Changes that affect KC wheat affect country elevators
One issue for the KC contract is that Kansas wheat doesn’t always grade 11% protein. That poses the risk that the available wheat would not make delivery grade. The result could be a cash value for wheat far below futures at times, which could cause basis divergence rather than convergence.
On the positive side, the KC wheat contract amendments will allow wider futures carries to develop when basis is weak and wheat is plentiful. But wider potential carries also mean greater uncertainty as to what constitutes a “good” carry relative to a country elevator’s holding cost. Some of the risk that’s currently reflected in volatile basis can transfer to spread volatility after the changes takes effect in 2011. Learning how to calculate the new Full Carry rates will be important!
The new KC program effectively widens Full Carry for Sept11/Dec11 KC wheat to 30+¢ (27¢ storage plus interest). Actual storage and FC are based on the exact number of days for the three-month cycle. Adding the 11% protein requirement doesn’t affect the Sept11/Dec11 spread, but it does put a one-time premium of 12¢/bushel on Sept11 receipts over July 11 receipts, which has the effect of widening the July11/Sept 11 Full Carry by 12¢.
Managers and traders have a learning curve to negotiate and have to reframe their spread and basis expectations. Higher delivery storage rates don’t guarantee higher basis; they only offer a transparent alternative: Wider futures carries for holding the wheat until somebody wants it. Adding the changes to the risks associated with high futures volatility, extra caution is in order when buying and merchandising 2011 crop wheat, and wider margins are well-justified.