Hedge Examples

Example 1: Placing Cash and Futures Hedge Orders

The merchandiser creates a new cash grain bid via the Bid Manager window. In this example, a cash bid is created for “New Crop 23’ for a delivery period from 9/01/2023 - 12/11/2023 using the December 23 CBOT Corn futures. At the time of bid creation the current CBOT ZCZ23 price is 502-2. With a basis level set at .25 cents over the futures , the cash bid is 5.27.

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Once the bid is created and made producer facing by synchronizing with CQG, the bid is ‘tradeable’ and the merchandiser, on behalf of the producer, can then take action on the bid. Using the Offer Manager, the merchandiser can create a new offer on this cash bid. Below, the merchandiser is making an offer on behalf of ‘SouthernCoop Farmer1’ to sell 15000 bushels of cash grain at $5.30 against the ‘New Crop 2023’ bid.

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Once the cash offer is ‘Created’, the Offer Manager panel will update with the newly created offer in addition to the Orders panel showing both the working cash grain offer and the futures hedge. As the cash offer was for 15000 bushels, 3 futures contracts are working as limit orders .50 over their current ZCZ23 (cash offer was .50 over the current bid).

Example 2: Changing Basis to Trigger Transaction

Using the example above, market conditions have changed and the merchandiser raises their basis from .25to .31 over the December futures via the ‘Edit’ button in the Bids Manager panel.

Once the basis is updated, the current prevailing cash is now ‘through’ the newly created cash offer and both the cash offer and futures hedges are filled. A notification will display in the left corner of the platform notifying the user of the fill(s). Note, the original futures hedge working is automatically canceled and new futures order is replaced to fill at the market.

In this example the cash order is filled at 5.32, which is .31 (basis) over the current ZCZ23 futures price of 5.01. These fill prices are visible in the ‘Average Price’ column below.

Example 3: Producer Offers Directly to Merchandiser's Bid

The producer sees a working cash bid that compliments his current marketing strategy so he decides to sell directly to the elevator's bid. This is similar to the previous example but without placing a limit order above the prevailing bid. Here, the producer simply ‘hits' the bid without placing the offer ‘above’ the elevator’s cash bid. Once the order is placed, both the cash and futures prices are executed and displayed accordingly in the Orders window. Below, the cash is filled at the prevailing elevator bid of 5.335 and the futures are sold at the prevailing bid of 5.0250 for December 2023. Note, the cash transaction was for 5000 bushels, which triggers a 1 lot of offsetting futures to fully hedge the cash position. 

In this example, if the underlying futures were to move and cause the cash bid to update in parallel, when creating the offer a warning will display to alert you to of this change in cash bid pricing.

If you wish to place the order, simply hit ‘Yes, Place Order’ or select ‘No’ to return to the Create New Offer modal to update any of the inputs.

Example 4: Transacting 'Odd Lot' Cash Quantities 

In the examples so far, the producer has been trading in quantities of 5000 bushels, which are hedged on a 1:1 ratio with CBOT grain futures as the underlying contract unit is also 5000 bushels. When cash bushel increments of less than a standard futures contract are transacted, the Hedge Account Balances and Hedge Account Balances Details windows track these smaller unhedgeable 'tails' of bushels. In this example, the merchandiser is bid .10 (basis) over the CBOT September Soybean 2024 futures. The bid has been created and published and is now producer facing.

Now, producer ‘SouthernCoop Farmer2’ is looking to sell 2000 bushels at the prevailing price for the ‘Old Crop Soy’ bid.

Once the offer is created, a notification will display in the platform and the orders panel will update with cash transaction.

The Hedge Account Balances window updates with a new cash position (if no current orders have transacted or are working).

You will notice with 2000 cash transacted, no futures hedge has been placed. As a default, the minimum threshold set to offset a cash position is 51% of the underlying contract unit of a standard CBOT grain futures contract (Contract unit 5000 bushels * .51 = 2550 bushels).  This can be configured differently for each customer for risk management purposes.  If this particular producer or another producer that conducts business with the merchandiser sells any quantity of cash grain greater than or equal to 550 bushels (2550 - 2000) a September 2024 Soybean futures hedge will be automatically sold. Here, another producer has sold 1000 bushels on the ‘Old Crop Soy’ bid, the Hedge Balances and Hedge Balances panels both update with the cash and futures hedges.

In the above, note the ZSU23 ‘Hedge Balances’ position has gone from +2000 to -2000. Before the second transaction, the elevator was long 2000 cash. With the additional 1000 bushels of cash transacted, a ZSU23 futures contract was sold and the offsetting 5000 bushels (futures underling) are taken into account (3000 bushels cash - 5000 bushels future).

Example 5: Additional Tail Balance

When a producer sells cash grain to the elevator in excess of the futures hedge threshold, the elevator is left ‘long’ the excess cash. For example, the elevator takes in 6,000 bushels of wheat, so an additional unhedged bushel of 1,0000 cash is left on the balance as the one lot of futures for 5,000 bushels does not hedge the order on a 1:1 ratio. Below, a producer sells 6,0000 bushels on the ‘Jan 2024’ through the bid. Both the cash and futures hedge transactions are viewable in the orders panel. The Hedge Balances panel updates with the filled 6000 cash order in addition to the 1000 ‘tail’ leftover from the futures hedge. The Hedge Balances Details windows also populates with the cash, futures and unhedged tail details.  

Below, the ZSF24 Hedge Balance account is now +1000 bushels as the elevator’s position is long 1000 bushels of cash that was not covered by the futures hedge executed to offset the cash position.