A new contract that looks promising for farmers to shift risk in the energy markets is the micro mini crude oil contract. The size of this contract is 100 barrels or 4,200 gallons. This is a new contract introduced by the exchange over the past year. It is benchmarked to WTI (West Texas Intermediate), which is oil sourced from U.S. oil fields.
Volume (number of contracts traded daily) has steadily grown, suggesting this is a viable futures tool farmers can use to hedge energy prices. Prior to the micro mini contract, you could use the standard futures contract (1,000 barrels or 42,000 gallons) or the half-sized contracts, called minis.
For many producers, 42,000 gallons is either too large or, because of its size, you may be limited to one purchase (hedge) a year. This implies timing is critical. The mini contracts, both in crude oil and ultra-light sulfur diesel (often referred to as heating oil), are half-size (500 barrels or 21,000 gallons). However, they are sparsely traded with light open interest and low volume. They are not very useful.
The micro mini contract in crude oil (not available in ULSD) shows good promise for farmers as a tool to hedge energy prices without having to lock in a contract with a supplier. Contract specifications are available online from the Chicago Mercantile Exchange.
A supplier-initiated contract may be an alternative to locking in a price. When you desire longer-term opportunities to shift risk, however, fees and built-in time premiums often make it difficult for farmers to effectively secure contracts. The micro mini crude oil contract trades each month. Liquidity in any market is important for both entering and exiting. Daily volume is also important. Combined volume and open interest in recent months have been large enough to provide both traders and hedgers confidence to use the newer micro mini crude contract.
A Tool to Shift Risk
With spring approaching, a time of year when the need for diesel and gas increases, having another tool available to shift risk is important. Bullish traders will also argue we may be in store for higher energy prices, due to the ongoing war between Ukraine and Russia, China lifting COVID restrictions, and only a limited number of oil rigs that have come online since oil prices plunged at the beginning of the pandemic.
Have conversations with your vendor to learn the tools they may offer you. In addition, have a conversation with your market advisor on micro mini crude oil contracts – how to use them and if they will fit your operation’s needs.
Editor’s Note: If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.
About the Author: With the wisdom of 30 years at Total Farm Marketing and a following across the Grain Belt, Bryan Doherty is deeply passionate about his clients, their success, and long-term, fruitful relationships. As a senior market advisor and vice president of brokerage solutions, Doherty lives and breathes farm marketing. He has an in-depth understanding of the tools and markets, listens, and communicates with intent and clarity to ensure clients are comfortable with the decisions.
