SPRING WHEAT FUTURES AND OPTIONS

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1 SPRING WHEAT FUTURES AND OPTIONS

2 W hether it s a farmer near Minot, a trader in Minneapolis or a there is only one place to look when it comes to hard red spring WORLD S LARGEST SPRING WHEAT MARKET Since its inception in 1881, MGEX has been the principal market for hard red spring wheat (HRS) first as a cash market, then futures and, most recently, options. Millers, exporters, elevators, farmers and speculators look to MGEX when they trade HRS wheat and with good reason. Known for its stable and reliable trading environment, MGEX has a reputation as a good place to do business. It offers the liquidity, the product line and the oversight to ensure fair and accurate trading for all its participants. ONE OF A KIND, HIGH-QUALITY WHEAT The HRS wheat futures contract trades by open outcry on the MGEX trading floor (it trades on an electronic platform after regular trading hours), and is backed by Federal Warehouse Receipt delivery. 1. Growing season. HRS wheat is the only major wheat class seeded in the spring. This means the crop is harvested later than wheat seeded in the fall, and September is its new-crop month. 2. Contract quality requirements. Protein is synonymous with quality when it comes to wheat. The MGEX HRS wheat futures contract is the only major wheat futures contract with a required minimum protein for its deliverable stocks. No wonder it s a favorite of bread flour millers when they look to price future wheat needs and manage price risk.

3 speculator outside Mexico City, wheat: The Minneapolis Grain Exchange (MGEX). A RISK MANAGEMENT TOOL Hard red spring wheat futures and options help traders manage risk, and they offer the prospect of profit for speculators willing to assume that risk. Each market participant has a specific objective. HRS wheat futures and options offer: For the wheat producer... Other major wheat classes are: Hard Red Winter Wheat - The most prominent wheat grown in the U.S., this is the wheat Kansas is famous for, and it is often blended with HRS wheat to produce bread flour. It is harvested in the summer, and the new crop month is July. Soft Red Winter Wheat - The third most produced wheat in the U.S., it is used primarily in the production of flour for cakes and cookies. Also harvested in the summer, its new-crop month is July, and its primary growing areas include Ohio, Missouri and Illinois. A method for pricing a crop that is yet to be produced. For grain elevators... Risk management and the opportunity to offer forward pricing to their customers. For the miller... A tool to price supplies needed for future flour production. For the speculator... The prospect of profits.

4 From spring planting to fall harvest, the market is often FUNDAMENTALLY SPEAKING Hard red spring wheat, like any crop, follows seasonal patterns. From spring planting to fall harvest, the market is often driven by the latest crop news. How many acres were planted? How will weather affect the size of the crop? How big are the yields, and what is the quality of the wheat? When the crop is not in the ground, the market often focuses on export demand and international supply. Here s a short list of primary fundamental factors affecting this market: Crop quality. Often, a cool, wet growing season increases the chance for crop disease and suppresses protein potential of the wheat, reducing the amount of quality wheat available for milling. On the other hand, a hot and dry summer encourages protein development but also potentially reduces yields. Low protein or quality issues with winter wheat typically will increase demand for spring wheat. Other markets. Corn, soybean and winter wheat prices often influence the direction of spring wheat prices. In addition, foreign exchange, energy and other commodities can influence wheat supply and demand. For example, a strong dollar means U.S. wheat costs more, potentially slowing foreign purchases of U.S. wheat and depressing prices.

5 BRITISH COLUMBIA ALBERTA SASKATCHEWAN MANITOBA ONTARIO QUEBEC driven by the latest crop news. SPRING WHEAT FACTS Government policy. Changes in government policy influence the amount of acres planted to various crops in the U.S. For example, a change in policy that benefits corn may shift acres away from wheat. Exports. Much of the U.S. spring wheat crop is exported to countries including Japan, Italy, Taiwan and the Philippines. The level of overseas demand from year to year strongly influences spring wheat futures prices. Hard red spring wheat flour is a favorite of millers and is typically used in the production of bread, bagels and hard rolls. It also is exported in large amounts. Canada produces spring wheat as well, and it is the primary competitor on the world market for spring wheat exports. HRS wheat is grown primarily in the northern U.S., including the Northern Plains and the Pacific Northwest. Year after year, North Dakota is the leading producer of HRS wheat, while South Dakota, Minnesota, Montana and Idaho usually round out the top five. Primary Spring Wheat Growing Areas

