NGFA Urges Rapid Implementation of Changes to CME Group's CBOT Wheat Futures Contract (10/29/09)

For Release
IMMEDIATE (Oct. 29, 2009)

 

WASHINGTON -- The National Grain and Feed Association (NGFA) today (Oct. 29) urged the CME Group and the Commodity Futures Trading Commission (CFTC) to implement changes to the CBOT wheat futures contract as soon as possible -- preferably with the December 2009 contract -- to begin the process of enhancing the contract's performance.
   
During a presentation at a CFTC Agricultural Advisory Committee meeting, the NGFA supported adoption of a variable storage rate concept as the "next logical step" to reestablish a convergence -- or narrowing -- of cash and futures market values as futures contracts approach expiration.

But the NGFA cautioned that the variable storage rate concept will take time to have its intended effect, since the storage rate would increase only gradually in response to futures market spreads.  That makes it imperative that the changes to the CBOT wheat futures contract be implemented "as soon as possible," said NGFA Risk Management Committee Vice Chair Matt Bruns, "ideally" with the December 2009 contract.

"Waiting until September 2010 to implement the variable storage rate, as proposed by the CME Group, could result in another two years before the change would have its full effect," said Bruns, vice president-exports for Archer Daniels Midland Co., Decatur, Ill.  "Our member firms and their farmer-customers, who rely on properly functioning futures markets to manage risk and market their crops, cannot afford another two-year wait."

The CFTC Agricultural Advisory Committee was scheduled to devote its entire meeting to the issue of reestablishing convergence in the CBOT wheat futures contract, including consideration of the recommendations of its Subcommittee on Convergence that called for the CME Group to implement the variable storage rate concept developed by the exchange effective with the December 2009 contract, identical to the NGFA's recommendation.

Established in 1896, the NGFA consists of more than 1,000 grain, feed and feed ingredient, grain processing, milling, export, biofuels and other grain-related companies that operate about 6,000 facilities that handle more than 70 percent of all U.S. grains and oilseeds.  It is the nation's largest trade association representing the interests of market participants who use grain and oilseed futures markets to hedge price and inventory risk.

Under the variable storage rate concept, storage (premium) charges assessed by grain elevators approved by the CME Group as locations for physical delivery of wheat to satisfy outstanding CBOT wheat futures contract obligations would expand or contract based upon the carry in the market that is implied by futures-market spreads.  If an increase in storage rates is triggered, it would make it more costly to continue to hold or roll futures market positions forward, which has contributed to the significant gap between futures and cash market values.  Under the proposal, the maximum that storage rates could increase or decrease would be about 3 cents per bushel per contract month. 

The NGFA noted that another "compelling" reason for implementing variable storage rates quickly is that the seasonal storage rates implemented by the CME Group in July at delivery warehouses are scheduled to decline in December by about 3 cents per bushel per month, which it said would be a move in the wrong direction.  "Even if the variable storage rate is implemented this December, it simply will have the effect of keeping the storage rate at its current level -- not ideal but at least better than letting the rate tick down and further delaying the variable storage rate's effects," Bruns noted.

The seasonal storage rate was one of several steps taken by the CME Group over the last 18 months in an attempt to address the problematic lack of convergence in the CBOT wheat futures contract.  These other actions included changing the deliverable instrument to a shipping certificate, adding wheat delivery locations and, effective with the September contract, reducing limits for the presence of a mycotoxin known as deoxynivalenol (vomitoxin) in wheat delivered to satisfy outstanding CBOT wheat futures contracts. 

The lack of convergence in the CBOT wheat futures contract, which has persisted despite the changes previously adopted by the CME Group, has had significant adverse impacts on farmers and the grain, feed and processing industry, particularly during the volatile grain market environment that occurred 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 the futures market.  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.

To enable the variable storage rate to more "robustly and quickly" encourage convergence, the NGFA also urged that it be triggered when 80 percent of full carry is reached in the CBOT wheat futures market, rather than the 85 percent trigger proposed by the CME Group.

The NGFA concurred that implementing the variable storage rate in December could have an impact on some futures market participants, but is justified given the "exceptional and urgent situation" that confronts the CBOT wheat futures contract.

"[W]e submit that the CFTC and the CME Group need to weigh potential impacts on market participants with open (futures contract) positions who already may have assumed the variable storage rate was coming versus the harm that could be inflicted on the wide swath of commercial grain hedgers and producers if convergence is deferred for up to another two years," Bruns told the CFTC Agricultural Advisory Committee.  "We believe strongly that the broader public good of implementing the variable storage rate quickly outweighs concerns about potential negative impacts."

The NGFA reiterated its previous position that if the change cannot be implemented with the December 2009 CBOT wheat futures contract, that it take effect no later than the March 2010 contract.  The NGFA noted that the number of open interest CBOT wheat futures contracts will decline from more than 190,000 to roughly 57,000 contracts in March 2010.  It also noted that futures market spreads currently are at less than full carry for several contracts prior to September 2010, a condition that the CME Group has said in the past could make them more willing to change a contract with existing open interest.
 
The NGFA's membership encompasses all sectors of the industry, including country, terminal and export grain elevators; feed and feed ingredient manufacturers; cash grain and feed merchants; end users of grain and grain products, including oilseed processors, corn refiners, flour millers, and livestock and poultry integrators; biofuel manufacturers; commodity futures brokers and commission merchants; and allied industries.  Canadian and Mexican firms also are NGFA members, and use its Trade Rules and Arbitration System by specific reference in their contracts.

The NGFA also consists of 35 affiliated state and regional grain and feed associations, as well as two international affiliated associations.   It has strategic alliances with the Pet Food Institute and the Grain Elevator and Processing Society, and is co-located and has a joint operating and services agreement with the North American Export Grain Association.