November 23, 2009
US grain industry doubts CME proposal to fix CBOT wheat
US grain industry participants have expressed concerns to federal regulators about CME Group's (CME) complicated proposal to narrow a problematic gap between Chicago Board of Trade wheat futures and cash prices.
The American Bakers' Association, North American Millers' Association and Louis Dreyfus Commodities said in letters to the Commodity Futures Trading Commission that the proposed new storage rate system for CBOT wheat may only be a Band-Aid for the markets' lack of convergence.
The CFTC is accepting comments on the proposal from CME, parent company of CBOT, through next Friday. If the CFTC doesn't act on the proposal by then, it is automatically approved. The CFTC didn't immediately return a call for comment.
CME wants to implement a variable storage rate for CBOT wheat that could change by about three cents from contract month to contract month. The exchange says it's confident the variable rate will eventually force the markets to come together, as they traditionally have done during the delivery period for futures, because higher storage rates will encourage deliveries of wheat against futures.
If futures and cash prices don't converge when futures go into delivery, it inhibits the ability of producers to hedge their risk of growing a crop. Producers and end users say the CBOT wheat contract has become an ineffective hedging tool because cash prices have sagged below futures for at least two years.
The price discrepancy came about as investors seeking alternatives to stocks poured into grain futures during the past several years. Buyers came into the markets who only bought futures and lifted prices with the sheer size of their investments. That made the futures market different than the cash market, which must still use the CBOT as a benchmark for cash prices.
CME has previously tried to improve cash-futures convergence without significant success. A CFTC subcommittee held discussions on the problem this summer and endorsed the variable storage rate concept.
Industry members said regulators should consider cracking down on index funds, which take only long positions, or bets that prices will rise. The CFTC maintains position limits in agricultural markets to reduce the potential threat of market manipulation but has granted waivers to some funds.
Bakers said in their comments to the CFTC they were hesitant to support CME's latest proposal because it could increase the cost of purchasing forward contracts if the change does not force convergence or deter participation by index funds. Forward contracts are cash transactions in which a commercial buyer and seller agree upon delivery of a specified quality and quantity of grain at a specified date.
The bakers recommended the CFTC "eliminate exemptions on contract limits" for funds to improve convergence. CME has downplayed the funds' significance by citing studies that claim there is no link between prices and funds' presence in the market.
Louis Dreyfus, a major wheat exporter and merchandiser, said a variable rate "will likely help in achieving the ultimate goal of convergence" but is "not an end-all solution."
