CME adjusts Wheat contract rules
CME Group Inc. (
) unveiled changes to its Wheat contract, the exchange's latest
move to align its futures instrument with grain trading in the
The new specifications, which deal largely with the quality of
Wheat that can be delivered against the contract, are aimed at
bringing futures prices closer together with the "cash" prices in
the physical market.
CME operates the Chicago Board of Trade, the USA's preeminent
agri exchange, and has come under criticism for this lack of
called convergence, which has created problems for farmers and
food companies that seek to use CBOT Wheat futures as an
instrument to hedge commodity price risk.
Under the new standards, Wheat containing more than 4 parts
per million, or PPM, of vomitoxin cannot be delivered against
futures, starting with the September 2013 contract.
Currently, Wheat with this much vomitoxin can be delivered at
a discount of 0.24 to the contract's price.
In addition, CME will increase the price discount for Wheat
containing 3 PPM of vomitoxin to 0.20 per bushel from 0.12.
Vomitoxin is a byproduct of a fungus that grows on Wheat that
has been exposed to excessive rain during a Key period of the
The US Food & Drug Administration allows no more than 1
PPM of vomitoxin, or about 1 kernel in 80 lbs of Wheat, in food
meant for human consumption. Standards for livestock feed are
"The market really does not want anything with any significant
amount of vomitoxin," said Bryce Knorr, an analyst for Farm
Futures, an agricultural publication.
This year, the USA's harvest of soft, red winter Wheat, which
underpins the futures contract and is used to make flour for
foods like crackers and donuts, was a big one.
That combined with high Corn prices means that more so than in
previous years, Wheat supplies are being directed to both food
and animal-feed processors.
Prices for soft, red winter Wheat futures have been rising
recently on spillover support from gains in the Corn market.
Tuesday, the most-active Dec Wheat contract re-treated 0.5% to
$7.9075 a bushel on the CBOT.
CME already had stiffened requirements on vomitoxin content in
recent years. Still, grain users pushed for the latest
adjustments to make "deliverable Wheat meet standard
merchandisable quality standards," according to the exchange.
The changes also are designed to make the Wheat contract a
more effective tool for protecting farmers against price
The Wheat contract has been criticized in recent years because
cash prices have lagged below futures prices when the markets are
supposed to come together, or converge, to make the futures
contract an effective hedging tool for farmers.
Hedges are less efficient for farmers if a wide gap exists
between futures contracts sold for price protection and money
taken in from cash grain sales.
Lower allowable levels of vomitoxin should make the contract a
better hedging tool because it will reduce the amount of Wheat
that can be delivered by canceling out poor-quality grain. That
should raise cash prices closer to futures prices. The smaller
the supply, the more valuable.
CME has previously overhauled its storage system for Wheat to
encourage the convergence of cash prices and futures.
The revised system allows prices charged by grain elevator
operators to fluctuate, and the rate has increased since the new
system took effect.
Rising storage costs encourage market participants to deliver
Wheat when a futures contract expires, and price convergence
depends in part on physical Wheat being delivered.
The revised storage system and the stricter vomitoxin
standards have helped bring futures and cash prices closer. Wheat
in St. Louis traded 0.25 below futures Tuesday. That compares to
a difference of nearly 2.00 in Y 2008.
Paul A. Ebeling, Jnr.
Paul A. Ebeling, Jnr. writes and publishes The Red
Roadmaster's Technical Report on the US Major Market Indices, a
weekly, highly-regarded financial market letter, read by opinion
makers, business leaders and organizations around the world.
Paul A. Ebeling, Jnr has studied the global financial and
stock markets since 1984, following a successful business career
that included investment banking, and market and business
analysis. He is a specialist in equities/commodities, and an
accomplished chart reader who advises technicians with regard to
Major Indices Resistance/Support Levels.