CHICAGO Dec 22 Kansas wheat farmer Michael
Jordan is breaking with a century-old tradition grain producers
have trusted to protect their businesses: He has stopped using
futures to hedge risks to his crops.
The CME Group's Kansas City wheat contract sets
grain prices for millers, exporters and other grain buyers both
today and in the future. Traditionally, prices converge with the
price of wheat sold in local cash markets.
But Jordan and other U.S. farmers say they no longer trust
this hedging tool, amid growing complaints among producers and
grain elevators that the hard red winter (HRW) wheat contract is
The last three expiring contracts have gone off the board
with wider-than-normal basis at their registered delivery
locations, with cash prices 25 percent or more lower, according
to exchange and cash market data.
The Commodity Futures Trading Commission (CFTC) is "very
aware of the problem" but has not made any promises about if or
how the problem may be addressed, said Kansas Wheat Commission
Chief Executive Justin Gilpin, who met with CFTC Chairman
Timothy Massad in Kansas City in August.
The exchange, too, knows there is an issue, but has been
reticent to make any promises, said David Schemm, president of
the National Association of Wheat Growers.
The CFTC declined to comment on the matter to Reuters.
CME spokesman Michael Shore told Reuters, "We continue to
have discussions with a broad cross-section of customers in this
market regarding their concerns," but he declined to comment
directly on the matter.
Futures contract problems have happened before. CME's soft
red winter wheat contract failed to converge for nine straight
contract expirations beginning in 2008, before CME implemented a
scheme known as variable storage rates (VSR) to force
Among possible solutions being discussed for the HRW
contract are a doubling of current storage rates or enacting a
VSR scheme, Schemm said.
The issue is sowing financial uncertainty throughout the
agricultural economy, from grain elevators and wheat millers to
crop insurers and farm banks.
"This is turning a lot of storage hedges and new-crop
forward contracts on their heads," said Dan O'Brien, an
agricultural economist with Kansas State University.
Growers hedge risk via forward cash contracts with
elevators, which take market positions to cover their own risk.
They, in turn, are able to offer farmers competitive prices for
future deliveries of grain.
Crop insurance calculations are also askew as prices that
set premiums and determine payouts, set by futures prices, are
far different than actual cash prices.
Schemm said that hurt his own farm. He missed out on a crop
insurance payout of about $10,000 because the futures prices
used to calculate his policy benefits did not reflect how far
the cash market value of his grain had fallen.
One key factor behind the contract problem, said Kansas
State University agricultural economist Art Barnaby, is storage.
The HRW contract sets monthly wheat storage costs at 6 and 9
cents per bushel. But elevators storing HRW wheat for these
contracts - including ADM, Cargill, Marubeni
Group's Gavilon Grain - say the price tag for this
storage should actually be valued much higher, Barnaby said.
That's because they do not want their storage capacity
filled with grain they cannot sell.
Meanwhile, massive global supplies of wheat are keeping cash
prices low, especially in Kansas, where farmers harvested
record-large yields this year.
The lack of coming-together of futures and cash prices has
left many farmers fearful this season. The loss of market
protections, they say, threatens to heap further pain on farmers
struggling with decade-low grain prices and net farm incomes at
a seven-year low.
Farmers have used futures for decades to hedge the financial
risk of planting a crop by locking in prices for future grain
"The whole point of hedging is to protect yourself against
price moves," said Jordan, who planted 1,000 acres of hard red
winter wheat this fall in north-central Kansas. "But instead,
all this has done is increased the risk."
(Editing by PJ Huffstutter and Leslie Adler)