Financial Regulatory Forum

U.S. commodities regulator says not convinced wheat convergence problem is solved

By Reuters Staff
October 30, 2009

By Christopher Doering
WASHINGTON, Oct 29 (Reuters) – The head of the top U.S. futures regulator said on Thursday he doesn’t believe the world’s largest exchange has figured out the root cause behind the lack of convergence in the Chicago wheat market.

Commercial grain companies say the lack of convergence — in this case where a Chicago Board of Trade wheat contract and cash prices fail to come together, or converge, at expiration — makes the wheat contract an ineffective hedging tool.

The CME Group’s CBOT has backed the use of variable storage rates to fix the long-standing problem of convergence that has roiled the market for several years.

The plan would allow storage rates at grain facilities eligible for delivery to change based on the price difference between futures contracts. Exchange officials believe variable rates would allow futures spreads to widen to a point that would bring two markets more in line.

Gary Gensler, the chairman of the Commodity Futures Trading Commission, the U.S. futures regulator, has been outspoken that convergence in the wheat market needs to be improved, but he was skeptical that variable storage rate would do enough to help.

“My concern is whether we’re really addressing the fundamental issue about this contract,” said Gensler, at a CFTC Agricultural Advisory Committee meeting.

After the hearing, Gensler told Reuters he was concerned the CME has been unable to determine why convergence is not taking place.

Gensler worried that implementing variable storage rates may only offer modest aid to addressing convergence and worried further help might be needed in the future.

During the CFTC meeting he also urged looking into other options such as cash-settled contracts or moving the delivery point to the Gulf of Mexico.

The 100-year old CBOT wheat contract is based on soft red winter wheat — now less than 20 percent of U.S. wheat output.

David Lehman, CME Group director, told CFTC that “we’re finally” in a position to implement variable storage rates, which would meet “the fundamental cause” behind the lack of convergence.

CME said in September it planned to begin new grain storage rates from September 2010. The CFTC has until Nov. 13 to act on the plan.

CME objected to the early adoption of the variable storage rates proposed by the CFTC subcommittee to start December 2009 given the large amount of open interest in it. The plan allows the exchange to raise or lower grain storage rates at CBOT delivery facilities by roughly 3 cents a month, depending on the price difference between the nearby contracts the month before expiration.

Several of the CFTC commissioners and others agreed that variable storage rates could be a way to improve convergence, but there was disagreement as to when they should begin.

Some in industry agree. “We believe strongly that the broader public good of implementing the (variable storage rate) quickly outweighs concerns about potential negative impacts,” said Matt Bruns with the National Grain and Feed Association.

But Chad Burlet of Burlet Trading said quick changes to the contract would do more harm than good. He urged waiting to implement new rates until the next crop year.

“What’s being considered with a change within the crop year is a massive wealth transfer that puts the commission in the inappropriate position of choosing winners and losers,” he said.

Both the CFTC and CME plans sparked violent price swings in futures prices when announced last month, causing some investors to lose hundreds of thousands of dollars.

(Additional reporting by Christine Stebbins in Chicago; Editing by Marguerita Choy) ((christopher.doering@thomsonreuters.com ; +202 898 8394 Reuters messaging: christopher.doering.reuters.com@reuters.net)) Keywords: WHEAT CFTC/CONVERGENCE

Thursday, 29 October 2009 19:03:50RTRS [nN29229371] {C}ENDS

Comments
One comment so far | RSS Comments RSS

Would the reason for a non-convergence be anything like a premium market where there is just a lot of demand going on right now?

I study technical analysis on the grain futures markets and this is very interesting to me.

 

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