UPDATE 2-CME ups wheat storage rates by 3 cts under VSR plan

Mon Jun 28, 2010 10:05pm IST

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* CME to raise wheat storage rate by 3 cents per bushel

* Wide carry between July/September contract triggers move

* New rate effective July 18 (Adds analyst comment, prices, byline)

By Mark Weinraub

CHICAGO, June 28 (Reuters) - CME Group (CME.O) said on Monday it will raise storage rates on deliverable wheat futures, the first move under its controversial variable storage rate program designed to improve the performance of a market that many traders view as broken.

The change, which will increase the maximum daily storage rate for wheat by about 3 cents to about 8 cents per bushel per month, takes effect on July 18. CME initiated the change because of the wide carry between the July and September wheat futures contracts.

The move was widely expected as traders have been closely monitoring the difference between the July and September contracts but the variable storage plan was creating some problems in trading contracts for 2011 and beyond.

"I do not think this is a surprise but I do think this uncertainty ... is something that is going to dampen volume," said Rich Feltes, senior vice president at MF Global Research in Chicago. "Some long-time wheat traders think it will spell the demise of the contract."

Although most market watchers are able to estimate storage rates for the next few contract periods, it was hard to predict the future carries for deferred months, which could discourage trading in those contracts.

The variable storage rate system is intended to improve convergence between cash wheat prices and the futures contracts at expiration.

Critics have said the distortions in the wheat market have made it impossible for millers and commercial firms to manage their risk using the futures market.

The storage rate was seen rising again in the coming months as analysts were expecting the spread between wheat contracts to stay wide. Light demand for U.S. supplies from overseas buyers was providing little incentive for elevators to move their wheat into the export channel.

"I think the spreads will stay wide because of the United States being in a noncompetitive position export-wise," said Dan Basse, grains analyst with research firm AgResource Company in Chicago. "We store wheat for the rest of the world.

During the period between May 19 and June 25, the July/September spread averaged 134.6 percent of financial full carry, well above the 80 percent threshold that triggers the increase in storage rates.

CME will measure the spread between the September and December wheat contracts from July 19 to Aug. 27 before determining if another change in storage rates is warranted.

Chicago Board of Trade December wheat WZ0 was trading at a 27-3/4 cent premium to the September contract WU0 on Monday morning. By comparison, September wheat was priced at a 14-3/4 cent premium to the July contract WN0.

The variable storage plans entices farmers and elevators to hold on to their wheat supplies, theoretically lifting cash prices to close to the expiring futures contract. Since the plan was announced, the premium for deferred months contracts compared to nearby wheat futures has risen significantly. (Reporting by Mark Weinraub, additional reporting by Sam Nelson; Editing by Marguerita Choy)

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