* Farm-market economists release wheat convergence study
* Reliability as a hedging market called into question
* Value of storing physical wheat seen distorting prices
By Christine Stebbins
CHICAGO, Nov 11 A new study of pricing and
storage problems with Chicago Board of Trade wheat futures
concludes that "fixes" aren't working and the problems may be a
threat to the long-term health of CBOT grain markets.
"If non-convergence were to persist, there would be
potential for a competing set of futures contracts that
enforces convergence to replace the current CBOT and KCBOT
(Kansas City Board of Trade) contracts," the study says.
The study, titled "Futures Market Failure?", was written by
University of Illinois economists Scott Irwin and Philip Garcia
and University of California Davis economist Aaron Smith.
The CBOT wheat contract, the world benchmark for decades,
has been under intense attack in recent years by farmers and by
commercial grain hedgers, which buy grain and process, export
or feed it to livestock.
The focus of the criticism -- which has drawn in the
regulator of the CME Group , CBOT's parent, the
Commodity Futures Trading Commission -- has been an inflated
value for CME wheat futures compared to actual cash prices
during futures delivery periods.
Normally, if futures are higher than cash, grain is
delivered against the contract and prices converge. If futures
are lower, grain is withheld and futures rise -- and converge.
The authors say the root cause of non-convergence occurred
because the price of physical storage in the cash market rose
above the fixed storage rate specified in grain futures at
futures delivery locations. The result is that wheat
consistently remains more profitable to store than deliver.
Nearly all wheat delivered against CBOT futures ends up in
the Toledo, Ohio, wheat growing region at facilities owned by
The Andersons, an exchange-approved warehousing firm.
The fixed futures storage rate was too low compared to
market conditions starting in 2006, the study says.
As a result CBOT wheat had failed to converge at expiration
for about five years, with futures as much as $2 per bushel
over cash, a signal the contract was broken, grain firms say.
"CBOT wheat has been the poster child for non-convergence,"
the study says.
But the economists also found similar problems in the even
larger CBOT corn and soybean contracts in a five-year period.
"Between 2005 and 2010 many Chicago Board of Trade corn,
wheat and soybean contract expirations exhibited convergence
failure with futures contracts expiring at prices up to 35
percent greater than the prevailing cash grain price," it
FIXES NOT WORKING?
Trying to "fix" the contract, the CME has put in place
"variable storage rates," or VSR -- a complicated scheme that
can raise or lower storage fees for wheat every delivery period
to, in theory, spur or restrict movement of wheat into
Under the current system, VSR has inflated storage fees to
the point that it has made soft red winter prices uncompetitive
in export markets.
"The institution of a variable rate storage rule appears to
have resolved the immediate convergence problems in that
market, but significant obstacles remain. The VSR is
complicated and potentially prone to manipulation," it said.
Irwin said in an interview that he and his colleagues were
confident they had sorted the reasons for the anomalies in the
CBOT wheat contract, which have baffled many experts who have
tried to sort the mechanics of cash grain merchandising, the
role of big companies, and even the role of Wall Street brokers
in engineering new and profitable ways to "hold" grain.
"We finally think we have cracked the riddle of these
recent and massive and unprecedented convergence problems,"
Irwin, who has been a consultant to the CME and CFTC on grain
market economics in recent years, told Reuters.
"It's all about what is the true market value of what I
would have to pay to get a commercial elevator in the delivery
territory to use the space instead of them," Irwin said.
Irwin said CME corn and soybean contracts are at risk of
running into convergence problems similar to wheat. He has
recommended to CME to consider raising storage rates at a fixed
rate say 8-10 cents -- not a variable rate.
"As a result of studies like this and ongoing feedback from
industry, over the last few years we've made modifications to
our wheat contract that have resulted in significantly enhanced
convergence," CME said in a statement commenting on the study.
The study is available at