The National Grain and Feed Association (NGFA) has urged the Commodity Futures Trading Commission (CFTC) to monitor closely whether planned changes to the Kansas City Board of Trade’s (KCBT) hard red winter (HRW) wheat futures contract contribute to enhance convergence between cash and futures market values if the agency.
In a statement submitted to the CFTC, the NGFA says KCBT’s decision to adopt a harvest storage premium was “an initial step in the right direction” and was a “constructive effort” by the exchange that should assist in improving the futures contract’s performance. But NGFA also cautioned that if those changes do not enhance convergence within a reasonable time, KCBT should be prepared to consider additional contract changes to bring about that intended result.
“Convergence matters not just sometimes, but consistently and predictably,” emphasizes NGFA Risk Management Committee Chairman Matt Bruns, vice president, corn processing at Archer Daniels Midland Co., Decatur, IL. “The NGFA believes strongly that any (futures) contract changes should be evaluated by industry, the exchanges and the CFTC against this measuring stick.”
Convergence refers to the narrowing between cash and futures market values as futures contract expiration nears. It’s essential if agricultural futures markets are to remain viable for use by commercial hedgers like grain elevators, feed manufacturers, farmers and others who rely upon them for price discovery and risk management, NGFA says.
The changes to the KCBT wheat futures contract, approved by the exchange’s membership in November, would increase the base storage rate by 3¢/bu., with an additional 3¢/bu. harvest storage premium from July through November. Under the KCBT seasonal storage rate concept, the current base storage rate for the KCBT HRW wheat futures contract would increase to 6¢/bu./month, with an additional “harvest storage premium” that would increase the rate to 9¢/bu./month during the months of July through November. The changes would take effect with the September 2011 futures contract.
NGFA says that if the KCBT-developed seasonal storage rate changes do not enhance convergence by September 2012, a year after implementation, additional revisions to the KCBT wheat futures contract may be necessary. Among the other potential changes that might merit consideration if that occurs is the variable storage rate methodology advocated earlier by the NGFA.
Such a variable storage rate concept was implemented in 2009 by the CME Group for the Chicago Board of Trade’s soft wheat futures contract after it experienced a significant lack of convergence over a period of more than two years.
NGFA’s statement also cited the conflicting views over the KCBT’s decision to also amend its wheat futures contract to impose an 11% minimum protein requirement at contract price, with a 10¢/bu. discount for 10.5% protein. NGFA notes that some delivery elevators and grain buyers have raised concerns about the adverse effect upon deliverable supplies – and potential detrimental impacts on convergence – that might be caused by a tighter protein limit during a crop year in which HRW protein levels are abnormally low.
Conversely, the NGFA noted that some end-users believe the protein requirement could enhance convergence by giving the “taker” of delivery greater assurance of receiving wheat of sufficient protein to meet market demand.
“In an environment with competing views on the best changes to contract terms, it will be especially important for the CFTC to monitor closely implementation of the changes and to evaluate fully and carefully whether they contribute to convergence,” says NGFA.
“We look forward to a continuing constructive dialogue on how best to achieve convergence for the KCBT wheat (futures) contract and ensure its effectiveness as a critically important price-discovery and risk-management tool.”