An effective delivery system for the Chicago Board of Trade (CBOT) Soybean Oil futures contract is a critical issue for market users throughout the United States and the world. The contract is universally recognized for providing an accurate price benchmark and an effective risk management tool for a broad spectrum of users. Implementing a contiguous delivery system that is centrally located in the major soybean oil production and consumption areas enables the contract to accurately reflect the US cash market.
Like most benchmark futures contracts, actual delivery is rare; most commercial market participants use the contract for risk management rather than as a source for physical soybean oil. However, while not a substitute for cash market trade, the soybean oil physical delivery system performs the function of assuring efficient cash-futures convergence and that an effective forward curve is discovered to assure soybean oil is efficiently allocated through time.
Each contract represents 60,000 pounds of crude soybean oil. Exact specifications of deliverable soybean oil may be found in Chapter 12 of the CBOT Rulebook. The contract is settled via physical delivery from approved warehouses located in six territories: Illinois (the portion of the state of Illinois north of latitude 38˚00’ N), eastern (the portions of the states of Indiana and Kentucky west of the Ohio-Indiana border and its extension and north of latitude 38˚00’ N), eastern Iowa (the portion of the state of Iowa east of longitude 93˚50’W), southwest (the portions of the states of Missouri and Kansas north of latitude 38˚00’N and east of longitude 97˚00’W), northern (the portion of the state of Minnesota south of latitude 45˚10’N and South Dakota south of latitude 45˚10’N and east of 97˚00’W), and western (the portions of the states of Iowa west of longitude 93˚50’W and Nebraska east of longitude 97˚00’W). A list of delivery warehouses is attached in Exhibit 1. Soybean Oil futures have over 1.5 billion pounds or 24,980 contracts of delivery capacity.
The delivery instrument for Soybean Oil futures is an electronic warehouse receipt generated in the CME Group delivery system. Each Soybean Oil warehouse receipt conveys ownership to the receipt holder of 60,000 pounds of crude soybean oil in the issuing warehouse.
The first delivery day of an expiring contract is the first business day of the contract month. The last delivery day is seven business days following the last trading day, which is the business day preceding the 15th calendar day of the contract month.
If a firm decides to make or take delivery against a futures position, the following procedure takes place to exchange a futures position for a warehouse receipt. The delivery process extends over three business days except for last intent day processing when the process is reduced to two days. This cycle is repeated for each delivery day in the delivery month until the last trading day. Open positions after the close of trading on the last trading day must be settled by delivery no later than the seventh business day following the last trading day or by an exchange of futures for related position no later than the sixth business day following the last trading day.
The three-day delivery process:
Day one (intention day/position day)
The holder of a short futures position (the short) initiates delivery by notifying the exchange before 4 p.m. that they want to make delivery. Holders of long futures positions (the longs) are ranked according to the amount of time they have held the long futures position (oldest is ranked first).1
After assignment, reports are available to long and short clearing members notifying them of their assignment.
Day two (notice day)
Invoices are provided to the long and short clearing members.
Day three (delivery day)
The warehouse receipt is delivered to the long; the long makes payment through the exchange delivery system during the 6:45 a.m. collection cycle.
Warehouse receipts are created by warehouses approved by the exchange. If a firm acquires a warehouse receipt through the futures delivery process (i.e., takes delivery of a warehouse receipt), the firm can:
- Carry the receipt and pay a storage charge to the issuer of the receipt. For the Soybean Oil futures contract, the rate is 5/10 of one cent per day per 100 pounds or approximately $90 per contract per month.
- Sell the warehouse receipt to someone else at a negotiated price.
- Redeliver the warehouse receipt by selling a futures contract and initiating delivery of the warehouse receipt to a new owner on the current or future contract expiration. There is no limit on how long a market participant may carry and pay storage on an outstanding warehouse receipt.
- Request load-out.
Warehouse receipts do not expire and there is no limit on how long an owner can carry them. A daily record of outstanding warehouse receipts is available each trading day in Deliverable Commodities Under Registration report available here.
