Weak CBOT wheat spread poised to trigger storage rate hike
By Julie Ingwersen
CHICAGO, May 30 (Reuters) - Weak demand for U.S. soft red winter wheat and ample global supplies have pressured the front Chicago Board of Trade wheat futures contract to a point where the exchange might need to raise storage rates for the first time in three years.
CBOT July wheat has declined in 15 of the last 16 sessions, and hit a near three-month low at $6.27-1/2 a bushel on Friday. Export demand for the U.S. wheat has flagged as drought-driven price increases have made it more expensive than European and Black Sea wheat.
"We are trading the demand side of the market, and we are overpriced. The feeling is we could slip down to $6," said Dan Cekander, an analyst at Newedge USA in Chicago.
The selloff also has pushed out price spreads among CBOT wheat contracts, with those for later months trading at a widening premium to nearby contracts.
The slide looks increasingly likely to prompt a hike in the rates that delivery elevators can charge to hold shipping certificates under CBOT's variable storage rates (VSR) system, a move last seen in May 2011. CME Group, parent of the CBOT, has kept the rate steady at the minimum of 5 cents per bushel per month since December 2012.
Shipping certificates are commitments to provide grain.
VSR was introduced in 2010 to improve the convergence of futures and cash wheat prices at delivery. The initiative followed a period in late 2008 during which cash prices for wheat fell roughly $2 a bushel below the futures price, raising concern that the futures contract was not useful for hedging.
Under the VSR scheme, CME monitors the spread during a month-long observation period that ends June 20. Already, anticipation that storage rates will rise in July, and possibly again in September, has widened the spread between July/September and September/December wheat prices, traders said.
The July/September (WN4-U4) settled Thursday at a 12-cent carry, the widest in the life of the spread. This is close to the "full carry" - the cost to store wheat from one contract to the next - of nearly 13 cents. VSR allows storage rates to rise when the spread averages 80 percent or more of full carry.
Storage rates fall if the spread averages 50 percent or less of full carry.
The September/December spread settled Thursday at 19-1/4 cents, widening from 13-3/4 cents at the start of the month.
"That's the discussion, that VSR is going to push this thing (the spread) out," said Glenn Hollander of Hollander & Feuerhaken, a long-time CBOT trader.
The widening wheat spreads may encourage grain handlers to store wheat at a time when deferred corn and soybean futures are trading at a discount to nearbys.
"We're seriously looking at just holding our wheat at harvest," said a trader at a major commercial grain firm who requested anonymity because he was not authorized to discuss strategic trades.
(Additional reporting by Michael Hirtzer; Editing by Peter Galloway)
