November 7, 2008

US grain industry group suggests modifying CBOT wheat plan

A US grain industry group has submitted a plan to the CME Group (CME) to consider using an approach that would force holders of long wheat positions to load out physical grain from delivery elevators.

The National Grain and Feed Association said Thursday (November 6) in a press release that it sent to the CME Group a "modified compelled load out concept" that would "enhance performance of the CBOT wheat futures contract."

The compelled load out would make those who held long positions - or positions that seek rising prices - to load out the actual grain. This idea is becoming popular in the Chicago Board of Trade wheat market as a way to narrow the wide gap between the futures price and the cash price. The CME Group owns the CBOT.

The NGFA said in the release "demand certificates" would be created. Those market participants holding futures positions could issue these certificates to force physical load out to exit their outstanding futures position. By doing so the group said this could help with the persistent problem of convergence - or narrowing - of futures and cash prices during the delivery period as the expiration date of CBOT wheat futures contracts near.

Traditionally when futures contracts near delivery and become spot months, prices in the physical market and the futures should be roughly equal. In the past few years, the soft red winter wheat contract, which is what is traded at the CBOT, has had yawning differences, with the futures price being at a significant premium.

Traders and analysts differ on why the gap between the two is so wide. Some note SRW wheat production is up sharply and others said an increase in non-traditional long-only index funds is also to blame.

NGFA said in its load out concept, it did not object to plans the CME Group has proposed to the Commodity Futures Trading Commission in September. Those plans await CFTC approval. However, the group said it was concerned the CME's suggested changes alone weren't enough to address the convergence needs of commercial users.

The NGFA consists of 950 grain, feed, grain milling and processing, exporting and other grain-related companies.