Non-Convergence in Domestic Commodity Futures Markets: Causes, Consequences, and Remedies

33 Pages Posted: 24 Oct 2015

See all articles by Michael Adjemian

Michael Adjemian

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS)

Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Scott H. Irwin

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Aaron Smith

University of California, Davis - Departments of Economics and Agricultural Resource Economics

Date Written: August 1, 2013

Abstract

During most of 2005-10, the price of expiring U.S. corn, soybeans, and wheat futures contracts settled much higher than corresponding delivery market cash prices. Because futures contracts at expiration are commonly thought to be equivalent to cash grain, this commodity price non-convergence appeared inconsistent with the law of one price. In addition, sustained non-convergence concerns market participants, exchanges, and policymakers because it can make hedging less effective, send confusing signals to the market, threaten the viability of a contract, and ultimately lead to a misallocation of agricultural resources. This report summarizes prominent theories that have been offered to explain non-convergence, including a new model that explains how the structure of a competitive delivery market can generate a positive expiring basis. The data support this delivery market theory over alternative explanations. Finally, we discuss various policy levers that have been offered to address non-convergence, as well as their likely impacts.

Keywords: commodity futures, index funds, grains, non-convergence, price discovery

Suggested Citation

Adjemian, Michael and Garcia, Philip and Irwin, Scott H. and Smith, Aaron, Non-Convergence in Domestic Commodity Futures Markets: Causes, Consequences, and Remedies (August 1, 2013). USDA-ERS Economic Information Bulletin No. 115. Available at SSRN: https://ssrn.com/abstract=2323646 or http://dx.doi.org/10.2139/ssrn.2323646

Michael Adjemian (Contact Author)

U.S. Department of Agriculture (USDA) - Economic Research Service (ERS) ( email )

355 E Street, SW
Washington, DC 20024-3221
United States
(202) 694-5576 (Phone)

Philip Garcia

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
427 Mumford Hall
Urbana, IL 61801
United States
217-333-0644 (Phone)
217-333-5538 (Fax)

Scott H. Irwin

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
326 Mumford Hall, MC-710
Urbana, IL 61801
United States

Aaron Smith

University of California, Davis - Departments of Economics and Agricultural Resource Economics ( email )

United States

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