The KCBT Board of Directors and the exchange’s wheat committee monitored the CBOT’s changes and observed soft red wheat contract performance, but pressure on KC for dramatic change wasn’t heavy. Hard red wheat cash and futures were tracking reasonably well and basis values were high enough that farmers were satisfied. But 2010 threw a wrench in those gears.
The Kansas City Board of Trade’s wheat committee studied the situation and debated first whether any change was necessary; amending terms of a futures contract is a major step, after all. (Some “issues” are seasonal or a function of an unusual crop and resolve themselves in time.) But the pressure from hedgers and from regulators increased as cash and futures remained far apart into the fall of 2010. KCBT’s wheat committee and board continued their review, and submitted a final proposal for membership vote to approve contract changes, which passed on November 30, 2010. Under CFTC regulations, approval will be automatic unless the CFTC finds material problems with KC’s amendments.
New rules of the road
These are the major amendments to the KCBT hard red winter wheat contract, effective with the September 2011 futures contract month, pending CFTC approval:
- The base storage rate on deliveries rises from 4½ ¢/bushel/month ($.00148/bushel/day) to 6¢/bushel/month ($.00197/bushel/day), during the calendar months of December through June;
- During the months of July through November, there will be an additional Harvest Storage Premium added at 3¢/bushel/month ($.00099/bushel/day). This raises the effective storage rate during these months to 9¢/bushel/month ($.00296/bushel/day);
- The Harvest Storage Premium shall become effective on September 1, 2011;
- Effective with the September 2011 futures contract, deliverable grades of HRW shall contain a minimum 11% protein level. Protein levels of less than 11%, but equal to or greater than 10.5% are deliverable at 10¢ discount to contract price. Protein levels below 10.5% are not deliverable. (There is no protein requirement on KC delivery wheat under existing rules.)
- Holders of outstanding warehouse receipts following the expiration of the July 2011 contract month will have five business days (August 24-30, 2011) to present such warehouse receipts to the issuing warehouse for upgrading to reflect a deliverable protein level. The issuing elevator may charge the holder 12¢/bushel to upgrade receipts with a designation of 11% minimum protein, or 2¢/bushel to upgrade receipts with a designation of 10.5% minimum protein. Warehouse receipts not upgraded shall not be deliverable against futures contracts from September 2011 forward;
- Effective September 1, 2011, the vomitoxin restriction shall be reduced from 4 ppm to 2 ppm.
Raising a delivery storage rate increases the cost of holding delivery instruments (warehouse receipts or shipping certificates), and widens Full Carry (FC) by that same amount. Reducing the maximum vomitoxin raises the quality of the wheat for a buyer, and all else equal may add to the value of the wheat. Adding a minimum 11% protein requirement also raises the potential value of wheat futures to a buyer. KC’s “seasonal storage rate” has the benefit that it’s a known, fixed premium, which reduces spread risk for traders.
Raising Full Carry can help isolate surplus inventory from the market. (“Why sell the basis today, the spread is paying me far more than my costs…”) This in turn can raise the nearby basis — one step toward convergence. Raising Full Carry also makes it somewhat less attractive for speculators to buy and hold front-month wheat futures as they might have to “roll” those longs forward in a wide carry. Some believe front-month spec longs artificially keep wheat futures above “real” cash values and discourage convergence.
It’s too early to say for certain whether the changes are good for either Chicago or KC’s wheat contract, and whether convergence will improve. The KC amendments take effect September 2011, and VSR is still new to Chicago.