…NGFA Stresses Urgency of Situation…
There was a strong consensus during the initial meeting of the Commodity Futures Trading Commission's (CFTC) Subcommittee on Convergence that the Chicago Board of Trade (CBOT) wheat futures contract needs to be amended to enhance its performance and improve convergence between futures and cash prices during the delivery period.
During a June 8 conference call, subcommittee members concurred that the CBOT wheat futures contract is experiencing the most severe convergence problems, and most participants agreed that the participation of index funds and other investment capital was a contributing factor.
Participating as the NGFA's official representative on the subcommittee is NGFA Risk Management Committee Vice Chairman Matt Bruns, vice president, exports for Archer Daniels Midland Co., Decatur, Ill. Several other members of the NGFA's Risk Management Committee and representatives of other NGFA-member companies also serve on the subcommittee.
Some concerns were expressed that the pending CBOT wheat contract changes scheduled to take effect in July – consisting of seasonal storage rates, new delivery locations and vomitoxin specifications – may not be sufficient to reestablish convergence. Several potential additional contract changes were discussed by the CFTC subcommittee, including demand certificates, the CME Group's variable storage rate concept, and changing the wheat delivery system to a Gulf-based contract, the latter of which was proposed recently in a study issued by several University of Illinois economists.
David Lehman, director of commodity research and product development at the CME Group and its representative on the subcommittee, outlined the exchange’s timeline to evaluate pending contract changes and consider additional action. He reported that the exchange has received applications from 58 facilities representing 87 million bushels of storage capacity to become regular for delivery, about 85 percent of potential delivery capacity identified by the CME Group in the new delivery territories. He noted that the CME Group would like to observe the effects of the July changes to the wheat contract for some period of time before deciding whether to take additional action. Lehman briefly described the CME Group’s variable storage rate concept, which could be the next contract change contemplated if the pending July changes do not achieve desired outcome.
But CFTC staff members participating on the conference call signaled strongly that the agency wants a plan developed by September or making further changes in the CBOT wheat futures contract if the pending July changes to the contract fail to have the desired effects.
During the call, NGFA representative Bruns reviewed how last summer’s rapid rise in futures values placed severe financial stress on many elevators to meet margin calls. He expressed concern that lenders may not have the capacity to service a repeat of that situation, and expressed a sense of urgency to reestablish contract convergence. He reminded the group that producers have felt impacts of the changed market situation as elevators have had to reduce or even eliminate traditionally offered cash forward contracts because of risk and financial exposure.
The subcommittee is scheduled to conduct a second conference call in late July to discuss that month's wheat contract expiration, examine whether convergence has improved and begin considering next steps, even though the pending contract changes will not have been fully implemented by that time.