March 24, 2009

A change in storage rates for corn and soybeans traded at the Chicago Board of Trade strengthened convergence between cash and futures prices, but more work remains to bring the same success in the wheat market, according to a new study.

An evaluation of convergence issues is included in a new marketing and outlook research report from the University of Illinois at Urbana-Champaign titled "Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts: Causes and Solutions."

As a futures contract nears expiration, premiums for risk and storage should in theory fade as the futures price converges with the cash price.

Recent storage rate changes for CBOT corn and soybean contracts addressed convergence problems because the delivery system is sound and remain within the flow of shipment for these commodities, the report's authors said.

Despite efforts to improve wheat convergence, "a major change in delivery terms is needed in order to address the underlying structural problems in the CBOT wheat contract," the authors said.

"The underlying issue is that historic delivery locations are no longer in the main commercial flow of wheat," they wrote. "Recently approved additions to the delivery locations for wheat are unlikely to address the structural problem because new locations are viewed as 'safety-valve' areas that will be used for delivery only when market conditions are unusual."

The report also notes that corn and soybean convergence trends still bear watching, "particularly in light of the downward trend in corn and soy shipments on the Illinois River."