The Delivery Market and Delivery Process

• System which links the cash and futures markets.
• Causes convergence - the act of bringing futures and cash market together to prevent mass variances.
• Allows a long futures position to convert to cash.

DVE vs CIF

• Takers view
• Wants to minimize cost by buying at the lower price
• Use DVE as protection against a cash short position
• Wants to cancel certs when DVE is cheaper than CIF
• wants to be long the nearby spreads
• putting themselves in position to own certs

• Makers view
• Wants to maximize profit by selling at the highest price
• Use the difference to decide which is better option
• When DVE is higher than CIF they would want to make delivery

What is the delivery market?

What is DVE?

Resources

• A big shout out and thanks to these following people for their wonderful guidance and help on this project.
• Mark Van Emon
• Kaitlyn Dunn
• Chris Keistler
• Jeff Wilson

Certificates "Certs"

The Delivery Market and Delivery Process

• Delivery Value Equivalent
• Differential - established number value based on location
• Par - zero differential
• Premium - amount added to DVE for certain grades
• Load out - fee associated with the cost of physically loading the grain out of a facility
• This fee is consistent at every facility
• DVE = frt/bu + differential + load out

• A certificate starts with a maker who issues a certificate that gets assigned to the oldest long through the CME.
• When the cert is issued to the oldest long it considered to be stopped and the taker must pay for the grain. The storage fees commence.
• There is a set storage fee of 0.00165 per day to the maker until they decide to take delivery.
• The taker now has three options
• Carry certificates and pay storage fees
• Redeliver
• Sell certs
• Cancel the cert and issue loading orders

Terms

We once again want to emphasize the importance of using hand calculations to have a full understanding of how this system works. This matrix is meant to be used after having a good idea of how the numbers are figured.

Overall Objective

• Delivery Point - the locations at which commodities may be delivered to satisfy a futures contract
• Delivery - the transfer of the physical commodity in satisfaction of a futures contract.
• Short - position of selling with expectations that the asset will fall in value
• Long - position of buying with the expectation that the asset will rise in value
• Maker "Issuer" - entity that is in the short position. They are the one who makes delivery
• Taker "Stopper" - entity that is in the long position. They are the one who takes delivery

Example Scenario

• Gain a basic understanding of the delivery system.
• Realize that the outputs of a matrix are only as good as the data put into it.
• A very vital part of the system is thoroughly understanding the delivery process and equation. Therefore, manual calculations are very important. This matrix should be used only after you have a general understanding of how the numbers are figured.

Lenice Jensen & Brett Wengert

How does this bring value to our company?

Agenda

• Exporter sells 10 million cash aug 20th - sep 10th to China.
• Instead of covering all of it with the CIF market, they will increase the values against the cash short. The exporter can hedge their cash short by buying the futures spread.
• To buy the spread they will buy August futures and sell November. This protects their cash short by establishing a nearby futures position to stop certs.
• The exporter would buy the spread if cash markets were thin and illiquid and if the CIF market was trading above DVE. If the CIF market was trading below DVE, the exporter would continue to buy CIF until the market moved to DVE values.

• Terminology
• What is the delivery market?
• Why do we use it?
• DVE
• How is it figured and used?
• DVE vs CIF
• How do you decide to take/make delivery?
• How does this system give our company value?

• Increase knowledge for merchants and traders
• Educate for risk management decisions
• Create understanding of futures vs cash
• Increase employees knowledge with issuer and stopper responsibilities when delivering or taking grain
• Generate additional revenue at our delivery facilities
• Provides opportunity to generate revenue in spread trading positions

Why do we use the delivery system?

• Can be used as a way to originate or market grain.
• For every short there's a long, bringing grain to the cash market.
• As an exporter, use futures to protect you against a cash short position.
• Take delivery vs. buying CIF
• As an interior facility at a deliverable location you use the delivery system to market your grain.
• Make delivery vs. selling CIF