Agricultural Commodities

Feed makers and food processors that use grain as a raw material may fix the price at which they buy through futures, in case the price rises before they purchase. Producers who sell crops may fix their selling price, in case the price falls before they ship.

Grains and soft commodities

Agricultural commodities differ from metals dug out of mines and crude oil pumped from oil fields: they are crops grown and harvested on farms. This page calls corn, soybeans, and wheat grains. Crops such as sugar, coffee, cocoa, and cotton are called soft commodities¹. Some sources, such as the US futures firm StoneX, also include corn, wheat, and soybeans in the term¹. This page uses the term for crops like sugar and coffee, separate from grains.

Japan imports almost all of its corn, and most of it comes from the United States. About 70% of the corn is used as feed, and more than 80% of that feed corn goes into compound feed for hogs, dairy cows, and other animals. Corn for food is mainly processed into cornstarch, which becomes sugars and food ingredients².

The general mechanics of commodity derivatives are covered in Overview of Commodity Derivatives.

W Co. fixes its purchase price with futures

Two typical uses of futures are a buyer of raw materials protecting against a price rise and a seller protecting against a price fall. A hedger is a participant who takes a position in futures or similar contracts opposite to a position in the cash market, in order to limit losses from adverse price moves. This kind of trade is called hedging. Buying futures to protect against a price rise is a long hedge³.

Consider a hypothetical example in which a feed maker, W Co., plans to buy 50 tonnes (= 50,000 kg) of corn from an import trading company in three months. W Co. buys one corn futures contract (a contract size of 50 tonnes⁴) at 40,000 yen per tonne. Consider the cases where the futures price in three months is 48,000 yen or 32,000 yen. Assume the cash price equals the futures price plus 2,000 yen per tonne. This 2,000 yen is the gap between the cash and futures prices, the basis.

When the price rises, the purchase cost increases to 2.5 million yen, but the futures earn a profit of (48,000 yen − 40,000 yen) × 50 tonnes = 0.4 million yen, so the net cost is 2.1 million yen. When the price falls, the purchase cost drops to 1.7 million yen, but the futures lose 0.4 million yen, and the net cost is again 2.1 million yen. In the fall, W Co. ends up paying 0.4 million yen more than if it had not bought futures. The hedge result is that the cost stays at 2.1 million yen whether the price rises or falls.

Figure description

Profit and loss of a buyer of corn futures at 40,000 yen per tonne. The horizontal axis is the final futures price, and the vertical axis is the profit or loss per tonne. The profit or loss on one contract (50 tonnes) is 50 times this value. The profit or loss is a straight line that rises by the same amount as the price, is zero at 40,000 yen, and is a profit above that and a loss below it. At a price of 48,000 yen the profit is 8,000 yen per tonne, and at 32,000 yen the loss is 8,000 yen. For W Co., this profit or loss offsets the change in the cash purchase cost.

If the basis changes, the result changes too. Suppose the futures price in three months is 48,000 yen and the basis widens to 3,000 yen. The cash purchase price is then 51,000 yen and the purchase cost is 2.55 million yen. The futures profit stays at 0.4 million yen, so the net cost is 2.15 million yen. If the basis narrows, the net cost falls below 2.1 million yen⁵. The basis is the cash price minus the price of the nearest futures contract month³. Basis risk is the risk that the basis widens or narrows unexpectedly while a hedge is in place³.

A producer on the opposite side sells futures to fix a future selling price. When the price falls, the futures gain makes up for the drop in sales proceeds, but when the price rises, the futures loss offsets the increase in sales proceeds. A hedge limits losses, but it also gives up the gain from a favorable price move.

Statistics by crop year, and old crop and new crop

Many agricultural statistics are built on the crop year, which runs from one harvest to the next². The start of the crop year differs by crop and country. For US corn and soybeans, it begins on September 1 and ends at the end of August of the following year. For example, the 2026/27 crop year runs from September 1, 2026 to the end of August 2027, and the new crop harvested in 2026 is counted in that year². The CFTC glossary gives wheat as an example, as shown in the table³.

Because the crop year changes partway through the calendar year, the price of the old crop already harvested and that of the new crop yet to be harvested can move as if they were different goods. The period from spring until the new crop is harvested is sometimes called the weather market, and the period from after the harvest until before spring the supply-demand market².

The price of corn is strongly affected by crop conditions in the Corn Belt, the main US growing region. Because Japan's corn is imported, exchange rates and shipping freight also affect the price. Trends in soybeans and wheat, which farmers can plant instead of corn, also affect the price. The stocks-to-use ratio and export volumes published by the US Department of Agriculture (USDA), and demand for bioethanol, which depends on the price of crude oil, also affect the price².

