Wheat Futures Price
The wheat futures price is different than the wheat price in the cash (physical) market. Generally, the price of
a commodity for future delivery is higher than the cash price due to carrying costs (insurance, interest, and warehousing
fees). This is called contango. The opposite of contango is backwardation. Backwardation is when the price of a commodity
for future delivery is lower than the cash price Backwardation is normal in a “seller’s market.”
When you trade wheat futures, your futures price depends on where you get into the market.
After you post your initial margin, your profit or loss depends on where you enter and exit the market (minus transaction
costs). Delivery of the product seldom occurs. Futures contracts typically are used as a price protection mechanism or an
investment tool, not as a method of selling or obtaining a product.
For
example:
The contract size for wheat is 5,000 bushels of hard red winter
wheat. So each $.01 move equals $50. As the market moves your account value adjusts. If your account value drops below the
maintenance margin a margin call is due. A margin call can be met by offsetting positions or adding money to your account.
The KCBT wheat can be delivered in Kansas City or in Hutchinson, Kansas, in March, May,
July, September and December. With the onset of the July 2008 contract, wheat can also be delivered in Salina/Abilene and
Wichita, Kansas at price differentials. The ability to deliver is necessary to maintain the economic relationship between
the cash and futures markets.
