By DOUG SCHMITZ
Iowa Correspondent

DECATUR, Ill. — The National Grain and Feed Assoc. (NGFA) has requested the Commodity Futures Trading Commission (CFTC) closely monitor planned changes to the Kansas City Board of Trade’s (KCBT) hard red winter wheat futures contract, which would take effect this September.

“It is critically important that convergence be reestablished in the KCBT wheat futures contract as quickly as possible,” said Matthew Bruns, vice president of corn processing at Archer Daniels Midland Co. in Decatur, Ill., back in August when the NGFA initially urged the KCBT to evaluate and adopt corrective changes to restore convergence to its wheat futures contract.

The NGFA said this would contribute to enhancing convergence between cash and futures market values if the CFTC approves the contract changes early this year. In a Jan. 4 letter, the NGFA said the KCBT’s decision to adopt a harvest storage premium was “an initial step in the right direction” and a “constructive effort” by the exchange that “should assist in improving” the futures contract’s performance.

But the NGFA also cautioned that if those changes do not enhance convergence within a reasonable time, the exchange should be prepared to consider additional contract changes to bring about the intended result.
“Convergence matters – not just sometimes, but consistently and predictably,” Bruns said. “The NGFA believes strongly that any (futures) contract changes should be evaluated by industry, the exchanges and the CFTC against this measuring stick.”

Hard red winter is a brownish, mellow high-protein wheat used for bread, hard-baked goods and as an adjunct in other flours to increase protein in pastry flour for piecrusts. Some brands of unbleached all-purpose flours commonly made from hard red winter wheat alone.

According to the KCBT, Kansas City wheat futures contracts are delivered every year in March, May, July, September and December. Currently, the daily price limit for hard red winter wheat futures contracts on the KCBT is 60 cents per bushel, or $1,500 per contract, above or below the previous day’s settlement price.

However, this limit increases 50 percent in the following trading session if the price of two or more futures contracts with delivery months in the first five listed non-spot contract months, or the final contract month of a crop year, closes at the price limit.

During the CFTC’s Agricultural Advisory Committee meeting last August, the NGFA initially urged the KCBT to evaluate and implement necessary changes to its hard red winter wheat futures contract to quickly reestablish convergence between cash and futures market values.

Approved by the exchange’s membership last November, the changes to the KCBT wheat futures contract would increase the base storage rate by 3 cents per bushel, with an additional 3-cent-per-bushel harvest storage premium from July through November.

Under the KCBT seasonal storage rate concept, the current base storage rate for the KCBT hard red wheat futures contract would increase to 6 cents per bushel per month, with an additional “harvest storage premium” that would increase the rate to 9 cents during the months of July through November.
But if the KCBT-developed seasonal storage rate changes don’t enhance convergence by September 2012 – a year after implementation – the NGFA said additional revisions to the contract may be necessary.

Among the other potential changes that might merit consideration is the variable storage rate methodology the NGFA previously advocated.

The CME Group for the Chicago Board of Trade’s soft wheat futures contract implemented such a variable storage rate concept in 2009 after experiencing a significant lack of convergence over a period of more than two years, the NGFA said.

The NGFA cited conflicting views over the KCBT’s decision to amend its wheat futures contract that would impose an 11 percent minimum protein requirement at contract price, with a 10-cent-per-bushel discount for 10.5 percent protein.
In addition, some delivery elevators and grain buyers have raised concerns about the adverse effect upon deliverable supplies – and potential detrimental impacts on convergence – that might be caused by a tighter protein limit during a crop year in which hard red winter wheat protein levels are abnormally low, the NGFA added.

The NGFA also expressed concern about some end users who believe the protein requirement could enhance convergence by giving the “taker” of delivery greater assurance of receiving wheat of sufficient protein to meet market demand.

“In an environment with competing views on the best changes to contract terms, it will be especially important for the CFTC to monitor closely implementation of the changes and to evaluate fully and carefully whether they contribute to convergence,” the NGFA said.

“We look forward to a continuing constructive dialogue on how best to achieve convergence for the KCBT wheat (futures) contract and ensure its effectiveness as a critically important price-discovery and risk-management tool.”