WASHINGTON, D.C., U.S. — Kansas City Board of Trade (KCBT) announced on Aug. 6 that it has raised its minimum margins for the hard red winter wheat futures contract and wheat calendar swaps. This follows the news that KCBT’s wheat contract had come under scrutiny at the Aug. 5 meeting of the agricultural advisory committee of the Commodity Futures Trading Commission (CFTC). At issue were the historically weak basis levels in hard red winter wheat that reflected lack of convergence between the cash and futures markets near delivery.
CFTC Chairman Gary Gensler said it was "essential that the exchange address the problems in this market, which appear to be related to the contract."
Jeffrey Borchardt, president of the KCBT, said the exchange has assigned its wheat contract committee to formulate solutions to the problem that seemed to be worsening as wheat futures prices posted sensational gains since mid-June and the cash basis in Kansas City and in the country recently sank to record-low levels. As the advisory committee met, the spot cash wheat basis on 11%-protein wheat in Kansas City was 60¢ below the September wheat future price, and in the country, basis levels were 120¢ or more below the September wheat future price.
Borchardt said the wheat contract committee has discussed several alternatives, including many that have been discussed in earlier years in deliberations over soft red winter wheat convergence.
"These alternatives have a common effect of transferring basis volatility into the futures spreads," Borchardt said. "Some solutions drop the volatility into the nearby spreads to achieve timely convergence. Others feather the volatility into the spread horizon over time. There are pros and cons associated with either result.
"What the committee is endeavoring to achieve is a solution that fosters convergence at the delivery period without creating unintended consequences for hedgers on either side of the market, long or short. The key here is the implementation of structural changes with the requisite ‘balance’ that the committee has so diligently maintained in recommending prior contract changes packages."
Testifying on behalf of the National Grain and Feed Association (NGFA) and its risk management committee, Matt Bruns, vice-president, corn processing, Archer Daniels Midland Co., Decatur, Illinois, U.S., said, "It is critically important that convergence be reestablished in the KCBT wheat futures contract as soon as possible. We have been in close contact with KCBT officials to convey our concerns, share information and discuss potential solutions. We know the exchange is working hard to respond to a charged market situation and to analyze potential contract changes to reestablish convergence, and we have expressed our desire to be involved in their process to help evaluate potential changes and provide feedback."