UPDATE 1-CBOT wheat convergence improves, more needed

(Updates with comments from CFTC head and CME)

By Christine Stebbins

CHICAGO, Sept 14 (Reuters) - The price difference between U.S. soft red winter cash wheat and Chicago Board of Trade futures tightened with September expiration on Monday but probably not enough to avoid more steps to fix the problem, officials and wheat industry sources said.

"We're still not satisfied with wheat convergence at the commission," Commodity Futures Trading Commission chairman Gary Gensler told reporters at a financial conference in Washington on Monday. "We think that more needs to be done."

"There has been some progress but more needs to be done here," he said. "We've got to get that convergence working even better than it looks to be right now.

The September contract marked the second CBOT wheat futures delivery reflecting revised contract specifications, including more delivery points and increased grain storage rates. For September, a stricter vomitoxin rule also went into effect.

The premium that futures held over cash prices narrowed to roughly 70 cents by Monday morning, compared with 83 cents at July expiration and nearly $2 a year ago in the key Toledo, Ohio, CBOT wheat delivery area.

CBOT September wheat futures WU9 expired quietly on Monday, going off the board at midday at $4.31 a bushel, down 10-3/4 cents. Open interest had shrunk to only 136 contracts as of Friday's close.

Typically, expirations are only monitored by CBOT insiders. But during the past year wheat has been keenly watched due to the continuing controversy over lack of "convergence" between expiring CBOT wheat contracts and cash prices.

Wheat millers, merchants, and exporters have complained for more than two years that the CBOT wheat contract was "broken" -- that convergence no longer was occurring, making obsolete the contract's use as a hedging tool and for bank collateral.

On Friday night, spot wheat bids in the key Toledo area were still 90 cents under CBOT December, or the equivalent of about 70 cents under CBOT September wheat this morning.

CME officials said convergence was improving, noting that a year ago the cash basis in Toledo was $1.98 under September. MORE TINKERING AHEAD?

Gensler said in July that the CBOT July wheat contract expiration had been better than other recent performances but the convergence gap was still "unacceptable" at 83 cents under the expiring July futures.

He promised that the regulator would take further steps to assure the restoration of convergence if the CBOT September expiration performance did not improve on July's.

Among the steps that CFTC is considering are "variable" storage rates, which would allow gains or reductions in grain warehouse storage charges.

The National Grain and Feed Association, the largest U.S. grain handlers group, last week called such rates "the next logical step" for CFTC and CME Group (CME.O), parent of CBOT, to try to restore convergence to the wheat contract.

Some wheat industry experts say the new rates will only enrich grain warehouse owners and not solve the problem. They argue more radical changes are needed to modernize a contract they say is out of step with changes in wheat marketing.

Such changes, they say, could include changing the wheat contract delivery area to the U.S. Gulf of Mexico, the main export gateway, or using a wheat cash index for contract settlements, not the CBOT spot contract.

"Last week Peru bought 140,000 tonnes of Black Sea wheat. When I went to a commercial and asked him why Peru, whose freight is tied to the U.S., would buy wheat all the way across the ocean -- he said because the funds have our wheat prices so pumped up that we can't be competitive in the cash markets," said analyst Roy Huckabay of The Linn Group.

Grain analysts say the CBOT wheat contract's use of shipping certificates that can be redelivered many times within a relatively restricted geographic area had evolved into a paper investment market for investors more than a grain marketing system for wheat millers or exporters.

As of Monday, there were a total of 22,078 delivery notices posted for delivery against the CBOT September contract -- on paper, more than 110 million bushels.

But only 1,282 of those are "new" deliveries representing new wheat moving into the system, while 20,796 represent "redeliveries," recirculation of wheat on paper disconnected from normal cash grain channels, according to CBOT data.

One encouraging sign was that 890 lots of the new deliveries had been posted at new delivery locations outside the dominant SRW wheat delivery area of centered on Toledo, Ohio.

(Additional reporting by Christopher Doering in Washington; Editing by Lisa Shumaker)