By DOUG SCHMITZ
Iowa Correspondent

WASHINGTON, D.C. — As of Aug. 9, the CME Group’s Chicago Board of Trade (CBOT) wheat futures and options on futures listed a record 354,169 contracts, with wheat futures alone hitting a record 316,053 contracts, passing the prior record of 294,345 posted on Aug. 2.

More specifically, according to the USDA’s Aug. 12 Crop Production report, hard red winter wheat production was forecast at 1.03 billion bushels, up 2 percent from July and 12 percent from 2009.

Despite this recent surge in contracts, the National Grain and Feed Assoc. (NGFA) four days prior urged the CBOT’s counterpart, the Kansas City Board of Trade (KCBT) – which mainly handles the hard red winter wheat futures market – to identify and implement changes to its hard red winter wheat futures contract, to promptly restore convergence between cash and futures market values near delivery.

At an Aug. 5 meeting before the Commodity Futures Trading Commission’s Agricultural Advisory Committee in Washington, D.C., Matt Bruns said the historically weak basis levels between futures and cash values have existed in the hard red winter wheat market for several months, which often neared $2 per bushel.

“It is critically important that convergence be reestablished in the KCBT wheat futures contract as quickly as possible,” said Bruns, vice president of corn processing at Archer Daniels Midland Co. in Decatur, Ill. who chairs the NGFA’s Risk Management Committee.

“We have been in close contact with KCBT officials to convey our concerns, share information and discuss potential solutions.”
An Aug. 9 Bloomberg report said wheat futures for December delivery dropped 11.5 cents, or 1.5 percent, to close at $7.4375 a bushel at 1:15 p.m. on the CBOT. On Aug. 6, the price fell 60 cents, or the most allowed by the exchange, and the biggest decline for a most-active contract since June 3, 2009.

That same day, CBOT wheat prices for September delivery exceeded $7 a bushel in United States trade for the first time since September 2008, before falling back to $6.93. Bruns emphasized the need to narrow the gap between futures and cash prices as futures contracts for hard red winter wheat – which are nearing expiration – as a “fundamental principle” of agricultural futures markets.

“Convergence needs to occur consistently and predictably for exchange-traded futures to continue having utility to hedgers,” he said. ”Convergence is absolutely critical to the price discovery and risk management functions of futures exchanges.”

Bruns said several examples of the lack of convergence in the KCBT wheat futures contract were “the large hard red winter wheat crop, heavy carryover stocks, some quality concerns, tight storage space, until-recently sluggish export demand and the impact of investment capital in agricultural futures markets.”

For now, Darin Newsom, senior analyst at DTN/The Progressive Farmer – who led an Aug. 10 “webinar” on wheat futures with farmers, grain buyers and traders – said the wheat market “may have calmed down at the moment, but still has potential for further swings.

“This is not a supply-driven market rally,” Newsom said of more than $8.41 per bushel in futures trading the week of Aug. 8.

“A great deal of this market is tied to incredible buying, in particular in the past couple of weeks, by noncommercial (speculative) traders.”

The NGFA said part of the recent improvement in the CBOT wheat futures contract could be because of the variable storage rate, “although it may be too early to definitively assess its impact given the existence of other contributing factors, such as a smaller soft red winter wheat crop and reduced carryover stocks.”

Under the variable storage rate concept, storage (premium) charges assessed by grain elevators approved by the CME Group as locations for physical delivery of wheat to satisfy outstanding CBOT wheat futures contract obligations expand or contract, based upon the carry in the market that is implied by futures market spreads.

Given the strong demand for grain storage and the possibility of increasing wheat storage fees being charged, regular delivery point grain elevators could find themselves forced to accept “below market” grain storage fees on grain that has been delivered by short or sell position holders, according to a July 14 analysis on why Kansas City wheat futures and cash prices haven’t converged.

“This situation may occur if long position holders who receive physical delivery decide that instead of immediately selling in the cash market they will store at the regular delivery facility, paying the rate of storage specified in the KCBT wheat futures contract (i.e., about 4.5 cents per month),” said Daniel M. O’Brien, Kansas State University extension agricultural economist, and Art Barnaby Jr., professor of agricultural economics.

Recently on the KCBT, wheat futures rose on speculation that the recent Russian ban (see related article this week) would boost demand for supplies from the U.S., with speculators raising their net-long positions in wheat futures and options by the smallest increase since they turned bullish in July, Bloomberg added.

But USDA Secretary Tom Vilsack said on Aug. 10 that despite the fires and floods in Russia, a world wheat shortage is unlikely.

Bruns said the NGFA hasn’t offered specific recommendations for changes to the KCBT wheat futures contract, but has met with the exchange’s Wheat Contract Committee to explore options.