Storage charges are paid and collected through the Exchange’s delivery system every month. On the 18th calendar day of each month, the clearing firm for the owner of each outstanding warehouse receipt is charged storage for the preceding month up to and including the 18th calendar day. If an outstanding warehouse receipt is delivered to a new owner before the next storage collection day, the unpaid accumulated storage is credited to the buyer in the delivery invoice.
For example, suppose an owner of a warehouse receipt is charged storage on June 18, which covers the storage period from May 19 through and including June 18. Further, suppose there are 30 calendar days of storage until the next storage collection on July 18. If the owner tenders the warehouse receipt on June 29 for delivery on July 1, that owner would be responsible for storage accumulated from June 19 through and including the day of delivery (July 1) or 13 days of storage. The invoice for the redelivery would credit the buyer with 13 days of storage. The new owner’s storage responsibility would start on July 2. If the new owner is still holding the warehouse receipt on July 18, that new owner will be charged the full storage for the previous month (June 19 through and including July 18). However, because the new owner was credited with 13 days of storage on the redelivery date of July 1, the effective cost to the new owner at the July 18 collection is 17 days of storage from July 2 through and including July 18.
Since warehouse receipts eligible for delivery originate from approved warehouses across six delivery territories, the delivery value of a warehouse receipt is based on territory differentials. Territory differentials are set based on an Automatic Adjustment Mechanism, which sets new delivery differential each January. The new January delivery differentials are announced each September.
The purpose of the Automatic Adjustment Mechanism is to equate deliveries across each territory based on that territory’s soybean crushing capacity. If a territory has more outstanding receipts relative to that territory’s crushing capacity compared to all other territories, it receives a discount with the January reset while a territory that has fewer outstanding receipts relative to that territory’s crushing capacity compared to all other territories receives a premium with the January reset. A detailed primer on the Automatic Adjustment Mechanism may be found here.
The Soybean Oil futures territorial delivery differentials, in cents per hundredweight, for Soybean Oil futures delivery months through December 2021 are as follows:
The Soybean Oil futures territorial differentials beginning with the January 2022 contract month and ending with the December 2022 contract month shall be as follows:
The owner of warehouse receipts may choose to load-out physical soybean oil via rail tank car or truck at any time. To begin the load-out process, the warehouse receipt owner’s clearing firm requests load out of the receipts in the exchange delivery system and the owner submits loading orders to the issuing warehouse. It is the responsibility of the warehouse receipt owner to furnish tank cars or trucks.
Loading via rail
The issuing warehouse’s loading obligation begins on or before the third business day following the date rail tank cars are ready for loading or warehouse receipts are cancelled, whichever occurs later. Loading orders received prior to 2:00 p.m. are dated that date while loading orders receive after 2:00 p.m. are dated on the following business day. The warehouse is responsible for loading each business day at the warehouse’s registered daily rate of loading. If there is a line-up of Soybean Oil futures loadouts, the warehouse is responsible for loading in the order that receipts are cancelled and conveyance placed at its daily rate of loading each business day. Loading against all rail orders scheduled for a given business day shall be completed before loading any orders scheduled for a subsequent business day. The warehouse is also required to hold tank cars after loading free of expense to the buyer (except for car rental) until the grade is ascertained. If the grade does not meet contract specifications, the warehouse is responsible for unloading and reloading oil that meets contract specifications free of expense to the owner.
Any warehouse not served by a Class I railroad must compensate the taker of delivery for any switching charge and/or rail rate to the nearest Class I railroad interchange point.
Loading via truck
The issuing warehouse is required to load tank trucks at a rate per business day equivalent to the warehouse’s registered daily rate for loading jumbo rail tank cars. Truck loading orders received prior to 2:00 p.m. are dated that date while loading orders received after 2:00 p.m. are dated the following business day. The warehouse shall advise the owner by 4:00 p.m. on the loading order date of the loading date and the tonnage due. Loading against truck orders scheduled for a given business day shall be completed before loading begins on any orders scheduled for a subsequent business day. The warehouse is responsible for loading as promptly as possible on the scheduled loading day but will not be responsible for any truck demurrage if the loading is completed on the scheduled loading day.
