CHICAGO Oct 20 Frustrated wheat traders who
say the Chicago Board of Trade soft red winter wheat contract
is no longer an effective hedging tool appear to be testing the
waters in a new market -- the Minneapolis Grain Exchange.
Open interest in the MGE's long-dormant, cash-settled Soft
Red Winter Wheat Index (SRWI) futures has exploded over the
last three weeks -- jumping from zero on Sept. 25 to 1,258
contracts as of Oct. 16.
Traders say the burst of activity for the long moribund
grain "index" contracts is directly tied to the travails at the
CBOT, its parent the Chicago Mercantile Exchange (CME.O) and
its regulator, the Commodity Futures Trading Commission.
"It is a reflection of firms that want to do something
other than hedge in Chicago and this includes some fairly well
known commercial names. Most of it I think seems to be spread
activity versus Chicago," said Rich Feltes, senior vice
president of MF Global Research in Chicago.
"Open interest in that contract is being helped along by
the sequence of events in Chicago, including this likely
approval of variable storage rates which many players simply do
not see as the final answer," he added.
Commercial grain companies have complained for more than
two years that the CBOT wheat contract has broken down as a
hedging tool, saying Wall Street investment flows that have
inflated futures far above basic wheat supply/demand forces.
The result -- a lack of convergence between cash and
futures prices at contract expirations, an essential condition
for hedging -- has also vexed the CME and CFTC. They have tried
various ways including higher grain storage fees to encourage
more grain to move out of storage and into marketing channels.
CFTC is considering unusual new "variable" storage rates
for the CBOT wheat contract. CME wants to install the new rates
from September 2010 -- nearly a full year later than a target
date suggested by a CFTC panel.
So actual implementation is still up in the air -- and
remains the wild card on pricing and timing that lashed CBOT
wheat spread traders harshly in the last month as speculation
on future storage costs whipsawed many into big losses.
"I think you've got the industry looking at this issue on
convergence in Chicago that has woke people up --- is there
another alternative, a different choice?" Scott Cordes,
president of brokerage Country Hedging and a member of the MGE
board of directors, told Reuters on Tuesday.
BACKLASH AGAINST CHICAGO WHEAT?
Scott Hedin of St. Croix Commodities Inc, another MGE board
member, attributed the sudden boost to "marketing opportunities
for not only the speculative community but also commercial
entities to capture some synthetic basis trading" using the
He added that a "general frustration with the Chicago
confusion" had also helped boost interest in the SRWI market.
The MGE's grain index contracts are based on an index of
cash prices collected daily from more than 500 grain elevators.
A huge, continual and abnormal discount of cash basis prices to
the CBOT wheat contract in recent years -- $1-2 or more per
bushel -- has been a huge problem for elevators.
The spread tightened to about 70 cents at CBOT September
wheat expiration but hedgers say it needs to improve.
A "synthetic," paper basis position can be fashioned, say,
with a sale of SRWI futures and a purchase of CBOT futures.
"Predictable basis and reliable convergence between cash
and futures markets" is touted for SRWI by the MGE's web site.
That element -- cash rather than physical delivery -- and
much smaller speculative participation in MGE have held back
the index contracts from getting much traction -- until now.
"I thought we'd have seen some interest much earlier. But I
think the trade was giving the CME a chance to fix their
contract," said one trader with commercial grain clients.
"However, patience of the grain handling community has run
out and the majority of players are looking for other
alternatives. This is how the SRW Index contract got its foot
in the door," the trader said.
A veteran MGE trader said: "My guess is from what I've seen
they've convinced some market maker or some small hedge fund to
spread that against the CBOT wheat contract with the idea they
are so disgusted with the lack of convergence in Chicago soft
red they want to show that this is a better tool."
(Additional reporting by Julie Ingwersen; Editing by David