N.G.F.A. explores CME proposal for wheat contract

by Josh Sosland
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CHICAGO — A delegation from the Grain and Feed Association met Aug. 19 with representatives of CME Group to explore the exchange’s "variable storage rate" concept aimed at improving the performance of the C.B.O.T. wheat futures contract.

Under the concept, storage charges assessed at elevators approved by CME as delivery locations for wheat against the C.B.O.T. wheat futures contract would expand or contract based on the carry in the market implied by the futures markets spread.

The N.G.F.A. described the variable storage rate concept as "the most likely next step to enhance performance of the C.B.O.T. wheat contract if convergence does not improve significantly during the expiration of the September contract."

The N.G.F.A. said it has been working for some time to "enhance the performance of U.S. futures markets" for traditional users that rely on contracts as a hedging instrument. The association said it has held ongoing communications with the CME Group to explore remedies for a lack of convergence that has plagued the Chicago wheat contract for longer than two years.

Rod Clark, chairman of the N.G.F.A. risk management committee and vice-president of CGB Diversified Services in Mount Vernon, Ind., said the CME was receptive at an Aug. 19 meeting in Chicago to the input and analysis of the association.

"It’s very clear the CME Group recognizes the importance of addressing the convergence issue in the C.B.O.T. wheat futures contract and doing so in a proactive way," Mr. Clark said.

Discussing the variable storage rate concept, the N.G.F.A. focused with the CME Group on three principal issues:

1. Fine tuning the full-carry calculation by which storage rate adjustments would be triggered under the concept;

2. The level of full carry that would indicate storage rate increases or decreases were warranted to enhance convergence;

3. The magnitude of such potential changes, when indicated.

The N.G.F.A. noted meaningful changes to improve convergence already have been made to the C.B.O.T. wheat contract, including higher seasonal storage rates, additional wheat delivery locations and reduced limits for the presence of vomitoxin in wheat delivered against contracts.

"But the NG.F.A. has said it believes additional steps may be needed to reestablish convergence," the group said.

The lack of convergence has had "significant adverse impacts" on growers as well as the grain, feed and milling industry, the N.G.F.A. said. The problem was particularly acute during the volatile grain market environment in 2008.

"Combined with a volatile soft wheat futures market that year, the lack of convergence contributed to extremely large margin requirements for grain buyers to maintain their hedge positions in futures markets," the group said. "That, in turn, caused many buyers to reduce or eliminate offering cash-forward contracts to producers, thereby limiting farmers’ ability to capture favorable pricing opportunities during a period of rapidly escalating fuel and input costs."

Adoption of the variable storage rate concept has been embraced by the subcommittee on convergence created by the Commodity Futures Trading Commission.

Further, to address the convergence issue, the C.F.T.C. subcommittee has said additional study should be given to a cash-settled next contract and a "delivery certificate decay concepts."

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