Delivery Process at the CBOT
Futures Market Delivery Process and What It Indicates About the Price Outlook
The one and only thing that keeps the futures markets relevant as the most valuable grain marketing tool is futures contracts can be exchanged for real commodities at the end of the trading period of each contract month.
In March, if cash corn prices are below the March futures, a seller of cash corn can deliver his corn on a March futures contract and be paid the March futures price instead of the lower cash price.
In March, if cash corn prices are above the March futures, a buyer of cash corn can buy corn via a March futures contract and pay the March futures price instead of the higher cash price.
Likewise, for May, July, September and December corn futures contracts and all other commodities in their respective futures contracts.
Therefore, during the delivery period, the futures price and the cash price come together, which is what makes the futures market a valuable marketing tool. Another way to say that is the ability to give delivery or take delivery of cash grain through a futures contract is what keeps the futures market honest.
The number of futures contracts assigned delivery is an important market indicator.
The more contracts assigned delivery each day during the delivery period, the more bearish for that market. Very few deliveries or no deliveries is friendly for the commodity’s price.
Detailed Example: 27 February 2019
Today was the last trading day before first notice day of deliveries assigned on the March 2019 CBOT grain and oilseed contracts.
The significance for traders is this was the last day to liquidate long (buy) futures positions in all the March futures contracts to avoid the possibility of being assigned a delivery of physical grain or oilseed product. If you were assigned a delivery tonight, your futures broker will call you tomorrow morning and inform you that you no longer have a long March futures position, but you now own 5,000 bushels of grain or beans (or 100 tons of soybean meal or 60,000 pounds of soy oil, etc.) at some CBOT approved warehouse (grain elevator).
Since you have to pay the current cash price for the entire value of the contract, your broker will be a little bit apprehensive. Your choices are to pay for the commodity and load it out of the elevator (for a substantial load-out fee), sell the commodity for cash to the elevator where it is stored, or redeliver the commodity through a short (sold) futures contract, in which case you would tell your broker to sell a March 2019 futures contract and he will notify the back-office people of his brokerage firm that you are going to redeliver your newly acquired commodity. He will give the back office the particulars of where your commodity is stored and the back office clerks will inform the CBOT clerks of the delivery details. The CBOT will then assign those same bushels to a March 2019 corn long position.
If assigned delivery, most likely you will redeliver the commodity unless you are Cargill, Poet, Bunge, Dreyfus, ADM, etc. You will be charged a brokerage commission when the futures contract was liquidated by the delivery, you will be charged interest on the entire market value of the contract for the 24 hours you held title to that commodity because your brokerage firm had to pay the CBOT in full for that commodity, you will be charged another futures commission for selling (short) the futures contract to redeliver and there will be some service fees charged to your account for the hassle. All in all, it could cost you 6 to 10 cents a bushel for the redelivery.
The first delivery notice for every delivery period is assigned to the oldest long position on the books for that month. In this example, that is March 2019 contract. The second delivery notice is assigned to the second oldest March long position, etc., until all the delivery notices for a given day have been assigned in chronological order from the oldest long. Note it is the holder of the short position who decides if and when he wants to make the delivery. The holder of the long position could be assigned delivery any business day of March. Note that March futures contracts quit trading around the 14th of the month (specifically, the last business day before the 15th of the month), so if you are still long after the last trading day, you will NOT be able to redeliver the corn until May.
Each business day, the futures exchange will report how many contracts were delivered, which brokerage firm gave delivery on behalf of one or more of its clients, which brokerage received delivery on behalf of one or more of its clients and the trade date of the last long March futures position assigned delivery.
So, you ask, why is this delivery information important to you as a grain marketer? Several items are indicative of market conditions.
If there are a large number of deliveries, that means nearby supplies are plentiful and it is a bearish indication. Likewise, if deliveries are light, it is a bullish indication. Light deliveries mean the owners of the physical commodity want to hang-on to the real commodity.
If the last contract assigned delivery on a given day was bought ten or more months ago, that is generally considered a bearish indication because there are a lot more longs (bought) contracts which could be assigned delivery and the holders of those positions will most likely want to sell March futures to offset their long position. The market’s perception is bearish if the last delivery assigned was a long time ago. Likewise, if the last long position assigned a delivery was traded a few days ago, there will not be many more deliveries and that is considered a bullish indicator.
