An article was brought to my attention today that indicated that spot and futures prices are failing to converge in certain futures markets. Below is an excerpt:
A futures contract is an agreement to deliver a specific amount of a commodity — 5,000 bushels of wheat, say — on a certain date in the future. Such contracts are important hedging tools for farmers, grain elevators, commodity processors and anyone with a stake in future grain prices. A futures contract that calls for delivery of wheat in July may trade for more or less for each bushel than today’s cash market price. But as each day goes by, its price should move a bit closer to that day’s cash price. And on expiration day, when the bushels of wheat covered by that futures contract are due for delivery, their price should very nearly match the price in the cash market, allowing for a little market friction or major delivery disruptions like Hurricane Katrina.
But on dozens of occasions since early 2006, the futures contracts for corn, wheat and soybeans have expired at a price that was much higher than that day’s cash price for those grains.
For example, soybean futures contracts expired in July at a price of $9.13 a bushel, which was 80 cents higher than the cash price that day, Professor Irwin said. In August, the futures expired at $8.62, or 68 cents above the cash price, and in September, the expiration price was $9.43, or 78 cents above the cash price.
Corn has been similarly eccentric. A corn futures contract expired last September at $3.36, which was a remarkable 55 cents above the cash price, but the contract that expired in March 2007 was roughly even with the cash price.
Henriques, Diana B. “Odd Crop Prices Defy Economics“. The New York Times: 28 March 2008.
Why aren’t arbitrageurs buying grain on the spot market, selling futures, and making delivery?
April 21st, 2008 at 11:14 am
Depends on when the delivery is expected. For spot commodities they typically are delivered immediately. For example, say you buy spot and sell futures. You would take delivery of the commodity and then you would have to hold them for say X amount of days until you have to deliver them. That X amount of days has a cost of carry associated with it.
September 6th, 2008 at 4:55 pm
Is it possible that there’s free money sitting around for arbitrageurs — that the growth in commodity trading hasn’t seen a similar growth in physical/futures arbitrageurs?