Today is first notice day for March ’20 grain futures. What is the fuss all about?

First Notice refers to the notification the clearing house gives a member firm that one of their customers has taken delivery of a futures contract. Beginning at the close of business yesterday and running through last trading day, companies eligible to make delivery on futures contracts are able to turn short futures positions into sales of actual cash grain per the rules of the futures contract. Likewise, anyone who held a long futures position in a March grain contract as of the close of business yesterday ran the risk of that long futures position “getting delivered on,” in which case the long futures position turns into ownership of the physical commodity in a delivery location per the rules of the exchange. The long customer’s brokerage firm pays the full value of the contract–5,000 bushels per futures contract at yesterday’s closing price, subject to any discounts or premiums for the delivery location & quality–and begins to accrue storage liability tomorrow.

Making and taking delivery (also called issuing & stopping) is relatively rare compared to the millions of futures contracts that trade daily in the most active contract months. However, it is a critical mechanism of commodity futures markets that ensures market integrity and utility for the grain industry as a tool for managing price risk.  It is through the delivery process that futures markets converge to physical cash grain markets.

Grain elevators that are registered as “regular” for delivery by the exchange for a particular futures contract are able to arbitrage differences between the value of the physical commodity at their location and the futures price. If a trader at a delivery house in Chicago is able to buy cash corn at $3.55 and deliver on the futures contract at yesterday’s closing price of $3.64 1/2, there is an arbitrage opportunity. Competition to capture that arbitrage will force futures and cash markets to converge, ensuring that futures markets–at least eventually–converge to the actual value of the underlying commodity.

Traditionally, a large volume of deliveries is bearish futures prices as it suggests that cash markets may be weak and futures relatively overpriced. Conversely, a lack of deliveries can be supportive, but it also depends on the spread price from the spot futures month to the next most active month. Even in an oversupplied market, if the carry is wide enough to adequately compensate the delivery house for the cost of storing grain the warehouse will be less inclined to make deliveries.