What determines the price of corn? Understanding the Futures Market | Agriculture, Business and Agritourism News

How much does corn cost?

To find out, you'll probably call your local elevator. There you can find out what the price of corn is today and agree on a price for delivery in a few months.

But how did they determine these prices?

Global grain prices are derived from the futures market, a term that describes the collection of exchanges around the world where buyers and sellers of financial instruments and commodities such as grains come together to exchange information, determine prices, and facilitate ownership and transfer of futures and options contracts. Through this contracting process, price is used to match available supplies to existing demand.

The United States is home to the largest stock exchange – the CME Group, a collection of exchanges including the Chicago Mercantile Exchange, the Chicago Board of Trade and the Kansas City Board of Trade. Grain, other agricultural raw materials, but also gold, silver, oil and even fertilizers are traded on these exchanges.

Futures contracts on these exchanges negotiate prices for corn, soybeans and wheat for various months in the future. These prices influence the price in local markets in the United States and around the world. To understand how this process works, it is helpful to define a futures contract and understand the different participants in the futures market.

Definition of a futures contract: An obligation to buy or sell a specified quantity and quality of a commodity at a specified price on a specified future date, with the contract based on a specified location.

Futures contracts are standardized financial instruments. For example, the March 2024 corn futures contract on the Chicago Board of Trade represents 5,000 bushels of No. 2 yellow corn. Unlike futures contracts offered with local grain buyers, delivery occurs infrequently. Instead, market participants trade with the representation of the physical assets in the form of a futures contract.

Participants in the futures markets:

• Hedger – Someone who buys or sells futures contracts to reduce the price risk of the underlying commodity they own. For example, a grain farmer may sell a March corn futures contract to lock in the price of stored corn that he will sell in March. On the other hand, a grain elevator operator could purchase a March corn futures contract to lock in the price of corn that they will purchase in March. Both the farmer and the elevator act to prevent a negative outcome from a price fluctuation in futures contracts. The mechanics of this and the local prices or “base” will be detailed in a later article.

• speculator — Someone who buys or sells a futures contract with the sole intention of making a profit from price movements. Speculators do not own the underlying commodity. For example, a speculator might expect the price of the March 2024 corn futures contract to be higher in the coming months. The speculator could buy a March futures contract at the current price and if it actually goes up as he speculates, he will make a profit. Common speculators include hedge fund managers or traders who act on behalf of others.

• estate agents — A firm or person that executes futures contract transactions on behalf of hedgers and speculators.

These participants are important to the functioning of the futures market and each has different goals. Sometimes the market moves in their favor and they benefit from it. Sometimes the market moves against them and to their disadvantage. The futures market brings together the knowledge, experience and speculation of thousands of traders to adjust the price of commodities minute by minute, hour by hour and day by day.

As a group of farmers meets to discuss what the price of corn, soybeans or wheat will be in the coming months, there are many guesses based on their experiences. Experienced marketers could provide them with additional insights. But in the end, the most reliable estimate of commodity prices in the coming months will come in the futures market, where thousands of buyers and sellers bring their collective knowledge to trading contracts and setting prices.

The purpose of this article is to stimulate your interest in understanding the futures market and how it could be useful to you. Futures marketing is complex and is best understood through careful study. The CME Group publishes an excellent primer on their website called “Self-Study Guide to Hedging with Grain and Oilseed Futures and Options.” To better understand what we have discussed in this article, we recommend that you read “Chapter 1: The Markets.”

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Dale Johnson is an agricultural management specialist and Mark Townsend is an agent associate with University of Maryland Extension. Her grain marketing columns appear biweekly in Lancaster Farming.