Industrial Harvest

Well, yesterday morning I became the proud owner of a July Chicago Board of Trade wheat futures contract (the 1000-bushel “mini” contract) – so perhaps it’s time to start telling the story of how all the pieces of this project will connect. 

A futures contract is, in essence, an agreement to buy a certain quantity (in my case, 1000 bushels) of a certain grain (wheat) by a certain date in the future (July).  Buying a futures contract is one thing, but actually following it through to delivery is pretty rare – out of the millions of bushels of wheat that are traded as futures contracts on the Board of Trade, only a very few end in the exchange of actual grain.  So, futures contract delivery is a specialized and complicated transaction, and most commodities brokers don’t deal with it very often, if ever (within the commodities brokerage world, there are folks that specialize in deliveries of futures contracts).   With help from Joanna, some of her co-workers, and a contact at the Board of Trade, I found out a few months ago that to actually deliver on a mini-wheat contract (1000 bushels), I’d need to have 5 mini contracts, or 5000 bushels.  That’s not only too rich for my blood, but 1000 bushels is going to be tough enough to deal with, thanks. 

So, we (they, really I can’t take any credit for this), devised an alternate approach.  Basically, I’m going to be using my futures contract to hedge, or manage risk – exactly the same way a baker or miller would use it.  The contract I bought today will basically lock in my price – any increase in price between now and then will make me money on the futures contract, offseting the higher price for the wheat on the “cash” market.  Instead of letting the contract expire and taking delivery, I’ll settle the contract shortly before its expiration date and then, in a separate transaction, go pick up the grain at an elevator.  I’ll be getting the wheat from the only grain elevator in Chicago that is certified for CBOT deliveries, a 12.3 million bushel behemoth on the Illinois River, now owned by Nidera.

My brokers Jim and Steven at Commercial Grain, Inc. (out of Arkansas, of all places) have been great to work with and super helpful and patient explaining how our relationship works and what my hedging strategy should be.  The lower I can get “in” to the market, the better covered I’ll be in the case of price increases between now and when I pick up the grain.  I was advised that $5.00 / bushel is probably a good point to jump in (and that’s basically what I’ve budgeted for), that although prices are on the upswing they aren’t expected to swing too wildly before we close out the contract, and that I should watch the weather reports and the upcoming USDA crop report to make sure (full disclosure, for those who might be inclined to nitpick my brokers’ advice:  my notes on this conversation are not that great, so it’s my translation, not the actual advice, that would be the issue – if there is an issue.  Do I sound like a lawyer yet?). 

So there were a few quiet days in which I filled out the requisite forms and pretended to understand the significance of the daily grain market reports these guys were sending me.  Then, there was that inexplicable insane swing in the markets last week, which I missed the day it happened.  The next day when I talked to Steven he was like “What?? You don’t know??” like there had been a nuclear explosion or something, although I’d probably miss that too because I’m apparently living under a rock out on the edge of the continent here… 

Anyway, we played it cool for another day or two, and then Monday morning, just as I was reading the grain market report saying prices seemed to be headed up and up above $5 for the foreseeable future, I got the call from Steven that the trigger had been pulled – he’d jumped on it first thing in the morning while prices were still low, and I was in at $4.99 3/4!