The National Grain and Feed Association (NGFA) today called the CME Group's proposed changes to its CBOT wheat futures contract a "good first step,” but said much more dramatic, substantive changes need to be made to restore the "integrity and functionality” of the contract and its value to commercial hedgers.
The NGFA continued to express a "sense of urgency” in urging the CME Group to explore a more comprehensive approach to enhance the convergence – or narrowing – between futures and cash market prices for the CBOT wheat futures contract during the delivery period. To assist in this effort, the NGFA said it was establishing its own task force to further analyze the concept of "demand certificates,” under which the taker of delivery could compel load out of the underlying commodity – in this case, wheat – as a potential solution for enhancing convergence.
Established in 1896, the NGFA consists of 950 grain, feed, processing, exporting and other grain-related companies that operate about 6,000 facilities that handle more than 70 percent of all U.S. grains and oilseeds.
The NGFA said it did not object to the CME Group's proposals to implement three changes to its CBOT wheat futures contract – seasonal storage rates; additional grain elevator delivery locations for CBOT wheat at market-based differentials; and tighter limits on deoxynivalenol (vomitoxin) in wheat eligible for delivery to satisfy outstanding futures contracts.
But the NGFA said it did "not believe these changes alone will be sufficient to achieve convergence” in the CBOT wheat futures contract, which it said "may be at risk of failing if current trends continue.”
As the principal reason convergence is not occurring, the NGFA cited the "disproportionate” participation of investment capital in CBOT futures markets compared to commercial participants that use futures markets to offset price risk in the underlying commodity. The NGFA noted that index and pension funds now control about 60 percent of CBOT wheat futures contract open interest (futures contract positions that are not liquidated by an offsetting transaction or fulfilled by delivery) – a share that represents about 1.5 times the size of the entire U.S. soft wheat crop.
"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,” the NGFA said, noting that commercial participation in the CBOT wheat futures contract has declined as a result.
The NGFA previously has cited the infusion into agricultural commodity futures markets of large amounts of capital from passively managed index and pension funds that take "long-only” positions unrelated to supply/demand fundamentals as a major contributor to futures price volatility and market disruption. Entities taking a "long” futures market position have bought futures or options contracts, but have not offset those purchases with a cash market position in the underlying commodity.
The NGFA said compelled loadout "may be part of the solution” to enhancing convergence in the CBOT wheat futures contract, although the association said it was not recommending adoption of the concept yet. "Certainly, some period of time to analyze the structure of such a change and how to implement compelled loadout would be needed,” the NGFA said. "Given the urgency of the situation and the need for solutions, we would urge that consideration be expedited and brief to evaluate whether compelled loadout is the right course.”
The NGFA said its task force would further develop the details of the compelled loadout concept with the goal of maintaining contract balance and functionality "so that long hedgers would not be inadvertently driven out of the contract because of unacceptable levels of risk.” The NGFA said it would provide its recommendations to the CME Group and other interested parties.
But the NGFA also encouraged the CME Group to research and design new alternatives to the current CBOT wheat contract, expressing concerns that ultimately, the continued dominance and ever-increasing share of open interest held by investment capital may make it difficult to achieve convergence on a consistent basis. The NGFA recommended, among other things, that the CME Group explore creating a new world wheat index contract, a U.S. wheat index contract comprised of all wheat classes, or some other index product that could be used by investment funds wanting to buy wheat futures contracts as part of an investment portfolio, and which potentially could operate side-by-side with the current CBOT wheat contract that could be used by traditional hedgers.
The NGFA's membership encompasses all sectors of the industry, including country, terminal and export elevators; feed mills; cash grain and feed merchants; end users of grain and grain products, including processors, flour millers, and livestock and poultry integrators; commodity futures brokers and commission merchants; and allied industries, such as railroads, barge lines, banks, grain exchanges, insurance companies, computer software firms, and engineering and design/construct companies. In addition, the NGFA consists of 36 affiliated state and regional U.S. grain and feed associations, as well as two international affiliated associations. The NGFA also has strategic alliances with the Grain Elevator and Processing Society and Pet Food Institute, and is co-located and jointly operates with the North American Export Grain Association.