The CME Group is researching how any new "variable" storage rates could improve the hedging performance of its Chicago Board of Trade wheat contract but no decision has been made, a senior CME official said on Tuesday. "At this point it is just a research topic," CME economist Fred Seamon told Reuters in an interview. "So the idea of us looking at when it will be implemented is a bit premature."
The CME, the world's largest derivatives exchange and parent of the Chicago Board of Trade, has been under fire for two years from grain traders who say the CBOT wheat contract is "broken" since cash and futures prices no longer converge when the futures contracts expire.
Lack of convergence destroys a futures contract's value as a risk-offset for traditional market hedgers, who take opposite positions in futures from the cash market and use the transactions as collateral for bank lines of credit. The National Grain and Feed Association, the largest US grain handlers group, has been among the most vocal critics wanting CME to make significant changes to its wheat contract.
"The variable storage rate concept has emerged as the most likely next step to enhance performance of the CBOT wheat contract if convergence does not improve significantly during the expiration of the September contract," NGFA said Monday in a statement. Under the variable storage rates, charges assessed by grain elevators approved by the CME Group as locations for physical delivery of wheat would expand or contract based upon the "carry" in the market implied by futures-market spreads.
Forward prices for commodities are normally higher than "spot" prices due to added-in costs for storage and insurance. But for now, Seamon said, the CME will wait to see if changes it already made to its wheat contact, including higher storage rates, more wheat delivery locations and, for the September delivery period, reduced limits on the presence of vomitoxin, a fungal disease that devalues grain for milling, improves convergence.
"We haven't looked at implementation," Seamon said of variable storage rates. "We would like to get first to the point of even whether we want to recommend this or not." The next test for the CBOT wheat contract begins on Monday, August 31, with first delivery notices on CBOT September wheat. Regulatory heat on CME is building. Last month Commodity Futures Trading Commission chairman Gary Gensler said that if the lack of convergence seen in the CBOT contract continues, the commission "will consider further actions that are necessary."
But CBOT wheat floor traders on Tuesday said if any changes in storage rates occur they did not expect the rules to be in effect any sooner than with the December 2010 contract. "Anything that has a material impact on pricing, if it has an effect on pricing, then it can not be implemented into contracts with open interest," Seamon told Reuters.
Asked about the changes made effective with the July 2009 wheat contract, Seamon said: "With storage charge changes the CFTC in the past has allowed us to implement them into open interest at the new-crop year, provided that the spread going into new-crop year is not at full carry."
The July 2009 contract was the first of the new 2009/2010 season for the just harvested soft red winter wheat crop. Analysts have said the CBOT contract, a world benchmark for decades, needs structural changes. Although SRW wheat accounts for only 20 percent of the overall US wheat crop, the contract's open interest on Tuesday was more than four times the combined open interest of wheat futures on the competing Kansas City Board of Trade and Minneapolis Grain Exchange.
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