US agriculture groups weigh in on CBOT convergence

The Commodity Futures Trading Commission, which regulates US futures markets, was accepting comments on the exchange's plan through Friday. CME, which owns the Chicago Board of Trade, is aiming to improve convergence between cash wheat and CBOT wheat futures by adding delivery territories, implementing seasonal storage rates and lowering the maximum allowable level of vomitoxin. Vomitoxin is the byproduct of a fungus that can sicken humans and animals if ingested.

CFTC staffers will review all the comments regarding convergence and then make a recommendation to commission members about how to proceed, an agency spokesman told Dow Jones Newswires. There is no timetable for when the commission will meet to consider the CME proposal, he said.

Convergence, a critical tool for hedging, is supposed to occur when futures contracts go into delivery. However, cash prices for soft red winter wheat, the variety traded at the CBOT, have remained well below futures prices.

Market participants blame different factors for the lack of convergence. Many point to a massive increase in SRW wheat production this year due to expanded plantings, while others complain about the influence of index funds that only take long, or bullish, positions.

Due to the lack of convergence, the CBOT's role as a risk-management tool "has come under considerable stress in the last few years, almost to the point of no longer providing that function," the American Farm Bureau said in a letter to the CFTC.

Adding delivery points and increasing the cost of storage may help the cash and futures markets come together, as the CME suggests, the farm bureau said. However, "it is not clear that on their own, such action will solve the fundamental convergence problem," it said.

The new delivery areas would include shuttle-train-loading facilities in a 12-county area of northwest Ohio; barge loading facilities on the Ohio River from Cincinnati to the Mississippi River; and barge loading facilities on the Mississippi River from below St. Louis to Memphis, according to the proposal.

Northwest Ohio locations will be added at a 20-cent-per-bushel discount; Ohio River locations at par; and Mississippi River locations at a 20-cent-per-bushel premium.

Similar to the national group, the Illinois Farm Bureau said it considers the proposed changes to be insufficient, although it doesn't oppose them. The CME's plan is flawed because the seasonal storage rates and additional delivery locations wouldn't take effect until the July 2009 contract month, it said.

The proposal also doesn't address convergence in CBOT corn and soy, the Illinois office said. Some market participants warn corn and soy could see convergence problems like wheat.

For a more comprehensive solution to the lack of wheat convergence, the CFTC should require "added surveillance" of index funds and speculators, the Illinois bureau said. Some industry members say long-only index funds artificially inflate futures prices because they don't take short, or bearish, positions.

US Wheat Associates, meanwhile, said it was disappointed the CME didn't pursue "appropriate classification of investors as hedgers or speculators." The exchange should "apply the appropriate speculative position limits" and prevent speculators from being classified as parties who commercially produce, own or use wheat, the industry group said.

US Wheat Associates, which promotes US wheat exports, said it supports additional delivery points and lower vomitoxin limits but has no firm position on seasonal storage rates. The group said it was undecided on the issue of "compelled load-out," an idea floated as by some market participants that would force holders of long positions in CBOT wheat to load out physical grain from delivery elevators.

CBOT wheat traders who chimed in on the CME's proposal had mixed reviews of the plan. The exchange should lower the vomitoxin level because it would bring the contract in line with export specifications, said John G. Carter, who identified himself as an independent wheat trader of deferred contracts.

The exchange is recommending the vomitoxin level for par delivery be lowered to two parts per million from three parts per million. The lower level would be implemented with the September 2011 contract, if approved.

Seasonal storage rates would "only increase the rent of terminal storage space with neither a guarantee of greater bushels delivered nor an answer to the problem of convergence," Carter said in his letter to regulators. Proposed changes to the storage rates include introducing seasonal premium charges, to be increased from July through November to 8 cents per bushel per month from the current level of 5 cents per bushel per month from December through June.