September 19, 2008

Kraft Foods Inc., operator of the largest soft wheat mill in North America, has urged federal regulators to reject a proposal from the CME Group Inc. (CME) aimed at narrowing the gap between cash wheat prices and wheat futures.

   
The exchange's proposal is "inadequate" because it does not guarantee the convergence of cash wheat and CBOT wheat futures, a critical tool for hedging, the food giant said. The markets are supposed to come together as futures contracts go into delivery, but cash wheat prices have remained at a significant discount to futures lately.

Without convergence, Kraft said it and "many other commercials, including farmers, are unclear about wheat the CME wheat futures contract represents." Company executives made their comments in a letter to the Commodity Futures Trading Commission, which regulates U.S. futures markets.

"We know it does not represent the value of U.S. soft red wheat and it also does not represent any other world soft wheat market," Kraft said about the CBOT wheat contract.

Kraft said the plan presents unquantifiable risk and is a hedging instrument that is not representative of the real value of the underlying physical market.

Soft red winter wheat, used to make pastries and snack foods, is the type of wheat traded at the CBOT, a unit of the CME. The CBOT wheat contract is a global benchmark for wheat prices.

CME issued its proposal to improve wheat convergence earlier this month amid pressure from frustrated market participants. The exchange has recommended adding delivery points, implementing seasonal storage rates and lowering the allowable level of vomitoxin, the by-product of a fungus that can sicken humans and animals if ingested.

The CFTC must approve changes to the futures contracts and is accepting comments on the CME's proposal until Oct. 3.