August 24, 2009

CME Group Inc. (CME) is moving forward with plans to propose a dynamic storage rate for the Chicago Board of Trade wheat futures contract if the market continues to struggle to converge with cash prices.

 

Exchange officials "intend to distribute the variable-storage-rate concept broadly to the industry for additional input, probably within the next two weeks," according to a member newsletter distributed Friday by the National Grain & Feed Association. NGFA representatives met with CME staffers Wednesday in Chicago to discuss the concept, the newsletter said. The association represents companies that handle more than 70% of all US grains and oilseeds used in domestic and export markets.

 

"The variable-storage-rate concept has emerged as the most likely next step to enhance performance of the CBOT wheat contract if convergence does not improve during the expiration of the September contract," the newsletter said.

 

Cash prices and futures are supposed to converge, or come together, when futures contracts go into delivery to facilitate hedging, but cash prices have been well below futures for at least two years. The lack of convergence has created headaches for commercial end users and producers.

 

The CBOT trades soft red winter wheat, which is grown in the eastern third of the country and used to make pastries and snack foods. It also acts as a global benchmark for wheat prices because of its liquidity and volume.

 

CME spokeswoman Mary Haffenberg said the exchange was still discussing the concept of a variable storage rate with market participants and would release its proposal in the "upcoming weeks" if there continues to be a wide gap between cash prices and futures. The CME has already overhauled the CBOT wheat contract to improve convergence and wants to see whether the changes work during the September delivery period before committing to additional adjustments.

 

First notice day for the September wheat contract is August 31. The last trading date for the contract is September 14.

 

"We continue to talk to customers and market participants about a plan for variable storage rates that could be used if needed," Haffenberg said. "We want to give the changes that we just started a chance to take effect."

 

Representatives of the CME and the NGFA sit on a Commodity Futures Trading Commission subcommittee that is studying the lack of convergence. The group said last month it would recommend regulators consider the variable grain storage rate to narrow the gap between cash wheat prices and futures if the other previously approved changes fail.

 

Under the concept, storage rates could increase or decrease from month to month depending on spreads between the nearby contract and the first deferred contract month. Specifics of the proposal, including the increase/decrease increment and trigger points for adjusting rates, are "still being discussed," Haffenberg said.

 

Higher storage charges can encourage people to make delivery earlier, as opposed to holding onto wheat to reap the benefits of carry charges. Carry is the cost of taking delivery of the grain and includes storage, insurance and interest.

 

The previously approved changes to the CBOT wheat contract include the establishment of three new delivery territories, implementation of seasonal storage rates and lower allowable level of vomitoxin. The new delivery territories took effect July 1, while the seasonal change took effect July 18 and the vomitoxin change comes Sept. 1. Vomitoxin is a fungal byproduct that can sicken humans and animals if ingested.