Chicago, September 24, 2008 - Food and grain companies, who complain they can no longer use the futures markets to hedge their purchases of wheat, have told U.S. regulators that Chicago Board of Trade proposals to narrow the gap in prices between wheat futures and cash markets do not go far enough.
CBOT soft red winter wheat futures, considered the global benchmark for wheat prices, have been trading at a significant premium to prices in the cash market. Companies say the gap makes it impossible to use futures to hedge against possible changes in grain prices.
"The recommendations ... we believe fall short in terms of the type of aggressive action needed to assure convergence," Kraft Foods Inc said in a statement filed last week with the U.S. Commodity Futures Trading Commission (CFTC).
Kraft, the largest North American food maker, owns the biggest U.S. wheat flour mill, located in Toledo, Ohio.
CBOT wheat futures have been trading at increasingly higher levels above cash wheat prices over the last three years -- up to $2 per bushel in the U.S. Midwest in recent weeks. Traders believe the futures contract no longer reflects the true value of soft red winter wheat when contracts expire.
Many in the grain trade blame large speculators, including commodity index funds and pension funds, who have invested heavily in commodities in recent years.
These funds, often called "passive investors" because they typically buy and hold long positions, maintain an unusually large share of the open interest in wheat futures. The index fund long position in CBOT wheat represented nearly 45 percent of all open contracts as of Sept. 16, the CFTC said.
The lack of price convergence has been driving away traditional users of CBOT wheat futures, commercial grain hedgers say.
"We have, and will in the future, be forced to seek alternative hedging mechanisms until the issue of convergence is resolved," Glencore Grain, a unit of commodities supplier Glencore International AG, said in a statement filed with the CFTC on Monday.
In an effort to close the price gap and help futures and cash prices to converge, the CME Group, which owns the CBOT, has proposed several changes to the wheat contract's specifications. The proposal followed a series of meetings this summer with members of the grain industry.
The changes include raising storage rates for wheat for part of the year, adding futures delivery points and raising quality standards by lowering the maximum allowable amount of vomitoxin, the byproduct of a wheat disease.
The exchange filed its recommendations to the CFTC, which has invited the public to comment on the plans through Oct. 3.
Comments posted so far indicate that grain companies don't believe the proposals go far enough, especially in curbing the influence of index funds.
Glencore said in its statement that it preferred "forced load-out," a system of delivery certificates that would require those holding long positions in CBOT wheat futures to load the physical grain out of delivery elevators as each contract nears expiration.
The idea is to prompt those long holders to sell futures to avoid such a scenario -- theoretically pushing front-month futures prices down, closer to cash values.
"'Forced load-out' is likely to be the best method for achieving rapid convergence," Glencore said.
However, Jeffrey Hainline, president of brokerage Advance Trading of Bloomington, Illinois, said it was unlikely such a system could be put into place quickly.
"Due to the material nature of this change... we feel that this could not be instituted prior to the new crop months of 2009," Hainline said in his comment to the CFTC.
Earlier this month, the National Grain and Feed Association, the largest U.S. grain trade group, said it backed the CBOT's proposed changes but believed additional steps were needed, including consideration of forced load-out.