October 5, 2009

The largest group of US grain handling companies said it can wait until March 2010 if no solution on storage rates can be in place by December 2009 to fix the Chicago Board of Trade wheat futures contract.

 

On September 29, CME Group, parent of the CBOT, said it would request a delay putting new "variable" storage rates for wheat into effect until September 2010, instead of the December 2009 wheat contract recommended by a special panel of the CME's regulator, the Commodity Futures Trading Commission.

 

The National Grain and Feed Association said in a statement that it has recommended "that the implementation date be December 2009 (rather than the September 2010 implementation proposed by CME) because of the pressing need for a solution to this market challenge which affects many sectors of the industry and commercial hedgers."  .

 

The CME attributed the delay to exchange rules that do not allow major changes in futures contract deliveries with significant open interest. The Dec 2009 wheat contract now accounts for two-thirds of the 333,314 contracts of open interest in CBOT wheat, as of Tuesday's closing trades.

 

Though NGFA respects this principle of market rule changes in general, it said there are trade-offs in delaying further action and there have been problems with wheat contract performance for several years that need to be addressed sooner rather than later."

 

It added that NGFA would urge a March 2010 implementation if the December 2009 date cannot be met.

 

Commercial grain companies -- led by the NGFA, which groups more than 1,000 companies with about 6,000 grain facilities -- have complained for more than two years that the CBOT wheat contract has become "broken" as a hedging tool.

 

Lack of "convergence" between cash and futures prices at contract expirations -- an essential for hedging -- has also vexed the CME and CFTC, which have previously tried various ways including seasonal storage rate increases as a cure.

 

CFTC chairman Gary Gensler in July called the situation "unacceptable" and vowed action to correct it.

 

But the timing remains a thorny, and expensive, issue.

 

CBOT wheat traders bitterly complained that the CFTC panel's surprise recommendation to apply the new storage rates in December prompted violent swings in futures prices last week, causing some investors to lose hundreds of thousands of dollars in two days.

 

Then the CME's announcement on Tuesday favouring the September 2010 time line prompted another wild swing in spreads, or relation between futures prices of various months.

 

Traders said it will be hard to set fair prices for futures while the timing of the new storage rates remains uncertain. Some traders have mentioned possible lawsuits.