UPDATE 2-CFTC's Gensler urges KCBT to fix wheat contract

* Gensler- KCBT must make changes to wheat contract soon

* KCBT making progress, cautions against acting too fast

* Gensler hints at possible legal options (Adds Gensler, analyst comments on VSR, paragraphs 10, 11, 18-20)

By Christopher Doering and Roberta Rampton

WASHINGTON, Aug 5 (Reuters) - The head of the U.S. futures regulator pushed the Kansas City Board of Trade on Thursday to make public proposed changes to its hard red winter wheat contract, where cash and futures prices are failing to converge.

Problems in KCBT wheat and CME Group's (CME.O) Chicago Board of Trade soft red winter wheat contract have prompted regulators and exchanges to seek ways to bring cash and futures prices closer together, a change many say is needed to restore credibility to the market.

CFTC Chairman Gary Gensler repeatedly pressed KCBT's president for a timetable for when it would propose a solution to convergence, but the exchange was reluctant to set a date.

"I respect that these are challenging" issues, Gensler said at a meeting of the CFTC's agriculture committee. "I'm glad we agree there is a problem but I would hope whatever solutions you come up with are soon, not many months."

CFTC Commissioner Bart Chilton told KCBT people are calling the agency demanding changes.

"There are a lot of (angry) farmers out there," Chilton said. "They don't care if you work every day from now until Christmas and and beyond. They want it fixed."

KCBT President Jeff Borchardt said he hoped the committee would agree on a fix in the next six to eight weeks, but said the exchange would be unlikely to announce it until year end.

Borchardt cautioned against a "knee-jerk reaction" that could harm its 150-year-old contract.

"I think they are making some good progress," Borchardt said of a committee at his exchange reviewing possible changes. "They are looking at alternatives that foster convergence either immediately or over time," he said.

Gensler hinted the CFTC could explore other ways to get KCBT to act quickly. "I don't know what our legal authorities are," he said.

When asked on the sidelines of the meeting what he meant by his comment, Gensler would not expound except to say he looked forward to hearing from the exchange in six to eight weeks "as to what they are going to recommend to fix this contract.".

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Take a Look: CFTC push for position limits [ID:nCFTCREG]

Factbox on variable storage rate plan: [ID:nN15229254]

Analysis: CME wheat converges with cash [ID:nN21269446]

CFTC wheat convergence back in spotlight [ID:nN04253063]

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The KCBT is the latest exchange to feel pressure to make changes to its wheat contract.

Wheat millers, merchants and exporters have complained for years that the Chicago Board of Trade's wheat contract was broken. They contend the contract can no longer be used as a hedging tool because wheat futures prices and cash prices fail to converge when the contract expires.

In response, CME Group instituted a much-debated variable storage rate (VSR) plan, which raised storage rates by 3 cents to 8 cents a bushel per month. [ID:nN28261726]

Early signs indicate the VSR solution has brought Chicago cash and futures prices closer together as the spot month expires, producing the best convergence in at least two years.

David Lehman, CME Group director, told CFTC there has been strong growth in volume and open interest since the VSR announcement, and an improvement in convergence. He did not pin the improvement in convergence solely on the VSR, also citing better market fundamentals.

"It's really too early to give much of the credit to VSR," said Lehman.

Some complain the VSR favors growers and grain merchants who have wheat to sell, at the expense of millers, exporters and other buyers, skewing supply-demand dynamics and shifting the convergence problem to deferred months.

"VSR has destabilized our contract" said Josh Kirley, an independent floor trader, who said desk managers and floor brokers are reluctant to take orders beyond the first two months "because positions are so difficult to get in to and out of."

Kirley said VSR has actually harmed the market.

"VSR has created needless uncertainty," he said. "Going forward five times each year VSR will unnecessarily impose more volatility into our spread futures."

(Additional reporting by Christine Stebbins in Chicago; Editing by John Picinich, Sofina Mirza-Reid and David Gregorio)