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CME Changes the Rules on Wheat Trading

CME adjusts Wheat contract rules


CME Group Inc. ( CME ) unveiled changes to its Wheat contract, the exchange's latest move to align its futures instrument with grain trading in the cash market.

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 crop's development.

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 lesser.

"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 volatility.

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.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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