The Chicago Board of Trade is ready to put proposed changes to its wheat futures contract, a world benchmark for wheat pricing, into effect quickly so the contract's performance as a tool for commercial hedging will return to normal, a top exchange official said on Friday.
CBOT's parent, the CME Group, said earlier it had proposed to industry regulator the Commodity Futures Trading Commission that wheat storage rates be increased, new delivery delivery points added, and make smaller amounts of vomitoxin, the byproduct of a wheat disease, eligible for par delivery.
All the measures aim at restoring the CBOT wheat contract's "convergence," or ability to narrow the gap between futures and cash prices during futures deliveries. The breakdown of convergence as grain prices soared to record highs in the last two years has crippled wheat farmers, millers, exporters, and bankers.
The CBOT's traditional "hedge" broke down - making it exceedingly difficult for the grain industry to hedge their price risk and secure financing to hold cash wheat positions. "The changes we announced this morning and submitted to CFTC are changes that we think will help improve convergence," said David Lehman, CME Group director and the architect of the changes, told Reuters in an interview.
"They are changes that we believe we can implement relatively quickly, opposed to some of the other changes that have been under discussion such as index settlement or demand-certificate compelled loadout, which would be very, very radical changes to the contract design that would require implementation only for contracts that have not yet traded."
Both index settlement and forced load-outs are derived from proposals by industry players, such as the National Grain and Feed Association, the largest US grain industry group. Many grain traders say the flood of speculative, hot money from Wall Street into grain markets has been a key factor inflating futures and disrupting the convergence process.
Index settlement and load-out "ideas are still out there," said Lehman. "We are continuing to have discussion with market participants over how those kinds of settlement mechanisms would work." But at this point there certainly could be some "unforeseen consequences" with forced loadouts of futures deliveries.
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