Milling & Baking News - November 18, 2008 - 46

Washington

N.G.F.A. proposal aims to improve
wheat futures contract performance
WASHINGTON - The National
Grain and Feed Association on Nov.
6 submitted a "modified" compelled
load-out proposal to the C.M.E.
Group for consideration as one approach to enhancing the performance
of the Chicago Board of Trade wheat
futures contract.
Under the proposal, a new tool, a
demand certificate, would be created
that those holding futures market
positions could issue to compel load
out of the underlying commodity as
a means of satisfying their outstanding futures contract obligations. The
N.G.F.A. indicated it believed such a
tool may encourage convergence of
futures and cash prices during the delivery period as the expiration date of
C.B.O.T. wheat futures contracts near.
"Convergence of cash and futures
prices has not occurred consistently in
recent C.B.O.T. wheat futures contract
expirations, limiting the contract's
usefulness for price discovery and
risk management on which traditional
market participants have relied," the
N.G.F.A. wrote to Craig S. Donohue,
C.M.E. Group chief executive officer,
in conveying its proposal. "The lack of
convergence has driven a number of
traditional C.B.O.T. customers away
from the market in search of alternative
pricing and hedging mechanisms."
The N.G.F.A. asserted infusion into
agricultural commodity futures markets of large amounts of investment
capital was a major contributor to futures price volatility and market disruption. Such investment capital interests typically take long-only futures
market positions unrelated to supply/
demand fundamentals, purchasing

futures or options contracts but not
offsetting those purchases with a cash
market position in the underlying
commodity.
The N.G.F.A. said the modified
compelled load-out concept represented a balanced approach that may
help reestablish a more predictable
relationship between cash and futures prices while not unduly
disadvantaging those holding
either long or short futures
market positions.
The modified compelled
load-out
proposal
would
adopt demand certificates for
all C.B.O.T. wheat futures contract
delivery locations, including new locations proposed by the C.M.E. Group
in September.
When certificates are registered,
the issuing warehouse would be required to declare which certificates
are to be regular shipping certificates
as currently utilized by the C.M.E.
and which would be demand certificates. An issuer of certificates would
have 24 hours after the last trading
day of each wheat futures contract
month to declare whether the taker
of delivery - the entity holding a
long futures market position - must
load out the underlying commodity. Demand certificates could not
be retendered for delivery against a
subsequent futures contract month;
instead, the load out must occur.
Regular shipping certificates for
which load out is not compelled by
the issuer could be retendered by the
taker against a subsequent contract
month, as currently permitted.
The maximum quantity for which

load out could be compelled would
be 15% of each facility's registered
load-out capacity. The N.G.F.A. said
the proposed quantity limit was designed to help ensure the marketplace
would be able to absorb supplies in
the unlikely event maximum deliveries are triggered.
Load out must occur within 60 days
during which time storage charges
would be paid by the taker of delivery.
If the load out didn't occur within 60
days, accelerated storage charges
would be paid by the taker of
delivery. Those increased storage charges would amount to
an additional 1c per bu per
day during the first month
following the 60-day load-out
period and would be doubled
each subsequent month that load
out was not accomplished.
Milling quality specifications would
be applicable to deliveries made under
modified compelled load out, including a maximum of 10 insect-damaged
kernels in 100 grams, a maximum of 1%
dockage and maximum of 2 parts per
million vomitoxin. The N.G.F.A. noted
these specifications would provide a
higher quality and more merchantable
product for the taker of delivery when
compelled to load out. The specifications would be applicable only when
the issuer of the demand certificate
compelled load out; C.B.O.T. wheat
futures contract quality specifications
still would apply when the taker initiates load out.
The N.G.F.A. proposal will be analyzed and reviewed by the C.M.E.
Group. The N.G.F.A. said it will consult with the C.M.E. Group during the
review process to determine whether
modifications may be advisable prior
to possible consideration by the exchange. MBN

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Milling & Baking News - November 18, 2008

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