Reuters Edge

Wheat traders say new futures limits change the game

CHICAGO (Reuters) - Expanded daily trading limits and sharply higher margin requirements to trade soaring U.S. wheat futures have changed the game and left traders wondering how the market will react.

“It is a very big deal,” said Vic Lespinasse, a veteran grain market analyst for Illinois Grain, a brokerage house. “I do not know what is going to happen.”

The three major U.S. grain exchanges said in a coordinated statement late on Friday that they will raise the daily trading limit in wheat futures to 60 cents per bushel from 30 cents, starting with the February 11 trade date.

The new limits take effect with Sunday night’s electronic session that begins at 7 p.m. EST.

The limit will rise 50 percent, to 90 cents, on the next business day and another 50 percent on each subsequent day when two or more contracts in the same crop year close limit up.

The exchanges requested the changes on Friday and they were approved by government regulators the same day “to enable the markets to fulfill their price discovery and hedging functions,” the Commodity Futures Trading Commission said.

The emergency move came only one day after two exchanges -- the Kansas City Board of Trade and the CME Group CME.N, parent of the Chicago Board of Trade -- said they would raise trading limits to 40 cents from 30 cents on February 12. The Minneapolis Grain Exchange said separately it would remove the price limit on its spot March contract, starting February 25.

That did nothing to calm the markets, which on Friday closed locked up the 30-cent daily limit for the fifth straight day in a buying frenzy from both speculators and grain users.

Once wheat futures rise the daily limit, exchange rules prohibit them from trading higher until the next session.

But the new rules do not change the fundamentals that have sparked the rally of the past few weeks, traders said.

“There is a good chance on Monday that we will probably trade limit up again,” said Markus Groebner, a wheat options trader at the Kansas City Board of Trade. “I just hope that we use it as a hedging tool and not as a financial toy.”

To cool speculative frenzy, the exchanges have also set sharply higher margin requirements -- good faith deposits paid to hold futures positions -- for wheat traders. Costlier margins often cast a bearish tone on markets, Lespinasse said.

At Monday’s close, initial speculative margins on each CBOT wheat contract rise to $4,050 (up 100 percent from Friday) and KCBT wheat margins to $4,050 (up 116 percent). MGE raised its wheat spec margin 54 percent to $3,510 per contract on February 7.


All three U.S. wheat markets have hit record highs this year on soaring demand for wheat as stockpiles in the United States, Canada and Australia, the top three exporters, shrink. Unusual crop losses the last two seasons have cut supplies.

The U.S. Department of Agriculture said on Friday that U.S. stocks of wheat by June will drop to a 60-year low.

Overseas worries about supply combined with the weak dollar have sent U.S. exports soaring, creating chaotic competition to buy futures from exporters, domestic millers and speculators.

The MGE spring wheat futures market remains the overall pace-setter, surging to a record high of $15.53 on Friday -- triple the price of a year ago. But wheat options traders calculating “synthetic” values based on options demand they saw on Friday indicated the contract even higher at $20.50.

“Expanding price limits is the only way this can be solved,” one CBOT trader said on Friday. “The only way you’re going to find the true value of MGE is to let it trade.”

Options traders said synthetics pointed to CBOT March wheat 72 cents higher and KCBT March wheat about $1.20 higher.

The huge wheat rally has been great for farmers. The market in trying to ration supplies is also trying to find a price that will assure adequate spring wheat acreage will be planted in the United States this summer. Most U.S. wheat is planted in the autumn, goes dormant and then revives for summer harvest.

Spring wheat is the highest protein bread wheat and is also valued by flour millers for blending with other grades.

The unprecedented wheat rally is intensifying internal pressures on wheat markets, a concern of the exchanges.

Traders said index funds which have been trying to “roll” their mandated holdings of futures from the spot month to deferred contracts this week have been unable to do so.

Many grain elevators have also sold cash grain earlier than they wanted to escape soaring margin calls. Banks have become more resistant to loans to feed such margin payments, despite demanding short futures positions as loan collateral.

The expanded futures limits will worsen those problems for elevators if prices continue to rise, Groebner said.

Editing by Peter Bohan and Braden Reddall