CFTC to study price convergence issues

Cattle Market & Farm Reports, Editorials
Dec 9, 2008
CFTC to study price convergence issues

The U.S. Commodity Futures Trading Commission (CFTC) plans to launch a new subcommittee to more closely examine the lack of convergence between cash and agricultural futures prices, commissioner Michael Dunn told an audience last Tuesday at the annual Farm Journal Forum.

In addition, Dunn added that the commission will likely issue a ruling in the coming weeks on a proposal submitted by CME Group Inc. (CME) which seeks to improve convergence on Chicago Board of Trade (CBOT) wheat futures by adding delivery points and implementing seasonally adjusted storage fees. Convergence, or the coming together of cash and futures prices as a contract nears delivery, is critical for hedging. The most severe convergence problems have arisen with soft red wheat, which is used to make pastries and snack food. That is the type of wheat traded at the CBOT and it serves as the global benchmark for wheat prices.

Thus far, traders and analysts have been divided as to why the price gap is so wide.

The new convergence panel, which will be a subcommittee of the Agricultural Advisory Committee at the CFTC, will be made up of agricultural industry representatives, producers, regulators and exchanges.

“We are setting up this task force so we can find out what is going on,” said Dunn. “You’re well aware that these things don’t happen overnight ... There are a lot of externalities that could be impacting that.” Dunn said that when convergence issues began, he challenged the industry to come up with a solution to the problem, and the CME proposal to improve wheat convergence was the culmination of discussions with regulators and market participants.

That proposal, which also seeks approval from CFTC for a decrease in limits for vomitoxin, a fungal byproduct that can sicken humans and animals, has been criticized by some in the agricultural industry for not going far enough to correct the problem. Still, many in the industry also say it represents a step in the right direction. — DTN