Comment Text:
As a country elevator operator I would like to offer some perspective on the CME’s increase in the base storage rate for corn and bean futures. Though I was pleased to see the CME take action to raise the base rates in an effort to improve the ability for corn and beans to converge, I am concerned the fixed increase does not offer the flexibility, like the VSR in wheat, to adjust to changes in supply/demand dynamics. The lack of convergence has challenged the country elevator companies, both coop and private who may not have a network of locations to offset risk, while the significant discrepancy between futures price and weak/wide basis has and will continue to affect the performance of crop insurance for our American farmers.
The CME’s methodology for instituting change in storage will result in its proposed change being effective 3 years after the problem arose. This is too long for the market to be inefficient. In the interim, a low basis environment could penalize the farmer as his crop insurance indemnity assumes a converging futures market. Thus the famers indemnity could be reduced by the amount of nonconvergence.
The VSR in wheat, by increasing the base rate in storage, has incentivized the warehouseman and the producer to hold wheat off the market during a period of significant domestic and global wheat production. As a result, we’ve seen cash basis values narrow and convergence occur which has not only helped in strengthening the viability of the actual futures contract, but has also helped performance of the crop insurance revenue guarantee upon settlement of the contract.
The NGFA Risk Management committee has suggested a similar system to VSR which provides the flexibility in storage rate adjustments while simplifying the observation period and time which the increase or decrease in storage rate would last. The aforementioned proposed hybrid would be based on an observation period that occurs once a year with increases/decreases to persist the entire year. This hybrid is different than the current wheat VSR which can change each option month/delivery period. By changing the rates and setting them once per year under this proposal it affords simplicity for all market participants to determine full carry calculations..
Your time and consideration on this issue are appreciated and our firm would be happy to discuss this issue with you in more detail at your convenience.