6 Hard red spring wheat options have found favor with SPREAD OPPORTUNITIES The MGEX HRS wheat contract is often traded as part of a spread against other wheat contracts, and while margin requirements on this spread trade are low, the opportunities are great. Prices for all three wheat classes tend to move in the same direction, but each contract moves at its own pace and on its own fundamentals. Because of its quality requirements, MGEX HRS wheat often trades at a premium to other markets. Still, the spread has moved in quite a range over the years, influenced by differences in export demand, growing conditions and supplies of quality wheat. In addition, the differing new-crop months can create interesting trading opportunities. Wheat Index Spreads The deliverable HRS contract also can be traded against the MGEX wheat indexes. These indexes are based on elevator bids for the three major classes. These contracts differ from traditional futures/options in that they are traded electronically and settle to a cash index with no delivery. A spread trade executed between the HRS contract and a wheat index contract offers a number of potential strategies and receives favorable margin treatment. One spread trade strategy is to use futures to create synthetic basis positions, allowing better management of basis risk. Because MGEX wheat indexes are highly correlated to their underlying cash markets, basis can be hedged by trading the spread between index futures and their deliverable counterparts. For example, a synthetic long basis position for spring wheat can be created by buying spring wheat index (HRSI) futures and selling MGEX HRS wheat futures. To create a synthetic short basis position, one would sell HRSI futures and buy MGEX HRS futures. For more information on agricultural indexes, call MGEX and request a copy of "MGEX Grain and Oilseed Index Futures and Options."

7 customers because of their flexibility. LIMITED RISK, UNLIMITED PROFIT POTENTIAL MGEX hard red spring wheat options have found favor with customers because of their flexibility. For producers, options are an affordable way to insure the price of a crop. Unlike futures contracts, which provide protection against volatile price movements by locking in desired price levels, options allow hedgers to benefit if prices move in their favor. Furthermore, this protection is provided at a known cost; options buyers never have a margin call. For speculators, MGEX HRS wheat options offer seasonal volatility plays and liquidity to get in and out of positions when needed. For a more detailed look at hard red spring wheat options, call MGEX and request a copy of Examining Futures and Options. This booklet contains several examples of strategies that capitalize on MGEX options. For quotes, charts, trading strategies and other valuable information on MGEX spring wheat futures and options, check us out on the Web at For more information: or

8 CONTRACT HIGHLIGHTS FOR HARD RED SPRING WHEAT FUTURES AND OPTIONS (Consult the Rules and Regulations of the Exchange for complete contract specifications. For current contract specifications, consult your broker, contact the MGEX at or or see Hard Red Spring Wheat Futures Hard Red Spring Wheat Options Trading Hours Open Outcry 9:30 a.m.-1:15 p.m. (CT) M-F Electronic 7:32 p.m.-6:00a.m. (CT) S-F Trading Hours Open Outcry 9:30 a.m.-1:15 p.m. (CT) M-F Electronic 7:34 p.m.-6:00a.m. (CT) S-F Contract Unit Delivery Months 5,000 bushels March, May, July, September and December Underlying Asset One Minneapolis Grain Exchange Hard Red Spring Wheat futures contract (5,000 bushels) Daily Price Limit $.30 per bushel or $1,500 per contract Delivery Months March, May, July, September and December Minimum Price Fluctuation 1/4 cent per bushel or $12.50 per contract Minimum Price Fluctuation 1/8 cent per bushel or $6.25 per contract Deliverable Grades No. 2 or better Northern Spring Wheat with a protein content of 13.5% or higher, with 13% protein deliverable at a discount. Daily Price Limit $.30 per bushel (same as underlying futures) Nothing herein should be construed as a trading recommendation of the Minneapolis Grain Exchange. Information in this publication is taken from sources believed to be reliable but is not guaranteed by MGEX as to accuracy or completeness and is intended for the purpose of information and education only. The Rules and Regulations of the Exchange should be consulted as the authoritative source on all Exchange issues.