Supply

Delivery Process Helps Get U.S. Soy to Buyers

The Mississippi River Inland System plays a significant role in the U.S. soybean delivery system. On March 1, USSOY.org published a detailed article on the topic of this network of U.S. waterways. From July 1 through October 30, major maintenance will be taking place on the Illinois River, a key part of the system. The Chicago Board of Trade (CBOT) ruled that the impact to barge freight should be known because this maintenance is planned and well-advertised. Anybody taking delivery during the maintenance time period should pay attention to the forward barge spot rates, as this could impact the future months’ price spreads.

Soybean shipping certificates shall specify shipment from one of the warehouses or shipping stations currently regular for delivery and located in one of the following territories:

  1. Chicago and Burns Harbor, Indiana Switching District
  2. Lockport-Seneca Shipping District – When used in these Rules, the Lockport-Seneca Shipping District will be that portion of the Illinois Waterway below river mile 304 at the junction of the Calumet Sag Channel and the Chicago Sanitary & Ship Canal and above river mile 244.6 at the Marseilles Lock and Dam.
  3. Ottawa-Chillicothe Shipping District – When used in these Rules, the Ottawa-Chillicothe Shipping District will be that portion of the Illinois Waterway below river mile 244.6 at the Marseilles Lock and Dam and at or above river mile 170 between Chillicothe and Peoria, Illinois.
  4. Ottawa-Chillicothe Shipping District – When used in these Rules, the Ottawa-Chillicothe Shipping District will be that portion of the Illinois Waterway below river mile 244.6 at the Marseilles Lock and Dam and at or above river mile 170 between Chillicothe and Peoria, IL.
  5. Peoria – Pekin Shipping District – When used in these Rules, the Peoria-Pekin Shipping District will be that portion of the Illinois Waterway below river mile 170 between Chillicothe and Peoria, IL and at or above river mile 151 at Pekin, IL.
  6. Havana-Grafton Shipping District – When used in these Rules, the Havana-Grafton Shipping District will be that portion of the Illinois Waterway below river mile 151 at Pekin, IL to river mile 0 at Grafton, IL.
  7. Havana-Grafton Shipping District – When used in these Rules, the Havana-Grafton Shipping District will be that portion of the Illinois Waterway below river mile 151 at Pekin, IL to river mile 0 at Grafton, IL.
  8. Louis-East St. Louis and Alton Switching Districts – When used in these Rules, St. Louis-East St. Louis and Alton Switching Districts will be that portion of the upper Mississippi River below river mile 218 at Grafton, IL and above river mile 170 at Jefferson Barracks Bridge in south St. Louis, Missouri.[1]
Source: U.S. Army Corps of Engineers

Future Delivery ABCs

The following is a high-level description of the delivery process from the Chicago Board of Trade. Even though most participants in the futures market will never be involved in actual delivery, it is important for all traders to understand the delivery process, due to the impact on futures contract pricing.

Grains or oilseeds futures contracts represent a commitment to make or take delivery of the commodity at some point in the future. To avoid delivery, you need to offset or roll forward your futures positions before a contract goes into its delivery cycle. Most futures positions are offset or rolled forward, and only a small percentage of them are held for delivery.

As the delivery month of a futures contract approaches, the cash price and futures price converge. In many cases, the cash and futures prices may be nearly the same. Although most futures positions are not held to delivery, it is the possibility of delivery that causes the cash and futures prices to converge.

Delivery of a Futures Contract

As a futures contract nears its delivery month, those who are still holding open futures positions are notified by their Futures Commission Merchant (FCM) or broker that they must either close out their positions or be prepared to go through the delivery process, which is facilitated by CME Clearing.

A short position holder must be prepared to deliver the underlying commodity. The delivery instrument for Grain and Oilseed futures is either a shipping certificate or a warehouse receipt. Only warehouses approved by the exchange can register and deliver these certificates or receipts. Therefore, a short position holder looking to deliver must be an approved warehouse or already own a certificate or receipt previously registered by an approved warehouse.

A long position holder must be prepared to take delivery of the commodity and pay the full value of the underlying futures contract. The long position holder receives either a warehouse receipt or a shipping certificate which entitles them to obtain the physical commodity from an approved warehouse.

Delivery Process 

The delivery for the different Grain and Oilseed futures contracts follow a three-day delivery process.

Day 1 (Position Day): The first day of this delivery process is called position day. This is the day that the short position holder in the market indicates to CME Clearing that he intends to make delivery on his futures position and registers a shipping certificate in the CME Clearing delivery system. Also, starting on the first position day, each futures commission merchant (FCM) must report all their open long positions to CME Clearing. CME Clearing ranks the long positions according to the amount of time they have been open and assigns the oldest long position to the short position holder that has given his intention to deliver.

Day 2 (Notice Day): On day two, which is called notice day, the short position holder and long position holder receive notification that they have been matched, and the long position holder receives an invoice from CME Clearing.

Day 3 (Delivery Day): Day three is the actual delivery day. The long position holder makes payment to CME Clearing, and CME Clearing simultaneously transfers the payment from the long to the short position holder and transfers the shipping certificate from the short to the long position holder. Now the long position holder is the owner of the shipping certificate and he has several choices. He can hold the certificate indefinitely but must pay the warehouse that issued the certificate storage charges, which are collected and distributed monthly by CME Clearing. He can cancel the shipping certificate and order the issuing warehouse to load-out the physical grain into a conveyance that he places at the issuing warehouse. He can transfer or sell the certificate to someone else. Or he can go back into the futures market and open a new position by selling futures, in which case he now becomes the short position holder. He can then initiate a new three-day delivery process, which would entail re-delivery of the warehouse certificate he now owns. Note that he will continue to pay storage charges to the warehouse until he re-delivers the certificate.[2]

Delivery is serious business. CBOT Rulebook Chapter 7[3] is the definitive source on how this process works.

Alan Barrett
Alan Barrett

Director of Consulting

Doane Advisory Services

Alan Barrett is Doane’s project consultant and accomplished commodity economist with more than 25 years of experience in futures and cash markets with a focus on cotton, commodity projects, non-traditional agricultural products, transportation and supply chain studies. Alan spent six years as a commodity futures broker. His expertise encompasses feasibility studies of oilseed crushing plants (soybean canola, and cottonseed), grain elevators, export elevators, shuttle elevators, grain container operations, flourmills and other processing facilities. Alan also has conducted transportation supply chain studies for grains, oilseeds, fertilizer, coal, natural gas, crude oil, and petroleum products. Alan has considerable experience in non-traditional agricultural products such as coal, coke, natural gas, chemicals, hydraulic fracturing fluid, hydraulic fracturing proppants, glycerin, fertilizer, micronutrients, salt, limestone, cement, iron ore, pig iron, and steel, especially feed ingredients. Mr. Barrett has a BS and MS in Agricultural Economics from the University of Tennessee.