Futures trading is based on the concept of convergence. Futures and cash prices will move to equality at delivery. This convergence between cash and futures is what makes futures a relevant hedging vehicle. The basis or difference between cash and futures is relatively stable and well defined so hedgers know what the relationship between their specific crop and the general CBT contract. Convergence has been a problem for the grain contracts at the CBT over the last few delivery months.
The CBT called special meeting to discuss this issue with users. A similar meeting was held by the CTFC last week. Unfortunately, there does not seem to be any easy solutions to the problem. This is not the first time that this problem has occurred. A similar issue developed ten years ago which lead to some contract changes to adapt to the changing market conditions for transportation and export of grains. The current problems with the basis at expiration are associated with transportation and warehousing costs for grain. With higher fuel prices and low river levels, the cost of transporting grain becomes higher than normal. When there are good harvests, the costs of storage also become extremely high.
This time the issue may be more complex with index users. As users of the market for index exposure have increased, the divergence between cash and futures has also increased. There is tremendous non-commercial pressure pushing prices above the cash price which drives away commercial users. This is an issue that will have to be fixed or there could be contract failure. This would not help anyone.
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