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

University of Georgia - Department of Agricultural & Applied Economics

Philip Garcia

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

Scott H. Irwin

University of Illinois at Urbana-Champaign

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 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)

University of Georgia - Department of Agricultural & Applied Economics ( email )

Athens, GA 30602
United States

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 Irwin

University of Illinois at Urbana-Champaign ( email )

344 Mumford Hall
1301 W. Gregory Dr.
Urbana, IL 61801
United States
217-333-6087 (Phone)

HOME PAGE: http://https://scotthirwin.com/

Aaron Smith

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

United States

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