pricing
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c. 4000 BC – first evidence of agricultural 

derivatives – clay tablets made in Mesopotamia 

to represent livestock, to save bringing actual 

animals to market

1611 – the Amsterdam Exchange opens its own 

purpose-built building

1697 – launch of the Dojima Rice Exchange in 

Japan

19th century – modern agricultural futures 

develop in Chicago

All contracts at this point are physically settled

The storied history of agricultural derivatives

Water is scattered to mark the end of trading at the Dojima Rice 

Exchange
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Agricultural PRAs (equally) storied history

The Public Ledger begins publishing agricultural prices in 

London in 1760 – still publishing to this day

Urner Barry’s Price-Current first published in 1858

Kansas City Price Current published from 1873 onwards

The Packer has been publishing news and prices for the 

fresh fruit industry continuously since 1893 

1966 – Cotlook launched as a cotton PRA

1984 – DTN launched to provide grains intelligence

1990 – Kingsman (now Platts) launched as a sugar PRA

2000s – the big global energy PRAs enter agriculture
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What is a Price Reporting Agency?

“Price Reporting Agencies (PRAs) are firms that 

assess the fair price of commodities and report 

these values to a wider audience that then uses 

those assessments of price either for information 

purposes or else as the basis for physical or 

financial transactions.”

• The largest PRAs come from the energy world – Platts, Argus, OPIS, ICIS

• Energy was earliest to embrace the PRA model due to greater price volatility and greater 

globalization than the agricultural or metals markets

• The use of PRAs is increasingly important in agriculture 
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Defining physical and cash settlement

Physical:

• At expiration, the contract is settled by physical delivery of the underlying commodity.

• Contract rules must fully describe the characteristics of the underlying commodity (i.e. grade, quality, 

weight, class, etc.) as well as specify delivery locations.

• Contracts that allow for the delivery of multiple qualities, grades, classes, etc. at values different from 

‘par’ should specify ‘non-par’ premiums and discounts commonly observed in the cash market.

• Contracts that allow for delivery at multiple locations should reflect differences in values, if they exist, 

between ‘par’ locations and ‘non-par’ locations, in the form of locational premiums and discounts.

Cash: 

• At expiration, open positions in the contract are settled by cash payment (debits or credits) in lieu of 

physical delivery of the commodity.

• Contract rules must fully describe the characteristics of the underlying commodity (i.e. grade, quality, 

weight, class, information source, etc.) as well as how the final settlement price is calculated: what cash 

data is sampled, which data source is the cash data sampled from, and how is the sampled cash data 

then used to calculate the final settlement price?
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Why was agriculture slow to embrace the PRA model?

1. Strong exchange tradition in agriculture – physical delivery futures well established and 

working well

2. More state subsidy or political intervention in agriculture, relative to energy and metals

3. More government data (USDA) available so less need for independent assessments

4. The largest firms are more important in the agricultural markets than in other 

commodities and these tend to be vertically integrated 

5. Agricultural trade is lower value on a per ton basis and so agricultural firms are less 

willing to pay high PRA subscription rates compared with other commodity producers

6. Greater fragmentation at the primary production level – hundreds of oil producers, but 

hundreds of thousands of farmers
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1. Interest in developing international 

benchmarks in locations where physical 

delivery may be more complex

2. The energy transition – biodiesel, 

ethanol, biomass – brings the agricultural 

sector into contact with the energy PRAs

3. The energy PRAs are relatively mature 

and looking for growth in new areas

4. Growing interest from agricultural firms in 

more granular risk management that 

gives the ability to manage quality risk or 

location risk

5. Success of initial launches has proved 

that cash settlement can work – halo 

effect

So, what has changed?

The Black Sea has been a ‘poster child’ for cash settlement
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Section Two

Use of Cash Settlement in Agricultural Contracts
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Key dates in cash-settled agriculture

• 1986 – CME replaces physical delivery of its feeder cattle futures contract with cash settlement

• 1997 – CME replaces physical delivery of its live hog futures contract with cash settlement

• 2007 – the Minneapolis Grain Exchange (MGEX) launches futures based on DTN cash prices 

• 2012 – Platts enters the agricultural sector by acquiring Kingsman, a sugar PRA

• 2016 – Platts Australian wheat contract listed on CME 

• 2017 – Platts Black Sea wheat contract listed on CME 

• 2020 – Argus expands its position in the agricultural sector by acquiring Agritel

• 2020 – Euromoney buys agricultural PRA AgriCensus

• 2020 – Platts South American soybeans contract listed on CME
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Key considerations in determining settlement method

Adequate Delivery 

Infrastructure?

Adequate Data For A 

Cash Index?

CFTC 

Requirements

Is There Adequate Infrastructure For Delivery?

A. For storable commodities, pre-approved ‘regular’ 

facilities such as warehouses that meet minimum 

Exchange requirements are needed.

B. For non-storable commodities, pre-approved 

facilities such as stockyards or terminal markets 

that enable the physical transfer of ownership 

and immediate movement and/or consumption of 

the commodity have historically been needed.

Is There Adequate Data For a Cash Index?

A. Is there a public or private data source that is 

reflective of the underlying cash market and has 

enough underlying data to support a futures 

contract?

B. Is it mandatory or voluntary data? Is it audited 

and reliable?

Exchange 

Considerations

CFTC Minimum Requirements Considerations:

A. Do one or both of the settlement methods allow 

for adequate deliverable supply to prevent 

market manipulation and/or price distortions?

B. Do one or both of the settlement methods 

accurately reflect the underlying cash market 

and allow the Exchange to monitor for price 

convergence?

C. Does the physical settlement process in the 

contract reflect current cash market practices?

D. Does the cash settlement process reflect a 

thinly traded cash market / lack of competition 

amongst participants?

E. Do one or both of the settlement methods meet 

all of the Commission’s core principles?

Which Settlement Method Best...:

A. ... allows the exchange to meet 

CFTC guidelines?

B. ... reflects pricing reflective of 

prevalent underlying cash 

marketing practices? i.e. does one 

converge better than the other?

C. ... discourages futures market 

disruptions and potential attempts 

at price manipulation at contract 

expiration?

D. ... encourages adequate liquidity 

throughout the entire life cycle of 

all contract months?

E. ... provides the most long-term 

room for growth for the Exchange 

while still meeting all of the above 

considerations?
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Commonalities in CME cash-settled listings

• Tend to be located outside the U.S. (Brazil, Black Sea, Australia, Thailand, etc)

• Managing physical delivery may be more complex in some of these locations

• Tend to trade as spreads to existing major physical benchmarks (CBOT vs Brazil soybeans; CBOT vs 

Black Sea Wheat, etc)

• In some smaller markets – Black Sea sunflower oil – the cost of establishing delivery would be 

prohibitive relative to the likely size of the contract

• Cash settlement is a new concept to agricultural traders so continued education is needed to support 

growth
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Conclusion
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The future of agricultural cash-settled futures

• Cash settlement has been widely adopted in energy and metals markets

• Cash settlement is gaining acceptance among global agricultural traders

• Since there is no delivery risk, does not require continuous liquidity and allows participants to 

trader sooner

• Choice of PRA is crucial: must be reputable, reliable and widely accepted

• A strong PRA partner also acts as another marketing channel for the contract

• WILL NOT replace existing physically delivered benchmark contracts

• WILL allow global traders to participate in regional price discovery while maintaining the 

relevance of physically delivered benchmark contracts
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