Lastly, you want to know who was assigned delivery. If it was a brokerage firm known to have clients with a name of Cargill, Bunge, Dreyfus, ADM, CB&G, CHS, etc., those are grain companies who wanted the commodity to meet their needs. They are collectively referred to as “strong hands” or “strong stoppers” because they are likely to keep the grain from being delivered in the futures again. If the brokerage firms assigned deliveries were mostly Merrill Lynch, A. G. Edwards, Morgan Stanley, and other primarily stock brokerage firms whose clientele are mostly non-grain people, you could correctly conclude their customers will be redelivering the commodity the next business day. These firms’ clients are collectively referred to as “weak hands” and “weak stoppers” and that is a bearish indication because those bushels will get redelivered many times until the “big boys” decide to buy futures and accept delivery at a lower price than it was when the deliveries started. Meanwhile, Cargill, ADM, and friends were collecting storage at triple the normal rate on the bushels in their warehouse for all those days the weak hands owned the grain plus they did not have their money tied-up in the cash grain bushels. On the outside chance that a receiver of the delivery wanted to load-out the bushels, the grain company will make the load-out fee cost prohibitive unless they want to get rid of the grain.
Usually, the daily delivery assignments are posted between 8:30 and 9:00 PM Central time on the CME website, but not tonight. I called the CME delivery hotline and they said they were dealing with a problem, but they expected to have the delivery information posted within 30 to 45 minutes. That was 90 minutes ago. Computers go haywire at the worst times. Their number, by the way, is 312 930 3172. I was shocked a real person answered the phone. What a refreshing surprise that was!
I am going to bed. The web address for the delivery report is:
Delivery Process at the CBOT on Friday 28 June 2019, First Notice Day for July Corn
All these lots (one lot = 5,000 bushels) of corn were put out for delivery by Cargill. Note the official CBOT allocation:
CONTRACT: JULY 2019 CORN FUTURES
INTENT DATE: 06/27/2019 (a Thursday)
DELIVERY DATE: 07/01/2019
LOCATION: ZONE 3
Facility Number 1754 CARGILL, INC. 439 lots at SPRING VALLEY, IL
Facility Number 1761 CARGILL, INC. 351 lots at LACON, IL
This delivery information was posted between 8 and 9 PM Central Time yesterday by the exchange. All this tells us is who is going to deliver, how many bushels and where the corn is located. What we also want to know is who will be assigned these 790 lots (5,000 bu per lot).
CBOT computers scanned all long (buy) positions of July corn to sort them by purchase date from the oldest buy position to the newest buy position.
This morning (June 28th), the holders of the 439 oldest long July corn positions will be informed that on Monday, July 1st, they will be the proud owner of 5,000 bushels of corn for each long contract they hold and the corn is in a Cargill warehouse in Spring Valley, Illinois with the CBOT designation of Facility #1754.
The next oldest 351 long July contract holders will be informed that on July 1st, they will own 5,000 bushels of corn at Cargill elevator in Lacon, Illinois, CBOT facility #1761.
On Monday, July 1st, the brokerage firms that have clients holding those 790 long July contracts will pay the CBOT the July corn futures settlement price of today’s close times 5,000 bushels. The brokerage firm paying the money will debit each client’s trading account that cash price times the number of bushels assigned delivery.
The CBOT will pay that same cash price into the trading account of the seller (Cargill in this case) of the July futures who chose to deliver that corn on their short July corn position.
When Monday’s trading account statements are calculated, Cargill will have 790 short July corn futures positions removed from its trading account because Cargill delivered that corn. Each trading account assigned delivery will have their long (buy) July position removed from their futures trading account because they received delivery. Cargill will have the money instead of the corn and those who received the corn deliveries will have the corn instead of futures. Cargill’s brokerage firm will apply the cash value of the corn to Cargill’s futures account.
We, as corn marketers, want to know:
1) Who was assigned delivery?
If the brokerage firm assigned delivery was Merrill Lynch, A. G. Edwards, E.F. Hutton, etc, it means their customer is likely people such as Sally Ward at 314 East Fourth Street, Macon, GA.
However, if the delivery was assigned to a client of R. J. O’Brien, ADM Investor Services, or Allendale, etc., the receiver of the deliveries is probably some user of corn such as Smithfield, Perdue, Poet Biorefining or ADM.
If Sally Ward received the corn, she is what the market calls “weak hands”. She does not want the corn. She is not going to haul the corn out of Cargill’s elevators, so she will redeliver those lots of corn the next business day (Tuesday, July 2nd) by shorting (selling) July corn futures today (Monday July 1st) and telling her broker to inform the CBOT that she will deliver those lots on Tuesday, the day after she takes ownership of those lots on Monday.
Let’s say Sally Ward had the oldest long position of four lots (20,000 bushels). Sally’s brokerage firm will be billed for the cash corn Sally received through her futures account. Sally’s firm will pay the CBOT and call it a loan to Sally in order to pay for the corn. The interest rate on that money will be at a loan shark rate for 24 hours.
When Sally Ward redelivers her corn the next business day, the next oldest four remaining July long positions will receive the delivery. If the new owners are “weak hands”, they will redeliver the same corn the next business day and that re-delivery process could go on for days or until July corn quits trading on or about the 12th of July. However, deliveries can be made any business day in July.