Samples are drawn at the time of loading by an official sampler approved by the exchange. The sample consists of two one-quart samples and one half-gallon sample. The warehouse forwards one of the one-quart portions to the owner. The half-gallon portion is retained by the warehouse as a referee sample for at least 30 days following loading.
The warehouse has the option of having the grade determined by one of the following methods:
- Official chemist analysis2 (warehouse to pay cost).
- Comparison between the owner and the warehouse’s analysis.
Final invoice is outside the exchange delivery system and is handled directly between the owner and the issuing warehouse. Final invoices will contain occurred expenses that follow the cancellation of warehouse receipts such as:
- Unpaid storage. For rail load-out, storage continues through and including the date that warehouse receipts are cancelled. Storage begins again on the sixth calendar day after the cancellation date if loading has not been completed and will continue until and including the date that loading has been completed. For truck load-out, storage continues through and including the date of loading.
- Overfill or underfills. The warehouse loads each conveyance to its stenciled capacity and any excess or deficiency for the amount on the warehouse receipt is settled at the market price on the date of loading.
- Loading charges. The maximum charge for loading rail tank cars may not exceed 1/40 of one cent per pound and the maximum charge for loading tank trucks may not exceed 1/25 of one cent per pound.
- Freight charges. Compensation for any costs associated with switching or rail costs to the nearest Class I interchange if applicable.
- Refining or sludge charges. A warehouse that loads a higher grade than required that also has a refining loss that is less than five percent may receive a premium of one percent of the cash market value at the time of loading for each one percent under five percent loss. For rail tank cars containing more than 150 lbs. of sludge and trucks containing more than 125 lbs. of sludge an allowance is made to the owner at 50 percent of the market price at the time of unloading.
Exhibit 1: Soybean Oil Delivery Warehouses
|FIRM / FACILITIES||REGULAR SPACE (POUNDS)||MAXIMUM WAREHOUSE RECEIPTS ALLOWED TO ISSUE|
|AG PROCESSING, INCORPORATED|
|Eagle Grove, IA||20,000,000||333|
|Mason City, IA||36,000,000||600|
|Sergeant Bluff, IA||21,000,000||350|
|St. Joseph, MO||24,000,000||400|
|ARCHER DANIELS MIDLAND CO.|
|Des Moines, IA||44,421,696||740|
|BUNGE NORTH AMERICA (EAST), LLC|
|BUNGE NORTH AMERICA (OPD WEST), INC.|
|Cedar Rapids, IA||3,840,000||64|
|Cedar Rapids (E), IA||9,300,000||155|
|Iowa Falls, IA||20,000,000||233|
|Kansas City, MO||10,364,000||172|
|Creve Coeur, IL||50,000,000||833|
(Harvest States Oilseed Processing and Refining division)
|INCOBRASA INDUSTRIES, LLC|
|LOUIS DREYFUS COMPANY CLAYPOOL HOLDINGS LLC|
|MINNESOTA SOYBEAN PROCESSORS|
|Gibson City, IL||45,600,000||760|
|SOUTH DAKOTA SOYBEAN PROCESSORS, LLC|
|ZEELAND FARM SERVICES, INC.|
- If there are multiple long futures positions with the oldest date, delivery is matched among the oldest long position holders for size, i.e., matches are made to reduce the number of occurrences where outstanding receipts from a particular warehouse are divided among multiple long position holders.
- Official Chemists are Eurofins Scientific, Inc. and Barrow-Agee Laboratories.
The Agricultural Research team has tried to accurately outline the procedures for delivery and load-out of soybean oil covered by CBOT Soybean Oil warehouse receipts. However, CBOT Rulebook Chapters 7 and 12 contains official rules that apply.