Markets Home

Active trader

Hear from active traders about their experience adding CME Group futures and options on futures to their portfolio.

Find a broker

Search our directory for a broker that fits your needs.

CREATE A CMEGROUP.COM ACCOUNT:

MORE FEATURES, MORE INSIGHTS

Get quick access to tools and premium content, or customize a portfolio and set alerts to follow the market.
Market Data Home

Real-time market data

Stream live futures and options market data directly from CME Group.

E-quotes application

Access real-time data, charts, analytics and news from anywhere at anytime.

CME DATAMINE:

THE SOURCE FOR HISTORICAL DATA

Explore historical market data straight from the source to help refine your trading strategies.
Services Home

Uncleared margin rules

Understand how CME Group can help you navigate new initial margin regulatory and reporting requirements.

Calculate margin 

Evaluate your cleared margin requirements using our interactive margin calculator.
Education Home

FX Insights from Macro Hive

Receive exclusive insights on key FX macro themes, volatility trends, and market events through our bi-weekly report.

Create a CMEGroup.com Account: More features, more insights

Get quick access to premium educational content, including expert-led webinars, a real-time trading simulator, and more.
      Course Overview
      • Learn About Agricultural Markets
      • Get to know Agricultural Options on Futures

      Grains/Oilseeds

      • Grain and Oilseed Overview
      • Learn about Corn Production, Use, and Transportation
      • Soybean Production, Use, and Transportation
      • Wheat Production, Use, and Transportation
      • Understanding Grains Volatility and Supply & Demand
      • Understanding Seasonality in Grains
      • Learn about Basis: Grains
      • Learn about Grain Convergence
      • How to Hedge Grain Risk
      • Grain Intramarket Spreads and Storage
      • Overview of Grain Intercommodity Spreads
      • Understanding Soybean Crush
      • Understanding The Grain Delivery Process
      • Variable Storage Rate
      • Understanding Fertilizer Futures

      Livestock

      • The Livestock Overview
      • Livestock Hedging and Risk Management
      • Fundamentals and Their Impact on Livestock Prices
      • Learn about Basis: Livestock
      • Understanding Seasonality: Livestock
      Introduction to Agriculture
      You completed this course.Get Completion Certificate

      Learn about Grain Convergence

      Also available in  |   |  | 

      Video not supported!

      Grain Convergence Overview

      Market participants who buy or sell physical grains and oilseeds are aware that the cash price in their local area, or what their supplier quotes for a given commodity, usually differs from the price that is quoted in the futures market.

      This price difference is because the price in a local market is made up of the futures price adjusted for such variables as freight, handling, storage and quality, as well as supply and demand factors impacting that particular area. Even in the same market where delivery occurs, the cash price will typically differ from the futures price, predominately due to storage.

      However, as the delivery month of a futures contract approaches, the cash price and the futures price come together, or converge, and it is this convergence that makes hedging effective.

      This module will discuss the concept of convergence in the grain markets and its importance for effective hedging.

      Hedging in the Grain Market

      Hedging in the grain market is based on the principle that cash market prices and futures market prices are highly correlated and tend to move up and down together because they are affected by the same economic and market factors. 

      Convergence occurs because futures positions can be converted into cash at expiration. 

      Both correlation and convergence are keys to effective hedging. It is what makes it possible to reduce the risk of a loss in the cash market by taking an opposite position in the futures market; in other words, selling futures if you are short in the cash market, and buying futures if you are long in the cash market.

      Taking the opposite position allows a loss in one market to be offset by a gain in the other market. Convergence assures that hedgers can expect a predictable relationship between cash and futures prices when they merchandize cash grain and simultaneously offset their futures hedges.

      When you hear a hedger talking about managing basis, which is the relationship between cash and futures prices, they are speaking about the predictability of the cash/futures price relationship, and this is driven by convergence.

      Arbitrage

      Continuous market forces ensure that the price relationships between cash grain and futures markets stay in line and that convergence takes place. If the cash and futures prices significantly diverge from one another, market forces will act to bring the two prices back in line. This is called arbitrage.

      If the cash price is below the futures price, it will signal a profit opportunity to simultaneously buy grain in the cash market and sell it in the futures market to take advantage of that price discrepancy. Grain warehouses that have been approved to deliver on futures will quickly act to capitalize on that opportunity, which will then bring the two prices back in line.

      Conversely, if cash prices are above the futures price, it signals a potential profit opportunity to simultaneously sell in the cash market and buy grain futures. Here an arbitrageur holds futures positions to delivery, loads out and uses the loaded-out grain to fulfill his cash market obligation. This action will bring the cash and futures prices back in line, drive convergence and quickly minimize any price disparities.

      Thus, arbitrageurs help preserve the relationship between the cash and futures markets and ensure that convergence takes place by the time a contract expires.

      Without this activity, futures markets may have little correlation to the cash market, making it difficult for hedgers to transfer their unwanted risk, which is the foundation upon which the futures markets were established.


      Test your knowledge

      Related Courses
      /content/cmegroup/en/education/courses/introduction-to-agriculture/grains-oilseeds/learn-about-grain-convergence
      • {{ course.name }}
      Previous Lesson
      Next Lesson
      Course Overview
      Get Completion Certificate
      Previous Lesson Next Lesson
      • YouTube
      • Twitter
      • Facebook
      • LinkedIn
      • Instagram
      • Rss

      CME Group is the world's leading and most diverse derivatives marketplace. The company is comprised of four Designated Contract Markets (DCMs). 
      Further information on each exchange's rules and product listings can be found by clicking on the links to CME, CBOT, NYMEX and COMEX.

      © 2021 CME Group Inc. All rights reserved.

      Disclaimer  |  Privacy Policy  |  Cookie Policy  |  Terms of Use  |  Data Terms of Use  |  Modern Slavery Act Transparency Statement  |  Report a Security Concern