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Q&A: CME Group ag manager Tim Andriesen

11/06/2013 @ 10:09am

Q: What is your role?

A: I’m responsible for the business part of the CME. In the clearinghouse, risk is managed between the counterparties and trades. And the front-end of that is the actual trading. Within the CME Group’s business lines, I’m responsible for the agricultural business line. THis involves understanding what the products are, what products we should offer, old products and making sure they remain pertinent, and managing this part of the business line.

Q: Is your background in Agriculture?

A: No. I grew up in eastcentral Illinois (Rantoul), in some of the best corn/bean ground in Champaign County, Illinois. Graduated from southern Illinois University and when I was looking for a job, I fell into the grain business. I spent 16 years trading cash grain with processors, coops, working with farmers. I then moved over to the financial world and was involved in the banking side trading over-the-counter products in both the U.S. and Australia. Four years ago, I joined the CME Group.

Q: What’s the history of futures contracts? Do they start as futures and become option products?

A: Options market makers have to hedge their risk. The primary risk is price risk. And to do that effectively, they need a futures market to lay that risk off into. So, it’s really difficult to have an options product without a futures contract. At the CME Group, we have deep and liquid futures markets. Because of that we can offer many different options contracts: Not just the standard options, but the short-dated new-crop options, weekly options, options on spreads for different months.

Q: Why are the short-dated new-crop options contracts so hot right now with farmers?

A: It fits a particular need for the producer. I’ve always been an advocate of producers using options. I love the idea that I can lock in a floor price or participate if the (corn, soybean, wheat) price goes up. If you think about producers, they are always optimistic thinking the price is going to go up. But, the realists say, “I gotta have some price protection.” The challenge with options is that you pay a premium for the option contract. And, depending upon the volatility of the market for how long that option exists, that really drives the premium that you pay. However, with short-dated new-crop options, they are options on the December futures, November soybean futures, and July wheat futures contracts only. So, instead of buying an option contract from the time it is listed until it expires in November, for soybeans, a farmer can opt for a short-dated contract. Another example, if a farmer is worried about the crop getting in. He/she only needs to buy an option that will expire in June vs. having to buy a full-dated option that wouldn’t expire until November. If the crop gets planted, but the farmer wants more price protection for a few more months, he/she then can buy another short-dated option for a few months out. THese contracts are popular because it gives the producer more control of what he/she is spending in options premium and more flexibility to what he wants to do with marketing crops.

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