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Corn+Soybean Digest

Smaller Corn and Soybean Growers Can Benefit from Mini Marketing Contracts

There are MINI Coopers, minivans, minibikes and iPod minis. They match the consumer's need for quality on a smaller scale. What about mini-sized corn and soybean contracts?

“The mini contracts can help the smaller farmer,” says Jim Jensen, Iowa State University Extension farm management specialist, Mt. Pleasant. “Growers can use them to spread soybean sales and possibly corn sales without having to use regular futures contracts.”

The minis represent 1,000 bu., while the regular Chicago Board of Trade (CBOT) corn and soybean contracts are 5,000 bu. each.

A grower who farms about 500 acres, with half in soybeans, could use only two 5,000-bu. soybean contracts to market beans for a 40-bu. average yield. But with a mini-sized bean contract, he could spread his sales out over 10 contracts. He would have freedom to price beans at various times when prices spiked and in distant months when elevators may not offer a cash contract.

Formerly part of the Mid American Commodity Exchange trading system, the mini contracts, which are also offered for wheat, are used little compared to regular corn and soybean contracts. “Currently, open interest is only about 1.6% of the regular December corn contract and 7.3% of the regular November soybean contract,” says Jason Moss, a marketing consultant for Brock Associates, Milwaukee, WI.

ONE REASON THE minis aren't used as much is “because most elevators already buy corn and soybeans in increments smaller than 5,000 bu.,” says Moss.

“So their use is really one of cash contracts vs. futures hedging, rather than standard vs. mini-contracts. Many growers who use a hedge account know they exist but just choose to use the larger contracts,” he says.

Carl Zulauf, Ohio State University agricultural economist, says the mini-sized contracts could be solid tools for smaller growers. But they are in the middle of a Catch-22 situation.

“Because they aren't heavily traded, there can be higher transaction or liquidity costs,” says Zulauf. “It can be harder to get the contract filled. That in turn makes people want to go to the larger contracts.”

Still, Moss sees the minis as potentially viable tools that could provide a profitable alternative to smaller operators, especially smaller soybean producers. “The mini-sized contract can facilitate selling in smaller increments or smaller fractions of the crop,” he says.

“For example, if a farmer produces 20,000 bu./year, he can hedge his crop in 5% increments using mini-contracts vs. 25% with the regular contracts,” Moss says.

Jensen points out that a lot of farmers don't like using the futures market, period. “But when elevators stopped offering cash contracts (for more than 30-60 days out) in 2008, they did more with the ‘board,’” he says. “However, for smaller growers, having to buy a 5,000-bu. contract may not provide an advantage. That's where the mini-sized contracts can be a benefit.”

Moss points out that the benefit of using mini contracts looks more attractive for the small soybean producer. “Production of 25,000 bu. or less of a crop per year has the validity to consider minis,” he says. “That's around 150 acres of corn or 500 acres of soybeans.”

SO IT GETS down to how small you actually are. For beans, a grower in the 250-acre range with no distant marketing available through the elevator may be locked out of multiple sales without using the mini-sized contract.

“The volatility of the grain markets means there can be more opportunities to make sales,” says Jensen. “Growers shouldn't have to face obstacles. The mini-sized contracts can help the smaller growers.”

Potential mini users should remember that, like with the regular contract, there are risks involved. There can still be margin calls when the market goes the wrong way. Just because it's a smaller contract doesn't mean losses can't occur.

Moss says growers should have a serious marketing plan when using mini-sized or regular contracts. “There are less expensive ways to learn to use futures,” he says. “If experimentation is a person's best way to learn, using one regular contract is the simplest. If that regular 5,000-bu. contract is too expensive a learning tool, they should be dealing with a simulation.”

Margin requirements are at the same levels for minis as for regular corn and soybean contracts. But the amount of money required in a margin account will be lower for minis because of the smaller size of the contract.

“The soybean contract requirement is the limit trade amount (70¢/bu.),” says Moss. “The corn contract margin requirement is 30¢/bu.”

So for a mini-sized soybean contract, the margin requirement is about $700 (70¢ × 1,000). It is about $300 (30¢ × 1,000) for the mini-sized corn contract. Of course, the margin money will be mostly offset by the increase in the commodity hedge price. But it must still be available at the time of the price movement.

Another drawback is there are no options trades on the minis, like on the regular contracts. “Options are a way to take a position and know up front how much you can potentially lose,” says Zulauf.

“Compared to larger growers, smaller growers may be more conservative with their money because of tighter cash flow and other constraints. Thus, a mini options contract may be more attractive to smaller growers than mini futures contracts,” he says.

CBOT offers marketer simulators for experimenting with commodity trades.

Mini-sized soybean contract specs are 1,000 bu. for No. 2 yellow soybeans. The limit up or down is 70¢/bu./day, expandable to $1.05 and then $1.60 when the market closes at limit bid or limit offer. Contracts are traded for January, March, May, July, August, September and November.

A 250-acre soybean crop averaging 40 bu./acre could use 10 mini-sized contracts (10,000 total bushels). Trades can be spread out when markets go up. Since many smaller growers are conservative, Jason Moss, marketing consultant from Brock Associates, says they might favor small trades at a time.

For example, when 2008 summer prices topped $15/bu., a grower might have sold two November 2009 mini contracts. He could have staggered sales afterward and have all or most of his 2009 crop locked in at the higher prices seen before markets tumbled in the fall.

If pricing was delayed until the beginning of 2009, $10 futures trades were available in early January then again in mid-April. One or two 1,000-bu. contracts could have been locked in, leaving the grower open to more trades in the event of market spikes later in the year.

For mini-sized corn contracts, specs are also 1,000 bu. of No. 2 yellow corn. The limit up or down is 30¢/bu./day, expandable to 45¢ and then 70¢ when the market closes at limit bid or limit offer. There are fewer trading months: March, May, July, September and December.

As with soybeans, trades for the mini corns gave growers the opportunity to book $7 futures prices in 1,000-bu. increments last year. But Moss says the 5,000-bu. contracts likely work as well or better for nearly all growers.

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