Wheat: The Road to Convergence
The CBT unveiled its new wheat contract and Feed & Grain looks at how the contract could achieve convergence between the cash and futures markets.
Elevators that handle SRW would be glad to see basis again converge with futures. But volatility and risk won’t disappear; it will shift from basis to futures spreads. Some hedgers would prefer the volatility remain in basis which is affected more by local conditions. Spreads are centralized and affected by diverse factors. And the global wheat surplus that weighs on basis today may vanish with one failed crop.
CBT wheat spreads currently reflect the market’s opinion the VSR concept will be implemented, trading wider than the current “full carry.” But spreads are well below the carries they could reach if VSR is implemented. SRW hedgers need to be cautious about setting “good” carries; it looks likely the game’s going to change.
VSR may not be a cure-all, but overall it is a solid step forward to resolving a thorny problem.
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