Comment Text:
Cash Corn and Beans have come close to convergence with futures only once in the last 2 years. Lack of convergence means lack of transparency in the value of grain. This penalizes the farmer, the small grain company, and the small grain and oilseed consumer the most.
Lack of convergence also can resort in farmers losing crop insurance indemnity payments as they are based off futures price, not cash values.
Poor convergence is a chilling factor that lenders look at when determining whether to provide funds to hedgers needed for risk management. Less convergence = less funds, and, or higher cost of funds.
CME has recognized the lack of convergence and followed their 6 step process in addressing the issue. That process will resort in increasing storage from 5c/month to 8c/month beginning with SX19 and CZ19. This is different than the way they addressed the Chi and KC wheat lack of convergence.
Efficient markets require consistent rules and consistent convergence. If tariffs remain in place and US bean carryout balloons above 700mbu we will likely not converge beans next year.
VSR would address these problems but it is poorly understood by some in the trade. An alternative to VSR would be a hybrid that only has 1 observation period/year instead of observing each delivery period. Having 1 period/yr instead of 5 for corn and 7 for beans lessens the complexity with only one period calculated per year and gives the trade a known Full Carry for all but 1 period per year.
I suggest a Hybrid that uses an 8c/month base rate as CME suggests plus a dynamic feature. The Hybrid would not require 2 years of CME study/focus groups or going far out on the curve where open interest is low. Thus it can address lack of convergence at the start of fall harvest when storage problems tend to be the most acute without waiting 3 years for change (as the current situation will likely result in).
For the dynamic feature, I suggest utilizing current VSR measures of 80% of FC to increase storage charges 5c/month and 50% of FC to decrease 5c/month (if above 8c base). For the annual observation period I suggest using the CZ/CH for corn and SX/SF for beans as the new crop value of storage would be known at that time.
Our global grain markets are dynamic as current events demonstrate. Our futures market contract specs need a dynamic element in them so that nonconvergence is addressed without 2-3 years elapsing before efficient markets can be restored.
