CFTC committee proposal rattles CME wheat market

CHICAGO, Sept 24 (Reuters) - A possible move by the Commodity Futures Trading Commission to implement variable storage rates for the Chicago Board of Trade 2009 December wheat contract jolted traders Thursday and sparked heavy spread trading.

"It really took us off guard and creates a lot of uncertainty," said one wheat broker on the CBOT trading floor. "We saw the back month spreads widened out overnight, starting with the March contract."

The CBOT wheat spreads expanded during the session, with the March 2010/March 2011 differential jumping 10 cents a bushel. By the close, the March 2010/March 2011 spread was 6 cents wider.

A CFTC subcommittee made up of grain industry, exchange and government officials to study the current lack of "convergence" at CBOT wheat expirations recommended trying the variable rates on Wednesday as the next step to try to fix the contract.

The move would allow the exchange to raise or lower grain storage rates at CBOT delivery facilities by roughly 3 cents a month starting with the December 2009 contract.

The real "shocker" to CBOT traders was that the proposal, if implemented, would change the rules in the December contract -- the one with the largest open interest and the one where most of the price bets by futures traders have been placed.

As of Wednesday's close, December 2009 open interest was over 200,000 contracts, or 63 percent of the total.

"They're playing with a contract that's already in existence, and people with hedges there. How do I know where to put my commercial hedges?" said Roy Huckabay, grain market analyst with The Linn Group brokerage in Chicago.

MOVING THE GOAL POSTS?

The current storage rate affecting the December contract is 8 cents a bushel and reverts back to 5 cents on Dec. 18 -- a change implemented earlier this year to improve convergence.

Lack of the usual coming-together of futures and cash market values at wheat expirations has devalued the century old CBOT wheat contract as a risk-management tool for hedgers, the National Grain and Feed Association and others have said.

The CME (CME.O), parent of the Chicago Board of Trade, surveyed traders on the variable rate storage idea last month.

David Lehman, director of commodity research at the CME, expressed concern about such a sudden change given the large outstanding open interest in the December contract.

"That has the potential to affect pricing of that spread on a significant amount of open interest," Lehman said during the subcommittee's third public meeting on Wednesday. "That's something the CFTC rules are pretty clear on." [ID:nN23420435]

Any change affecting an agricultural contract with open interest must be approved by the full CFTC.

CME plans to finish its research on the variable storage rate concept "very soon" and will decide "whether to move forward with it or not," Lehman told Reuters on Thursday.

The price spread between CBOT December and March futures on Thursday closed basically unchanged at 20 cents a bushel, representing the full cost to finance and store wheat from December to March.

But the forward, deferred month spreads had widened out 3 to 6 cents by the close, as deferreds gained on expectations the rule would go into effect.

NGFA, the largest U.S. grain handlers group, earlier this month called the proposal "'the next logical step'" in the ongoing effort to encourage convergence between cash and futures market values in the CBOT wheat futures contract."

"The National Grain and Feed Association is pleased that the CFTC Subcommittee on Convergence has decided to recommend speedy adoption of the variable storage rate concept," NGFA said in a statement on Thursday.

But merchandisers worry the move will disrupt cash marketing patterns, enticing firms to build more storage bins to hold soft red winter wheat to cash in on big storage fees.

"What we have here is CFTC and National Grain and Feed looking at one small part of the picture and not taking a macro approach," said Glenn Hollander, general partner with cash merchant Hollander and Feuerhaken, a 40-year CBOT veteran.

"We're changing agriculture to conform to the market, not the other way around." (Additional reporting by Julie Ingwersen; Editing by Marguerita Choy)