cancel
Showing results for 
Search instead for 
Did you mean: 
Senior Contributor

KCBOT targets convergence with VSR proposal

 The following paragraphs come from the Kansas Association of Wheat Growers' news email....  What do you think?  Will this solve the problem?

 

"The Kansas City Board of Trade Wheat Contract Committee has proposed a contract amendment that would institute variable storage rates as early as September 2011. The amendment has been proposed to "foster convergence at the delivery period during times of weak basis."

 

The Kansas City wheat contract came under fire from many producers and organizations during the 2010 harvest, when basis widened beyond historic levels due in part to record-breaking wheat stocks and large supplies of low- to mid-quality wheat.

 

In 2009, the Chicago Board of Trade made a similar change, but it is too soon to judge the effectiveness of that move, according to Justin Gilpin, CEO of KAWG. "The KAWG has been and will continue to be involved in this issue. KAWG sent a letter outlining several concerns we have with variable storage rates. In particular, we do not see how they will improve basis levels at country elevators, or open the delivery mechanism," Gilpin said.

 

The proposed amendment, which has been tabled by the KCBOT Board, would have to be ratified by the KCBOT membership and approved by the Commodity Futures Trading Commission before it can go into effect."

0 Kudos
3 Replies
Contributor

Re: KCBOT targets convergence with VSR proposal

This will not resolve the problem of non-convergence.  It would only result in widening the spreads between months that would make it more profitable to hold the grain in the limited deliverable space.  It is time for the futures contact to be changed to reflex the value of the wheat in the commercial flow.  Currently the wheat that is in the deliverable positions in not in the commercial flow. We no longer have a terminal market system that existed as late as the early 1970s.  This is not a new problem, but one that has seen in other futures contracts.  The one that is really close to this one is the problems in the 1970-1980 with the canola/rapeseed on the Winnipeg futures exchange.  The problem was solved when they basically changed the contact to reflex the prices paid to farmers.  To save the this contract as a tool of price discovery, it must be changed to reflex a publicly seen price that wheat is bought and sold.

0 Kudos
Senior Contributor

Re: KCBOT targets convergence with VSR proposal

One only needs to see how well it's working for SRW. I think the CFTC went into the wilderness with this attempt. But it's clear they don't want a free market solution.

 

Big agribiz was making noises that the policy was encouraging domestic wheat prices to rise above global prices because they - or some one - could make more storing for increased storage rates resulting from the VSR. The message was - of course - that farmers better sell for less to re-adjust domestic price, which is just part of the big grain companie's propoganda. There are other plausible economic dynamics for low exports from N America - and lowering prices in N America will never gain global market share - ever. End of story. But that isn't part of agribiz propoganda 101. Unfortunately US Wheat Associates bought into that one without being able to explain how it works.

0 Kudos
Senior Contributor

Re: KCBOT targets convergence with VSR proposal

From my understanding of the VSR issue, the change in rates is not to encourage storage, but to discourage those who would prefer to sit on the grain, in somebody else's elevator.  The negative impact of sitting on grain in an elevator you don't own is the elevator can only turn it's storage one time, until the contract expires.  Grain elevators would rather turn their storage over 2 to 3 times or more because they make more money on trading margins than on a one time flat fee.

 

This issue is also compounded by the lack of terminal elevators designated as contract delivery points and their unwillingness to allow nearby producers to deliver against their contracts when basis levels hinder convergence.  They fear the grain will simply sit in the space and limit their trading opportunities, hence lower profits.  And also why KCBOT is considering implementing VSR.

 

Even so, I agree with the newsletter, this change to VSR is not yet proven to bring about convergence.

0 Kudos