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Changes sought to CBOT wheat contract

Big global grain buyers have told U. S. regulators that the Chicago Board of Trade needs to improve on a plan to narrow a gap between wheat futures and cash prices that has hurt their ability to hedge big price swings.

Major grain companies that questioned the CBOT plan included Cargill Inc. and Bunge Ltd. But another big player in the market, Archer Daniels Midland Co., said the CBOT’s suggested changes were sufficient.

“We have serious concerns that the steps taken will not effectively address and correct the problem,” Cargill said in a statement filed with the U. S. Commodity Futures Trading Commission (CFTC).

CBOT Soft Red Winter wheat futures, the global benchmark for wheat prices, have been trading at a huge premium to prices in the cash market. The difference has been $2 a bushel or more in recent weeks, with futures trading at around $6 a bushel this week and cash prices quoted near $4 at some locations.

Grain companies say the gap makes it impossible to use futures to hedge against possible changes in grain prices.

“This presents strong evidence that the futures market is broken and the viability of the Chicago contract as an effective hedging instrument has to be called into question,” Cargill said in its statement, dated Friday.

Traders believe the futures contract no longer reflects the true value of Soft Red Winter wheat when contracts expire.

In an effort to close the gap and help futures and cash prices to converge, the CME Group, which owns the CBOT, proposed several changes last month to the wheat contract’s specifications. The proposal followed a series of meetings this summer with members of the grain industry.

The changes include raising storage rates for wheat for part of the year, adding delivery locations and raising quality standards by lowering the maximum allowable amount of vomitoxin, the byproduct of a wheat disease.

The exchange filed its recommendations to the CFTC, which accepted public comments on the plan until Oct. 3. The CFTC has released the statements on its website.

Grain processor Bunge supported the changes but, like Cargill, said more action was needed.

“These changes alone…are not likely to achieve the convergence sought by many commercial market participants,” Bunge said in its statement.

Some traders blame the gap between futures and cash prices on large speculators, including commodity index funds and pension funds, who invested heavily in commodities in recent years.

These funds, often called “passive investors” because they typically buy and hold long positions, maintain an unusually large share of the open interest in wheat futures. The index fund long position in CBOT wheat represented 46.1 per cent of all open contracts as of Sept. 30, the CFTC said.

Both Cargill and Bunge said the exchange should consider “compelled load-out,” a system of delivery certificates that would require those holding long positions in CBOT wheat futures to load the physical grain out of delivery elevators as each contract nears expiration.

The idea is to prompt those long holders to sell futures to avoid such a scenario – theoretically pushing front-month futures prices down, closer to cash values.

In a dissenting view, Archer Daniels Midland, another major grain processor, said the current CBOT proposals were sufficient.

“Only the aforementioned solutions are optimal at this time,” ADM said in its comments to the CFTC, warning that other steps could have “unintended consequences.”

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