Soft red winter wheat, used for flat breads, cakes, pastries and crackers, has served as a benchmark for world wheat pricing for over a century. Recently, however, grain traders have stopped using it in this way, complaining that a flood of Wall Street money has inflated futures beyond cash values.
CME Group, the CBOT’s parent company and the world’s largest futures exchange, proposed the changes, which include increased storage fees during the harvest period and new cash delivery points. The move is an attempt to reestablish a credible benchmark, and to discourage the holding of grain, which can be an influential element in market fluctuations.
Less potential for manipulation
In its approval letter, the CFTC said: “In its analysis, the Commission staff found that the amendments have the potential to increase economically-available deliverable supplies, delivery capacity and the number of shipping certificate issuers for the futures contract, and should reduce the contract’s overall susceptibility to manipulation.”
Both the Commission and the National Grains and Feed Association (NGFA) – the largest US group of grain buyers – have said that further changes may be needed, however, to create market convergence with actual cash value.
Commission chairman Walter Lukken said: “While these amendments are a good first step, additional changes may be needed to ensure that this contract serves its price discovery and risk management functions.”
Speculation can perform an important function, helping the price discovery mechanism by highlighting any emerging imbalances between supply and demand – in this case, encouraging planting when supply is tight and prices are high and discouraging it when supply is good and prices are low.
Disproportionate investment
The National Grain and Feed Association (NGFA) has been saying for over a year that a massive difference between the amount of speculative investment and the volume of delivered wheat has led to this mechanism breaking down.
According to the NGFA, about 60 per cent of wheat futures are now controlled by index or pension funds, which are not subsequently liquidated by a delivery or offsetting transaction. This equates to approximately 1.5 times the entire US soft wheat crop.
It said: “The disproportionate participation of investment capital relative to total participation in CBOT wheat futures has been the primary factor leading to deterioration in its performance.”
A 60 per cent seasonal premium for storage, as well as increased train and barge loading facilities in northwest Ohio and along the Ohio and Mississippi Rivers, will be established in July 2009, while stricter vomitoxin levels (a by-product of wheat disease) – from 3ppm to 2ppm, will be enforced from September 2011.