CME Looks To Help Growers Minimize Risk

There aren’t many businesses riskier than farming.  The CME Group says they are always looking for ways to help producers manage that risk and lower uncertainty.  John Ricci, the global head of agricultural products with the CME Group, said they have several exciting initiatives underway.

“We’ve got a lot of exciting products that are coming," Ricci noted.  "We've already got a couple of launched this year, everything from our latest lumber contract that will meet evolving production trends in the U.S. to hard red spring wheat, which will allow market participants the ability to manage every major North American wheat market on a single exchange. It's an exciting time here at CME Group.”

He said CME Group is excited about their micro products.

“I’m very excited about this suite of products, which are smaller-sized versions of our benchmark corn, soybean, wheat, soybean oil, and soybean meal futures," Ricci said.  "What's great about these products is they're one-tenth the size of the benchmark product, so think around 500 bushels. These are also cash-settled. So, this is appealing to smaller hedgers, who might have concerns about being over-hedged with some of the larger contracts, i.e. the 5,000 or some of the producers that want to hedge with more of a precision-type in 500-bushel increments too. So, if you are a five or a 10-acre farm, and you don't necessarily have the 5,000 bushels to hedge, this allows you to hedge in 500-bushel increments instead.”

He added that smaller contracts might be more useful.

“Throughout the process, as we were designing it for optimal end-user experience, we got a lot of positive feedback about the direction we were heading. You know, one of the ones that stood out, interestingly enough, is the interest that we're seeing from the smaller dairy and livestock operators using either the corn or the soybean meal to manage their feed input costs," Ricci said.  "These contracts give them a more flexible way to hedge their feed exposure in smaller increments, again, going back to 500 bushels versus 5,000 bushels. These have been among our most successful agricultural product launches at CME Group. In the first week alone, we saw over 350,000 contracts trade and participation and interest remained strong across all five products in the portfolio.”

Options, Ricci noted, are a rapidly growing market.

“We now have an option expiry for every day of the trading week. Because of the shorter duration, this also means that the premiums are lower. So ag, because of the seasonality and all the different growing seasons and all the different products in the portfolio, you tend to see volatility jump throughout the summer with weather and other events that can create uncertainty around crop conditions. So, this means option premiums tend to be higher, which is when producers need protection the most. These products allow for more precise hedging around market-moving events like acreage, crop progress, export sales, or prospective planting, as well as when events occur outside of exchange hours.”

So, how do the listing schedules work?

“Weeklies have an expiry each day, and they're listed out two weeks on a rolling basis," Ricci said.  "There are multiple releases across the business week. With short-term options, market participants will now know exactly what their cost would be upfront to manage exposure through that specific time frame.”

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