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Grain price discrepancies worrying farmers in Ohio

By CELESTE BAUMGARTNER
Ohio Correspondent

MARION, Ohio — Ohio farmers are becoming more alarmed with the growing discrepancies in the Chicago Board of Trade (CBOT) futures contracts and local prices for corn, soybeans and wheat, said Rob Rettig, board member of the Ohio Corn Growers Assoc. (OCGA).

Essentially, the difference between the price of a bushel of grain in the cash market and the price of that same bushel of grain, as determined by the expiration price of a futures contract traded in Chicago, is showing wider than usual discrepancies.

“There is a problem called convergence,” said Rettig. “This is new ground for a lot of folks; there has been a lot to learn.”

The lack of convergence could have a dramatic effect on one’s ability to mitigate risk via the use of CBOT contracts, Rettig said. What convergence means has to do with what is called the law of one price, said Carl Zulauf, Ohio State University agricultural economist. That means that the same commodity at the same place should have the same price.

“When a futures contract goes into delivery, the cash price of the delivery locations and the futures prices should basically become one, because the futures contract are now a cash contract,” Zulauf said.

“The notion is that during the delivery month, the futures markets and the cash markets must come together. They become one and the same.”

That isn’t working right now, for wheat especially, Rettig said.
“That is what got people up in arms,” Rettig said. “A lot of folks have theories on what is going on. Many people would like to blame the index funds, speculative interest, for raising the price the above the cash value of wheat.”

The problem could be that the delivery mechanism is out of whack, Rettig said, and Zulauf agreed. He thinks it is premature to assume that the problem lies in speculative trading of the futures contracts. That may be the case, but it is premature to make that assumption.

“I think with the issue of convergence – and I’m going to get speculative here – it probably has something to do with the delivery mechanisms,” Zulauf said. “The specifications of how you make delivery, where you make delivery, because this is a convergence issue and that is an issue that arises out of delivery ... I would have to look at delivery mechanisms first.”

This country is exporting a lot of grain; the ethanol industry is using a lot of grain. The livestock industry is scattered around the country. In many cases the current delivery points are not located close to those users, Zulauf said.

“The immediate question I would raise without having an answer is, ‘Are the current delivery points in the flow of demand right now or are they out of position?’” Zulauf said. “That would explain the lack of convergence, because you have to pay a premium to get the grain into one of those delivery positions because it is not in the flow of demand.”

When markets go into periods of unusual situations, stresses and strains appear that one would not see in normal times, Zulauf said. The current situation has been referred to as “the perfect storm,” Rettig said.

“We’ve had (the) stock market performing poorly; the dollar doing very poorly; the home equity crisis,” he added.

“A weak dollar makes all of our goods that much cheaper on the world market; a short crop of wheat, and on top of that, China and India are growing like gangbusters; on top of that, there’s the ethanol situation – and it all happened at once.”

The Commodity Futures Trading Commission (CFTF) has called for a public forum in Washington, D.C., on April 22 to address concerns from the agricultural sector. OCGA is sending representatives in an attempt to share the uneasiness of Ohio farmers.

The organization encourages growers to contact the OCGA office with their experiences and recommendations. For information visit www.ohiocorn.orgonline.

This farm news was published in the April 16, 2008 issue of the Farm World, serving Indiana, Ohio, Illinois, Kentucky, Michigan and Tennessee.

4/16/2008