January 5, 2007
Mr. Fred Seamon
Agricultural Economist – Business Development
Chicago Board of Trade
141 W. Jackson Blvd., Suite 1020
Chicago, IL 60604-2994
Dear Mr. Seamon:
The North American Millers' Association (NAMA) appreciates this opportunity to comment on potential changes in the CBOT’s wheat contract, as outlined in your email of December 7, 2006.
NAMA is the trade association representing the wheat, corn, oat and rye milling industry. NAMA’s 48 member companies operate 170 mills in 38 states and Canada. Their aggregate production of more than 160 million pounds per day is approximately 95 percent of the total industry capacity.
Over the years NAMA has repeatedly told the CBOT that the exchange’s wheat contract was gradually losing its viability as a hedging mechanism. That decline in value predated, but has been exacerbated by, the recent activities of large index funds. If changes are not made, millers will be forced to aggressively seek alternative means of hedging risk.
As far as the finances of the CBOT are concerned, we doubt the exchange would miss the participation of U.S. millers in its wheat futures contract in the short term. But if the contract loses the participation of classical hedgers like millers, the contract will be less and less grounded in supply and demand fundamentals. We believe that would damage the contract over the long term to the detriment of the exchange.
So, we congratulate the CBOT for its willingness to consider changes to improve the value of the contract, and offer the following opinions on your proposals.
- Change the delivery instrument from a warehouse receipt to a shipping certificate.
- Increase the daily storage rate from 15/100s of a cent per bushel per day (approximately 4.5 cents per bushel per month) to 18/100s of a cent per bushel per day (approximately 5.4 cents per bushel per month).
- Increase the daily load-out requirements on Toledo regular warehouses. The current load-out rate for rail cars in Chicago of 35 rail cars per day would be maintained since Chicago regular warehouses are also required to load-out 3 barges per day.
- Reduce the vomitoxin level in deliverable wheat from 4 ppm to 3 ppm.
NAMA response – We doubt this change would improve the convergence and liquidity problems, but we know of no particular reason to oppose this change. We are aware that shipping certificates have been in use in the corn and soybean futures market for some time, and apparently have been successful. However, as many wheat millers are unfamiliar with their details we would appreciate receiving information about their use.
NAMA response – Here again, we doubt this change would improve the convergence and liquidity issues that need addressing. However, we are aware that storage charges have not changed in years, and have no objection to this proposal.
NAMA response – We support this change.
NAMA response – We strongly support this proposal. As NAMA representatives have stated many times in various forums including CBOT public meetings, it is virtually impossible to make flour that meets the Food and Drug Administration’s 1.0 ppm vomitoxin guideline from wheat that contains 4.0 ppm vomitoxin. In most years, therefore, the CBOT wheat contract is in no way a viable means for sourcing milling quality wheat.
While reducing the maximum vomitoxin in deliverable wheat to 2.0 ppm would more closely mirror the practices of the underlying cash mill market, a move to a maximum 3.0 ppm would be a good interim measure.
5. Increase speculative position limits.
NAMA response – We support this proposal on the grounds that short speculative positions may ameliorate the impact of the large long hedge positions.
Further, we strongly support the concept of separately reporting the positions of commercial hedgers and speculators in the Commitment of Traders report. Further, we would support an effort to seek the release of past and current index fund data, on an aggregated basis, from the Commodity Futures Trading Commission.
We appreciate your desire to improve the contract, and any consideration you can give our views.
Sincerely,
James A. Bair
Vice President
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