If Poet Biorefining received those four lots, the market calls that “strong hands”. They have the money and the physical capability to remove that corn from the Cargill grain elevator. Cargill will charge Poet a load out fee and away goes the corn from Cargill to Poet or the two firms likely will swap futures for cash corn closer to where Poet wants the corn.
Meanwhile, all this corn is still in Cargill’s elevator and each 24-hour owner of that corn is paying (through their futures trading account to the CBOT to Cargill’s trading account) storage for 24 hours, probably a penny or more per bushel per day. It is gravy money for Cargill! They were storing the grain for only the market carry and now they are getting market carry plus a penny a day! After Sally pays a high interest rate on the cash dollars her brokerage firm used to pay for the corn and commission for liquidating the July futures when the delivery was assigned and pay another commission to the brokerage firm when she redelivers the corn. All-in-all, she will spend 8 to 12 cents a bushel.
If the corn deliveries are to “weak hands”, the market thinks that is bearish. If the deliveries are to “strong hands”, the market thinks that is bullish.
2) What is the date of that long July corn that was assigned that 790th delivery lot?
If that 790th long July 2019 corn position was established 13 May 2018, the market will think there are a lot July corn contracts yet to be liquidated or delivered and that is bearish (negative to price of corn). However, if that 790th delivery was to a July 2019 long established on June 24th, 2019, the market concludes there can’t be many more deliveries! In which case, that is considered bullish for the price everything else being equal.
The futures accounts assigned deliveries are often referred to as “stoppers”. Likewise, we have “strong stoppers” and “weak stoppers”. Poet is a strong stopper and Sally Ward is a weak stopper.
Why would Cargill deliver 3.95 million bushels of corn?
I am sure Cargill does not want to see all that corn leave its facility with all our planting problems. Steve Bruce said getting corn out of the Lacon facility is especially difficult and Spring Valley is not a piece of cake. I am sure Cargill is delivering this corn to collect that penny a day per bushel storage… that is $39,500 per day for Cargill.
Also note Cargill, like all grain warehouses, can set their load out fee at whatever price they choose. If Sally Ward or Poet contacts Cargill to arrange for load-out, Cargill just might tell then the load-out fee will be 45 cents per bushel… That will stop any load out of corn.
Market Outlook for Soybeans November 1, 2019
Delivery assignments on the November soybean contract began Wednesday, October 30 after the close of trading of the CBOT. That is when all those holders of short November bean futures can, if they wish, deliver 5,000 bushel “lots” of physical soybeans on their 5,000 bushel futures contracts.
When a lot is “put out” for delivery on a futures contract, the CBOT assigns those deliveries to the oldest long (buy) November (in this case) bean position first, then the second oldest, then the third oldest, etc.
November 2019 beans settled 4¾ cents lower Wednesday afternoon than where they settled on Monday afternoon as the holders of long November beans sold out their long positions and merchandisers sold out long November positions they held for their own hedge account and November basis contracts for farmers to avoid any chance of being assigned delivery.
First notice day (first notice of deliveries assigned to a given futures contract month), soybean deliveries against the November 2019 (SX19) contract totaled 1,659 contracts. The CBOT reported that all long November bean contracts through the 10/28/19 and some established on October 29th were assigned delivery as of Wednesday afternoon. Most of those bean deliveries were assigned to “weak hands”. That means people who have no use for the soybeans and will redeliver those beans in the futures market the next business day. On Wednesday afternoon, CBOT announced J.P. Morgan stopped (received) 115 of those 1,659 November bean delivery lots. Who is a brokerage client of J. P. Morgan? Cargill. But the vast majority of the bean deliveries on first notice day went to “weak hands”.
If the deliveries had been to “strong hands”, the market would not expect many of the beans to be redelivered the next business day. “Strong hands” are people who use soybeans as a part of their commercial business.
So, it was not surprising last night that the CBOT announced 1,426 contracts (just 233 contracts less than Wednesday) were assigned for delivery today (November 1st). JP Morgan (i.e.: mostly Cargill) stopped all the deliveries posted last night.
Yesterday, November beans settled up ¾ of a cent. Presently, November beans are up 7½ and have been up 9 ½. January beans are up 4 cents and have been up 6 and the rally is mostly because Cargill took all the beans the market had “put out” for delivery.
With soybean harvest far from finished, why would Cargill stop (take delivery) of 7.705 million bushels of beans? I can think of a few reasons.
Gosh, maybe the 2019 soybean crop was not as large as USDA said it was. Maybe Cargill has very large export orders to fill. Maybe Cargill is planning to increase its pace of soybean crush.
As far the price outlook for soybeans, Cargill stopping all those beans is obviously friendly for the bean market as opposed to Sally Ward and friends being assigned those bean deliveries.