Corn and soybean futures on Japanese exchanges

The Dojima rice market, regarded as the origin of exchanges, was approved by the Edo shogunate in 1730⁶. Today, corn futures and general soybean futures are listed on Osaka Exchange. The table below compares the two contracts. Both began trading on the Tokyo Commodity Exchange on February 12, 2013, and moved to Osaka Exchange on July 27, 2020. The items in the table follow Japan Exchange Group's contract specifications for corn futures and for general soybean futures⁴⁷.

Both are physically settled futures: if held to expiry, the actual commodity is delivered. For corn, the delivery locations are the exchange-designated piers at the ports of Kawasaki, Yokohama, Chiba, and Kashima⁴. For general soybeans, they are designated warehouses in Tokyo, Kanagawa, Chiba, Saitama, and Ibaraki⁷.

The buyer pays the delivery amount based on the delivery price, which is set by the volume-weighted average price (VWAP) of the day session on the last trading day⁴. The day session runs from 8:45 to 15:40 as the regular session, with the closing session at 15:45[^jpx-corn-spec].

If a position is closed out by resale or buy-back before expiry, only the confirmed difference in gains and losses is paid or received, which is cash settlement⁸. If held to expiry, it is finally settled by physical delivery⁴.

An option whose underlying asset is a futures contract is called an option on futures³.

Soft commodity specifications

As an example of a soft commodity, take the Coffee C futures of ICE Futures US in the United States. The contract size is 37,500 pounds, and Arabica coffee can be delivered from 20 countries. Each country carries a premium or discount, and the contract is settled by physical delivery⁹. Unlike the two Japanese contracts, which fix a single standard grade, some specifications widen the range of what can be delivered by applying premiums and discounts by origin.

Risks (weather, basis, and margin)

The period from spring until the new crop is harvested is sometimes called the weather market². A buyer who has not hedged is exposed to a price rise, and the seller of futures loses money on the same rise. There are also trades that take an index of temperature or rainfall itself as the underlying and protect against weather-driven swings in earnings.

As in the W Co. example, if the basis changes unexpectedly before the hedge is lifted, the net cost changes too. This is basis risk.

With physically settled futures, holding to expiry leads to physical delivery. Participants who do not want delivery close out by resale or buy-back before the last trading day. The mark-to-market and margin mechanisms used to settle gains and losses are explained in Futures Margin and Daily Settlement.

What this page does not cover

This page does not cover agricultural options on Japanese exchanges.

Notes

1. StoneX, "What are softs?" (financial glossary), the opening definition and the list of included commodities ("coffee, cocoa, sugar, corn, wheat, soybeans, fruit, cotton, rice, and livestock"). ↩ ↩²

2. Japan Exchange Group, "商品概要（とうもろこし先物）" (Product overview: corn futures; in Japanese), the three paragraphs of "とうもろこしとは" (What is corn: imports, uses, and price factors) and the paragraph of "とうもろこしの価格形成上の特徴" (Characteristics of corn price formation: old crop and new crop, the weather market and the supply-demand market, the crop year, and the example of the US crop year). ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶

3. U.S. Commodity Futures Trading Commission, "CFTC Glossary" (Futures Glossary), the entries "Crop Year", "Basis", "Basis Risk", "Hedger", "Long Hedge", and "Option on Futures". ↩ ↩² ↩³ ↩⁴ ↩⁵

4. Japan Exchange Group, "制度概要（とうもろこし先物）" (Contract specifications: corn futures; in Japanese; updated November 4, 2024), the items "取引種類" (type of trading), "標準品" (standard grade), "取引開始日" (start date, including the note on the July 27, 2020 transfer), "限月取引" (contract months), "取引最終日" (last trading day), "立会時間" (trading hours), "取引単位" (contract size), "呼値の単位" (tick size), "受渡値段" (delivery price), "受渡場所" (delivery locations), "受渡方法" (delivery method), and "決済方法" (settlement method). ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶

5. The gains and losses exclude fees and the actual costs of importing (currency conversion, changes in freight, and so on). All figures are hypothetical. ↩

6. Japan Exchange Group, "堂島米市場" (Dojima Rice Market; in Japanese), the opening paragraph. It states that the market was approved in the 15th year of Kyoho (1730). ↩

7. Japan Exchange Group, "制度概要（一般大豆先物）" (Contract specifications: general soybean futures; in Japanese; updated November 4, 2024), the items "取引種類" (type of trading), "標準品" (standard grade), "取引開始日" (start date), "限月取引" (contract months), "取引最終日" (last trading day), "取引単位" (contract size), "呼値の単位" (tick size), "受渡場所" (delivery locations), and "決済方法" (settlement method). ↩ ↩² ↩³

8. Japan Exchange Group, "用語集" (Glossary; in Japanese), the entry "差金決済" (settlement of differences). ↩

9. ICE Futures US, "Coffee C Futures" (product page), "Contract Size" and "Settlement", and the list of premiums and discounts by origin of deliverable coffee. ↩ ↩²