Sunday, July 26, 2009

The Debts of the Spenders: CFTC Proposes Further Limits on Wheat Contracts

If the CFTC is trying to drive down the price of wheat, these actions are a pretty good way of deterring bulls. Instead of focusing attention on grains, the CFTC should address the cost of carry for other commodity sectors like COMEX gold or NYMEX crude where eggregious speculation has run amok for the past few years.

CFTC Grp Suggests Storage Rate Change To Fix CBOT Wheat

A government subcommittee said Thursday it will recommend regulators consider a variable grain storage rate to narrow the problematic gap between cash wheat prices and futures if other previously approved changes fail.

The proposal, from the Commodity Futures Trading Commission’s Subcommittee on Convergence in Agricultural Commodity Markets, is less sexy than the recent recommendation from a U.S. Senate panel. The panel urged the commission to reform the Chicago Board of Trade wheat futures market by clamping down on participation by index traders.

The CFTC subcommittee thought it would be more “even handed” to acknowledge there are a “number of complicit factors” in the lack of convergence between cash prices and futures, said Jeff Harris, CFTC chief economist and chair of the convergence subcommittee. The group held its second public conference call Thursday to identify a set of possible solutions to improve convergence.

CFTC Chairman Gary Gensler earlier this week told a hearing of the Senate’s Permanent Subcommittee on Investigations that the agency will take aggressive action to fix the CBOT wheat market. The Senate panel has blamed “excessive speculation” by commodity index traders for inflating wheat futures prices relative to cash prices. Cash prices and futures are supposed to converge when futures go into delivery, but cash soft red winter wheat prices have lagged well below futures for at least two years. SRWwheat, traded at the CBOT, is used to make pastries and snack foods.

The concept of a variable storage emerged as the CFTC subcommittee’s top recommendation after other options were ruled out, including a compelled load-out system. Under the proposal, which has yet to be formally written, storage rates could increase or decrease from month to month depending on spreads between the nearby contract and the first deferred contract month.

If the spread was 85% of full carry, the storage rate would be increased by 5/100 cent per bushel per day after the end of the delivery period, according to CBOT’s initial concept proposal. The subcommittee hasn’t finalized what would trigger adjustments or how much rates would be adjusted. Higher storage charges could encourage people to make delivery earlier, as opposed to holding onto wheat to reap the benefits of carry charges. Carry is the cost of taking delivery of the grain and includes storage, insurance and interest. Dynamic storage rates would add “some complexity to the market,” said Dave Lehman, director of commodity research
and product development for CME Group Inc. (CME), parent company of the CBOT.

However, the market would be able to adapt, he said on the conference call. The subcommittee said it won’t recommend the CFTC’s full Agricultural Advisory Committee consider compelled load-out or switching the par delivery point to the Mississippi River Gulf, an export hub.

Compelled load-out is a system that would require holders of long positions to load out physical grain from delivery elevators. However, two ideas will be forwarded to the full CFTC committee for more study, the subcommittee said. They are the concepts of a cash-settled market and a devaluing of delivery certificates as time passes from contract expiration. In a cash settled market, the final settlement price of a futures contract can be determined using an index of cash prices.

The subcommittee is expected to send its recommendations to the full committee in late September following the expiration of the September contract month. Members are waiting to see how previously approved changes to the CBOT wheat contract affect convergence of the September contact.

Source: CME News For Tomorrow
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