For Release: July 17, 2009
Subcommittee Considers Options to Remedy Convergence
Washington, DC — On Monday, June 8, 2009, from 1:00 p.m. to 4:00 p.m., members of the Subcommittee on Convergence in Agricultural Commodity Markets conducted their first public conference call. The subcommittee was formed under the jurisdiction of the CFTC’s Agricultural Advisory Committee to identify the causes of poor cash-futures convergence in select agricultural commodity markets and advise on actions to remedy the situation.
Subcommittee members identified the Soft Red Winter (SRW) Wheat futures contract traded on the Chicago Board of Trade (CBOT) as the contract with the most pronounced convergence problem. At the same time, members of the Subcommittee acknowledged that the CBOT Wheat contract is currently undergoing significant design changes, with the goal of alleviating convergence issues. Most of the changes, including additional delivery locations and seasonal storage rates, are to be implemented beginning with the July 2009 delivery month.
Although generally supportive of the changes, members of the Subcommittee expressed concern that these changes may not be sufficient to achieve convergence and pointed out several structural problems with the SRW Wheat contract. While this contract is predominantly being used to hedge price risks for all wheat grades grown in the US and internationally, the soft red winter wheat crop deliverable under the contract actually accounts for only a small fraction of wheat produced in the United States. Many believed that this fundamental disconnect between the cash and futures markets contributes to poor cash-futures convergence in wheat. Consequently, there may be a need to change contract specifications to better reflect the nature of production and flow of wheat in the United States.
Members of the Subcommittee also discussed convergence problems in other agricultural products – corn, soybeans, rice, and cotton – that do not seem to have the same structural problems as the one in the CBOT SRW Wheat contract, but also periodically suffer from convergence problems. These periodic episodes of a lack of convergence may be best addressed by adjusting the storage rate for a commodity or otherwise changing delivery specifications of the futures contract. These options would be considered for all agricultural commodities with a convergence problem, including wheat.
Members of the Subcommittee on Convergence agreed to consider different options to remedy convergence problems in agricultural products and to deliver a full menu of these options to the CFTC’s Agricultural Advisory Committee. The options will broadly fall into two parts: Plan A and Plan B. Plan A will consist of the changes in the CBOT SRW Wheat contract that are currently being instituted by the CME Group. Plan B would include a menu of options related to the structural changes in the CBOT SRW Wheat contract; and various ways to adjust the storage rate/delivery specification for grains and oilseeds. Plan B will be recommended for implementation to the CFTC’s Agricultural Advisory Committee if the changes implemented under Plan A do not significantly improve convergence by August-September 2009.
Commissioner Michael V. Dunn stated: “I sincerely thank members of the subcommittee for their hard work in studying the causes and developing potential solutions to the lingering lack of convergence in our agricultural commodity markets. I would like to stress that as Chairman of the CFTC’s Agricultural Advisory Committee, I am prepared to consider all possible options to address this issue and hope to quickly take the necessary steps to ensure that our agricultural markets function properly so that everyone, from farmers to consumers, benefits.”
The next conference call of the Subcommittee on Convergence will take place in late July, shortly after the changes in the CBOT SRW Wheat futures contract take effect and their impact can be assessed.
Minutes of the conference call and a summary of answers to questions submitted by Subcommittee members prior to the conference call are attached.
R. David Gary
Last Updated: July 17, 2009