By KEVIN WALKER
Michigan Correspondent

CHICAGO, Ill. — The National Grain and Feed Assoc. (NFGA) met with CME Group last month to discuss implementation of the variable storage rate concept sometime this fall, after current contracts have expired.

“We’ve been urging the CME Group to move forward on the variable storage rate concept as soon as possible because we don’t think the problem is going to go away,” said Randall Gordon, a spokesman for the NGFA. “We’re hopeful they will seek approval of the variable storage rate concept after September.”

The variable storage rate concept means that wheat investors pay more for storage the longer they hold the commodity. It’s hoped that such a policy will put an end to excessive long-term speculative positions in wheat.

“They want to watch the expiration of the September wheat contract to see if the narrowing between futures price and cash price occurs,” he said.

Gordon said there are different theories on what factors caused the run-up in wheat and other commodities last year. One factor driving the increase in grain prices might have been the run-up in transportation costs, but that too could have been driven primarily by the increase in the price of oil, which might in turn have been investor-driven.

In any event, futures contracts work well for grain elevator operators when there is a convergence between the futures and cash prices, or nearly so, by the end of the contract; but Gordon said that hasn’t happened for the last two years. The lack of convergence causes ill will on the part of the farmer toward the grain elevator operator, he said. It also makes use of the futures market problematic for the elevator operator.

“The problem with the Chicago Board of Trade contract is primarily with soft spring wheat,” Gordon stated. “(Commodity Futures Trading Commission) Chairman (Gary) Gensler has indicated he does believe there should be limits on speculative futures contracts moving forward.”

The CFTC convened a subcommittee on the lack of convergence last March. So far the government agency has withdrawn only two “no action” letters it issued to investment houses allowing the entities to invest excessively in long positions in commodities such as wheat, but there are many such companies.

Gordon said the agency can’t simply snap its fingers and rescind its previous actions all at once, since contracts take time to expire. This committee has decided to endorse the variable storage rate to achieve convergence.

The subcommittee is scheduled to make its recommendations to the CFTC’s Agricultural Advisory Committee shortly after the September wheat futures contract expires.