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Jim Meade / Iowa City
Senior Advisor

KCBT wheat convergence lacking

Two Kansas State University professors claim the KCBT wheat contracts have the same lack of convergence problems seen earlier on the CBT.  Contracts are going off the board with a basis of $1.20.


"Barnaby and O’Brien recommend against locking in a wide basis for any new crop forward contracts, and instead use short hedges, put options, a basis contract, or hedge to arrive contracts. They say hedgers cannot count on convergence of cash and futures and there is no way to guarantee that the wheat basis will remain stable at currently wide levels. They are concerned that farmers will be caught on the wrong side of the wheat basis if it narrows from a US or global crop issue."


The problems at the Chicago board of Trade in which cash and futures contracts would not converge have spilled over to the Kansas City Board of Trade. There, wheat contracts are expiring with a futures premium of $1.20 or more. Blame has been placed on a variety of problems, including insufficient warehouse receipts, market longs holding on to their grain and not selling it, and others."

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9 Replies
Veteran Advisor

Re: KCBT wheat convergence lacking

Jim how does that last line justify the lack of convergance?  I mean if they force delivery or cause you to roll to a new month shouldn;t that cause the market to converge? Also Kinkos could print them some more Warehouse reciepts right?  I think sometimes our agri news media (Uhhm SF) needs to do a little more probing of these kindof stupid statements. JR

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Jim Meade / Iowa City
Senior Advisor

Re: KCBT wheat convergence lacking

I agree that the summary I quoted doesn't do justice to the article. One really needs to read the one page story to make any sense of it. I probably should not have posted the summary. My main theme was that it seems like the ability of the farmer to hedge price risk is not being fixed with any degree of confidence. As far as I'm concerned, it's not a level playing field and probably never will be again. We farmers are and need to be trying to figure out some different ways of hedging price risk.
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Re: KCBT wheat convergence lacking

i am not sure how to say, explain this idea, but without on farm storage, farmers are forced to forward sell and deliver,

often thinking that the first one to do so gets the best deal. obviously basis widens. we just need everyone to not sell until

futures and cash converge. ha ha ha ha ha ha. hooweeee. so the problem is " i better sell before anyone else.'


OK, identify the problem. suggest practical solution.


nothing new in this post, guess i've done all i can do.


we need a derivative that buys and sells basis, and convince the funds it's a huge money maker.


sorry, i'm not making fun of anyone, i just don't think there's a solution. Palouser would say let us deliver or take

delivery of futures contracts. and i agree. would still need lots of farm storage. 

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Re: KCBT wheat convergence lacking

Hope I get this right

If not, somebody correct me but I am going to use some real numbers of a real hedge


I have July 12 SRW hedged [sold on the board] at 6.64


Normal basis is -80 to -1.20


I should be able to flat out my sale at 5.44 to5.84 once I sell the physical and the CBT contract.[the same day]




If CBT wheat goes to 10.00 and world price is not as much of an increase

The enduser/exporter has no choice but to widen the basis to make the cash price competative with world markets


I could see a much wider basis and cash at 6.00


So now I get 6.00 cash, the board went off at 10.00 and I pay 3.36 margin

Giving me a net 2.64 for my wheat


I know this may  not  be exactly  a true example of 10 futures and 6 cash but just to show what could/can happen when CBT does not go off at cash price


Somebody put up some numbers and show us how to hedge when the basis can get worse than the carry might be or else us my example


Wheat has about a dollar carry and the basis could get a lot worse than a dollar more. It had almost 2.00 carry when I hedged the 6.64 sale


A lot of marketing sessions say this example is a true hedge, but I say it will only work if the CBT stays equal to cash, not take off if some funds decide to run the market. Some basis movement is expected, but we have had corn go from plus 50 to negative 20


Try and hedge that with a 30-40 cent carry

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Re: KCBT wheat convergence lacking

I know this is waaaaayyyyyy too idealistic, but isn't the reason there is no convergence because we can't deliver?  I know a "few" of the big players can deliver, but the way it was explained to me, no one else can.  Why do we allow them to do that?  The boards are supposed to be a price discover mechanism.  If we can't deliver against the "future" price that we agreed to in the contract, then what good is the whole system?


This basis mess is why I'm not hedging, even though I would love to start on 2011 wheat with this rally.  If basis shrinks back to normal levels (around here -$0.40), then a hedge will be ok.  But if it widens from here...margin calls will kill the position and eat into the cash sales.


I guess on farm storage is probably the only answer.  However, that still doesn't allow me to lock in a price on upcoming production.  I hate the idea of having to market after harvest only.   

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Senior Advisor

Yes, I'm for producer delivery .....

..... as Dekus noted.


Since the CBOT has jury rigged their system with inflating storage costs on longs to pressure longs instead of letting the market work I think it would be a good policy to try  connecting the physical to the futures by letting producers deliver against those who miscalculate what wheat is worth, eliminate paying for the risk difference between cash and futures price when buying an option (which isn't recoverable). THAT'S market function.


I don't know if the the KBOT has as nonfunctional a delivery system as the CBOT, but my guess is that it might have a better chance of making the delivery system work than the CBOT ever tried to do. Would the CFTC interfere if KBOT tried to make a functional system? I don't know. But they sure caved to the CME.



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Senior Contributor

Re: Yes, I'm for producer delivery .....

Is the  1.20 diff because of scale, does it takes  a min quantity to operate in these circles?  Is it lack of commercial storage, producers like to use their storage and then  ..


I can tell you the spec world wishes there was better convergence. Too many specs who take the risk of selling growing but not mature crops and then only get paid in part.


Mkt needs a delivery point and transop adj and cash settlement?



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Senior Contributor

Re: Yes, I'm for producer delivery .....

Its not really a "market" when the product isn't deliverable.  And this is intentional.  They couldn't play as many games with the markets if the futures markets were deliverable.  The funds wouldn't jack with the market so if they had the risk of actually owning a product.  We don't have open, competitive, and transparent markets for products traded on the Board and Merc.  We already have laws in place to control this but USDA and DOJ turn a blind eye because of the revolving door policy between USDA, the producer groups, and the corps.

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Re: KCBT wheat convergence lacking

Jim, this is a very big concern and one that our state's grower association has been discussing with CFTC.  Consensus between both groups is that the system is broken and needs to be fixed.


Some items that we are aware of; In Kansas, producers have tried to deliver against their contracts and the delivery points refused delivery.  From what I've learned, the contract does not require the delivery point to actually accept delivery.  It's entirely up to them whether they want to take the grain or not.  From the elevator's perspective, it's a matter of  profitability and turn around of storage which effects profitability.  If they accept the grain, it will most likely tie up that storage space for a very long time before the owner of the contract liquidates his/her position.


Also, from those who know, they say hedge funds reacted to the rules changes in corn and beans and have move their funds into wheat and are a primary cause for lack of convergence in Wheat.  The big question is what is the correct way to address it.  We have encouraged the regulators to explore options that would restore confidence of all traders in the market.

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