The Chicago Board of Trade (CBOT) on Feb. 13 received U. S. government approval to limit cash grain delivery instruments held by non-grain firms – its latest move to cool criticism about the performance its grain contracts.
CBOT’s regulator, the Commodity Futures Trading Commission (CFTC), approved an amended Feb. 9 request to reduce the large number of warehouse receipts and shipping certificates held by firms not directly related to the cash grain industry.
The move is designed to enhance the hedging effectiveness of CBOT’s benchmark wheat, corn, rice, oats, soybeans, soymeal and soyoil contracts, a CFTC statement said.
“We will monitor the effectiveness of this and other grain contract changes to see if convergence remains an issue requiring further action,” CFTC acting chairman Michael V. Dunn said.
The rule change, to be phased in on Feb. 17, limits the number of certificates or receipts anyone can hold to the spot month speculative position limit and comes just before the March delivery cycle begins Feb. 26. CBOT said it will consider and provide exemptions for bona fide commercial hedgers.
“The delivery system is a check and balance to make sure everything is in line on the cash side. The closer you can get to having commercials involved in the delivery system and making it transparent is the way we need to go,” said grains analyst Don Roose with brokerage U. S. Commodities in West Des Moines, Iowa.
Grain hedgers, led by the 900-member National Grain and Feed Association (NGFA), have complained for months that the traditional process of grain delivery against CBOT contracts, especially its wheat contract, is broken.
They say Wall Street index funds and other investor buying inflate grain futures far beyond actual supply and demand, destroying “convergence” at delivery – when cash and futures prices traditionally come together to make hedging work.
“NGFA believes imposing some limits on holding delivery instruments for extended times might be warranted to enhance transparency and availability of certificates/ receipts to the marketplace,” said NGFA spokesman Randall Gordon.
Some traders felt the new rule might change an investing game that non-grain investors have been playing with grain.
With interest rates so low, investors have been holding grain futures as an asset that includes a built-in gain since the “cost-of-carry” in storage and other charges normally makes forward futures deliveries more valuable, traders say.
It is such “rolling” of massive long positions in delivery by non-grain firms that hedgers have attacked as inflating futures prices.
But grain traders have cautioned that limiting “long” positions for funds in the cash market may also end up downsizing fund participation in futures, hitting liquidity.
The rule change limits a non-grain firm to holding 600 shipping certificates or warehouse receipts for corn, soybean, wheat, oat and rough rice futures; 720 for soybean meal futures; and 540 for soybean oil futures.
Non-grain market participants now holding more than the new limit of shipping certificates or warehouse receipts for corn, soybeans, wheat, soymeal, oats or rice have until May 31 to comply, the exchange said.
For soyoil, they have until Sept. 25 to comply.
Just this week CBOT’s parent, the CME Group, amended its request to give non-grain firms more time to comply to the soyoil limits given the huge number currently registered with the exchange: 13,000 cash receipts, the equivalent of 780 million lbs. of soyoil.
“The further date is certainly in order to allow some large holder the time needed to liquidate,” said Eugene Kunda, a former CBOT economist now with the office of Futures and Options Research at the University of Illinois.
“Since the issuers have no incentive to buy back or otherwise withdraw the number of receipts outstanding, it begs the question of who will hold the receipts the large holder is forced to sell.”