U.S. livestock producers seeking to switch from high-cost corn to wheat in their feed rations face a hurdle from a controversial plan that makes it more profitable for grain elevators to hold on to their wheat supplies, analysts said.
The CME Group’s plan, which aims to narrow the spread between soft red winter wheat futures on the Chicago Board of Trade and prices in cash markets when a contract expires, raised its so-called variable storage rate April 23.
The rate on soft red winter wheat will rise to $0.00665 a day, or about 20 cents a month, on May 18, up from the current charge of $0.00565. Storage rates have risen by the maximum allowable three cents a month five straight times since CME implemented its VSR plan in the summer of 2010.
The increase comes at a time when corn prices exceeded those for CBOT wheat for the first time in 15 years two weeks ago due to the tightest corn stocks since the 1930s, which has livestock feeders mulling a switch in their feed ration.
“There is every incentive on earth for people to hold soft red wheat, not sell it,” said Mike Krueger, president of The Money Farm, a grain market advisory service.
“I think every spare kernel of storage space available is going to be stuffed with soft red winter wheat at harvest and it is going to stay there as long as there are those enormously wide carrying charges,” he said.
CME executives say the variable rates plan has improved convergence, as the spread between cash soft red winter wheat prices and CBOT futures has narrowed since it was implemented with the July 2010 contract.
Since the plan was announced, the premium for deferred months contracts compared with nearby wheat futures has risen significantly.
With those big premiums – CBOT September wheat is currently priced about 76 cents above the old-crop May contract – farmers and elevators can afford to wait months before selling their supplies at the higher prices.