1. Why does the Illinois Waterway Delivery System for corn and soybeans use shipping certificates instead of warehouse receipts?

A: Because facilities along the northern Illinois River are primarily throughput, handling large quantities of grain with minimal storage capacity, shipping certificates better represent the cash market in the delivery territory than warehouse receipts. Shipping certificates are commonly used in instances where commodities are not held in storage for long time periods, while warehouse receipts are used as title to stored commodities.

2. As the delivery system for corn and soybean futures, do shipping certificates pose a greater risk of financial default for takers of delivery and for the Chicago Board of Trade?

A: No. Since CBOT shipping certificates are not secured by grain in storage as are warehouse receipts, issuers of shipping certificates are required to obtain a letter of credit equal to 100 percent of the market value of outstanding shipping certificates.

The delivery system also limits the quantity of shipping certificates outstanding to no more than 25 percent of the shipping firm’s net worth. The system replaced the minimum net worth requirement for firms approved to issue shipping certificates from $5,000 per contract of regular capacity to a minimum net worth of $5 million. The $2 million is working capital requirement remains unchanged. These requirements decrease the risk of financial default compared to the warehouse receipt system, since regular warehouses are only required to obtain performance bonds equal to a small percentage of the value of the grain represented by the receipts.

3. Has the Illinois Waterway Delivery System changed the corn and soybean contracts to "export only" contracts?

A: No. The contracts are effective hedging and price discovery mechanisms for both the domestic and export markets. Since the grain is tributary to the northern Illinois River competes in an active domestic cash market, the delivery mechanism reflects supply and demand forces for both the domestic and export markets. Furthermore, shipping certificates provide more flexibility than warehouse receipts and allow deliveries to occur prior to the grain being physically moved into a shipping station. As a result, the new delivery mechanism facilitates arbitrage between the futures and cash markets while allowing the grain behind the shipping certificates to retain the flexibility of moving into either the domestic or export markets.

4. Do problems related to flooding, freezing, or mechanical failure adversely affect the transportation of grain on the northern Illinois River?

A: According to the U.S. Coast Guard, which has jurisdiction over safety and navigation issues on the inland river system, the Illinois River never officially closes. The USCG has confirmed that barge traffic on the Illinois River has been suspended only three times in the past 20 years. Those suspensions occurred in 1995 for a 60-day lock rehabilitation and in 1993 and again in 1995 for a one-to-two week period due to flooding.

The U.S. Army Corps of Engineers, which is responsible for the maintenance, rehabilitation, and operation of locks and dams on the Illionois River, reports the average closure time for all locks on the Illinois River during 1980 to 1996 was 6.75 hours. While no transportation system is free of the occasional stoppages due to the weather, mechanical breakdowns, or labor strikes, the Illinois River has proved to be a reliable mode of transportation, shipping more than 10,000 barge loads of grain downriver anually.

5. What happens if there is an obstruction along the delivery area and river traffic is suspended?

A: If there is an announcement that river traffic will be suspended for 15 days or more as a result of an obstruction that affects a majority of regular shipping stations, then shipping stations upriver from the obstruction must provide loaded barges to the taker of delivery below the obstruction. That should include insurance and freight paid to New Orleans, LA. As reimbursement for the cost of barge freight, the taker of delivery reimburses the maker of delivery according to the reimbursement amount shown in the Location Differentials table.

6. Does the potential for transportation problems on the Illinois River adversely affect spread trading in the corn and soybean futures contracts?

A: No. The short periods of time when the locks on the Illinois River may be closed are expected to have a minimal effect on futures spread trading. Since delivery takes place at a location within the natural flow of grain, futures contracts and spreads accurately reflect changes in supply and demand. This system makes it easier for market participants to determine whether futures spreads should indicate carrying charges or inverses. This results in equitable trading opportunity for all market participants and enhances the liquidity of spread trading.

7. Does the concentration of ownership of barge freight have an adverse effect on the performance of the Illinois Waterway Delivery System?

A: Barge freight ownership in the Illinois Waterway Delivery System is significantly less concentrated than the lakes and ocean freighter market. According to the U.S. Army Corps of Engineers Navigational Data Center in 1995, there were 11,535 jumbo covered barges owned by 49 firms on the inland river. While 5 large firms account for approximately 64 percent of this total, 17 firms operate 100 barges or more. By contrast, trade sources indicate that three firms own approximately 75 percent of the "Laker" vessels used to transport grain on the Great Lakes.

Furthermore, most major agricultural news services publish daily barge freight rates and the U.S. Department of surveys barge companies on a daily basis and publishes a weekly summary.

8. How do the southeastern U.S. markets maintain links with the futures delivery market?

A: Grain ordered loaded onto a barge or into rail cars from a shipping point along the Illinois Waterway Delivery System can be directed to points in the Southeast. Barges can be turned northbound on the Ohio River and then onto the Tennessee River to users as diverse as integrated poultry operations, corn wet-millers, and soybean processors. Furthermore, most hedges are not carried to the point of maturing into delivery. Market participants from the Southeast and around the world can use Chicago futures markets with the Illinois Waterway Delivery System as a basing, or reference point for cash trades. Hedgers can exchange futures with their respective trading partner(s) to offset hedged positions, i.e., exchange for physicals (EFPs).

9. Why are there additional shipping stations listed for the soybean futures contract than there are for corn?

A: The additional shipping stations for soybean, which are located in the southern part of the Illinois Waterway, reflect the lower quantity of soybeans shipped from the northern section of the Illinois Waterway.

10. Why not use cash settlement?

A: Since commodity cash markets are less liquid and more decentralized than financial cash markets, it is necessary to collect cash prices over several days from a wide geographical area to derive a cash settlement price that cannot be manipulated or subject to distortion. The cash settlement price calculated from this procedure would no longer reflect the underlying cash market at any particular point but rather an average price over time at numerous locations. Convergence, arbitrage, and hedging effectiveness would be diminished for all participants in the market by using cash settlement in this type of situation.