By KEVIN WALKER
Michigan Correspondent

CHICAGO, Ill. — The CME Group announced late last month that it will implement a variable storage rate for wheat contracts beginning September 2010, pending approval from the government.
Fred Seamon, an economist at the CME Group, said that there tends to be a lack of convergence between the futures price and cash price of wheat when the market is at 85 percent of fully carry or greater.

In the futures market, full carry occurs when the price difference between contracts with two different delivery months equals the full cost of carrying the commodity from the delivery month of the first contract to the next. Carrying costs include interest, insurance and storage. This situation encourages investors to hold long term speculative positions in wheat. The variable storage rate concept will increase the cost of storage, making these positions less profitable for investors.

Kendall Keith, president of the National Grain and Feed Assoc. (NGFA), said that in recent years investors have been virtually guaranteed a five or six percent return on a wheat contract, as opposed to two or three percent on a bank CD.

“Investors understand that equation and they take the wheat,” Keith said.

The NGFA would like the CME Group to implement a variable storage rate as soon as possible, but Keith said an upcoming meeting of the Commodity Futures Trading Commission’s (CFTC) Agriculture Advisory Committee will have the effect of delaying a decision.

“We’d still prefer to go with a December 2009 implementation, but if they’re not going to do that we’d prefer they do it with the March 2010 contract,” Keith said.

Seamon said that it would be against the company’s policy to implement the change sooner than September 2010 and he said it would also violate CFTC policy.

“Implementing the change too soon would be disruptive to the market,” said Mary Haffenburg, a spokeswoman for the CME Group.
She also suggested that the NGFA would like the change to occur sooner because of a purported financial interest it might have in the change; but Keith said that “the reason we want it to happen sooner is we’ve had a problem with convergence since 2006.”
He also said that, no matter when the change is made, somebody will be negatively affected.

“There are people that have open positions; it will affect spread relationships, there’s no doubt,” Keith said. “The market does not want changes to take place where there are open positions. This has been going on for a long time. Regardless of what time period you pick people are going to get hurt.”

The CFTC is now accepting public comments on the proposed change.