Comment Text:
Dear CFTC,
I'm a 4th generation Kansas farmer writing to you about the critical importance of Convergence between corn and soybean futures contracts and the underlying cash grain markets.
I support a Variable Storage Rate (VSR) structure similar to that in effect in wheat contracts.
Both farmer producers, and end users of these commodities, along with the whole ag industry sector tying them together, need the reliable hedging tool, of futures contracts that reflect and react, in real time, to the dynamic supply and demand changes inherent in agriculture.
One very important role played by the futures contracts is giving market transparency to the value of grain storage.
This is reflected in the spread between various monthly futures contracts. The fixed storage rates embedded in the current futures contracts are obviously not dynamic. During times of crop shortage the futures spreads react by "inverting", meaning the nearby futures contract is higher than the deferred contracts, this effectively allows the market to assign a negative value to storage, sending a market signal to accelerate physical/cash grain movement out of storage into the supply chain moving toward the end users demanding it. Market inverses allow the nearby futures market to respond to and reflect the actual cash market (Convergence) making it an effective hedging tool. However, the fixed storage charges embedded in the existing futures contracts do not allow Convergence in times of oversupply, especially in excess of existing storage capacity available at the embedded fixed rate. During these periods of supply and demand imbalance, basis vs. futures contracts in the cash market can become extremely negative for extended periods of time, in order to compensate for the lack of available storage, at the artificially low fixed rate. When this occurs, hedging via futures contracts can not only be ineffective at managing price risk, but it can actually increase risk because the weakening cash price is being reflected in a weakening basis movement and not fully in the futures contract.
Federal Crop Insurance programs and policies are by definition tied to, and indemnity payments determined by, futures contract prices and not directly to cash grain prices (futures +- basis) received by the producer. Obviously this creates risk management dilemmas and uncertainties of a whole additional magnitude for farmers and their lenders. Ag production financing increasingly relies on these USDA/RMA backed, farmer purchased, policies as the primary collateral for operating and production loans on an annual basis, in an industry defined by revenue volatility causes often beyond the control of either borrower or lender. Again, VSR would increase the reliability of futures contracts to more fully, frequently, and dynamically, reflect the true supply and demand, market clearing price (Convergence).
Respectfully,
Jay R. Garetson
