Comment Text:
The grain industry is in desperate need of improving the current out-dated delivery system. Storage rates need to be able to change with fluctuating market conditions in order to work properly. It must be dynamic to market conditions and influences and not politics like the current system is. The current changes are taking too long to implement (3 yrs), so convergence is not timely to influence. A lack of convergence does not represent the market conditions and is unfair to all while unfairly benefiting large companies that can more easily offset risks.
An example would be in a crop insurance environment for the farmer. This generally places us in a low basis environment and indemnity payments get reduced if the market is unable to converge properly since reference prices use futures rather than cash markets. Non-convergence also reduces our ability to borrow funds for credit for hedging purposes.
A recently suggested VSR would solve the problem. A hybrid with one yearly observation period would create less complexity and uncertainty about what full carry is and how it is affected by changing market conditions. This hybrid is flexible and does NOT rely on the CME focus groups and applies where open interest is significant.
Utilizing current VSR measures of 80% of full carry provide a monthly deliverable storage increase of 5c, and 50% of full carry to provide a monthly deliverable storage decrease of 5c (not to decrease below the 8c monthly base rate).
We also believe that using CZ/CH and SX/SF for annual observation periods as new crop value of storage should be known and adopted.
