The National Grain and Feed Association (NGFA) has asked the Chicago Board of Trade to consider forcing buyers of CBOT wheat contracts to take physical delivery of grain in some instances in order to bring the contract and cash grain markets back in sync.
The NGFA, the largest industry group of grain buyers and handlers, has complained for more than a year that the CBOT wheat futures contract is broken as a risk-management tool for hedging since at delivery its price and cash market values no longer “converge,” an essential for the risk-offset process.
NGFA said this week it submitted a modified “compelled loadout” concept to CBOT’s parent, the CME Group, as “one potential approach” to correct the problem.
This change would be on top of those already proposed by the CME – everything from increased storage rates, more delivery points, and a higher wheat quality – to improve contract performance, CME says. Those changes are currently being reviewed by the Commodity Futures Trading Commission, the futures regulator.
NGFA says a new tool – “demand certificates” – should be created so those holding futures market positions could be compelled to physically loadout wheat as a means of satisfying their outstanding futures contract obligations.
Buyers and holders of physical grain, such as grain elevators or processors or feed mills, normally sell futures contracts to offset risk, profiting on futures if grain prices fall. These “shorts” are the normal NGFA member positions.
Futures buyers, especially speculators, drove grain futures prices to records this year, forcing punitive rises in “margin” fees for the shorts and sparking complaints by NGFA that speculation by such buyers was bleeding the grain industry.
NGFA has toyed with “forced” loadout as a way of discouraging such non-grain industry futures market players from past practices. The latest submission to CME Group comes in response to continued lack of convergence by the CBOT wheat contract, NGFA said.
The group also is suggesting the maximum quantity for compelled loadout be 15 per cent of a facility’s registered loadout capacity and loadout to occur within 60 days. After that, storage charges would accelerate.
“Some additional changes… may be desirable, and other solutions to achieve convergence also may exist,” NGFA said.