Futures Limited For Non-Grain Players

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The Chicago Board of Trade (CBOT) on Feb. 13 received U. S. government approval to limit cash grain delivery instruments held by non-grain firms – its latest move to cool criticism about the performance its grain contracts.

CBOT’s regulator, the Commodity Futures Trading Commission (CFTC), approved an amended Feb. 9 request to reduce the large number of warehouse receipts and shipping certificates held by firms not directly related to the cash grain industry.

The move is designed to enhance the hedging effectiveness of CBOT’s benchmark wheat, corn, rice, oats, soybeans, soymeal and soyoil contracts, a CFTC statement said.

“We will monitor the effectiveness of this and other grain contract changes to see if convergence remains an issue requiring further action,” CFTC acting chairman Michael V. Dunn said.

The rule change, to be phased in on Feb. 17, limits the number of certificates or receipts anyone can hold to the spot month speculative position limit and comes just before the March delivery cycle begins Feb. 26. CBOT said it will consider and provide exemptions for bona fide commercial hedgers.

“The delivery system is a check and balance to make sure everything is in line on the cash side. The closer you can get to having commercials involved in the delivery system and making it transparent is the way we need to go,” said grains analyst Don Roose with brokerage U. S. Commodities in West Des Moines, Iowa.

Grain hedgers, led by the 900-member National Grain and Feed Association (NGFA), have complained for months that the traditional process of grain delivery against CBOT contracts, especially its wheat contract, is broken.

They say Wall Street index funds and other investor buying inflate grain futures far beyond actual supply and demand, destroying “convergence” at delivery – when cash and futures prices traditionally come together to make hedging work.

“NGFA believes imposing some limits on holding delivery instruments for extended times might be warranted to enhance transparency and availability of certificates/ receipts to the marketplace,” said NGFA spokesman Randall Gordon.

Some traders felt the new rule might change an investing game that non-grain investors have been playing with grain.

With interest rates so low, investors have been holding grain futures as an asset that includes a built-in gain since the “cost-of-carry” in storage and other charges normally makes forward futures deliveries more valuable, traders say.

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