Wheat farmers have historically used grain futures to hedge against low grain prices, but many are losing faith in the tactic.
As Reuters reports, CME Group’s Kansas City wheat contract sets grain for millers, exporters and other grain buyers both today and in the future, and traditionally, the prices converge with the price of wheat sold in local cash markets.
Many U.S. farmers say they no longer trust this hedging tool, amid growing complaints among producers and grain elevators that the hard red winter (HRW) wheat contract is broken.
The last three expiring contracts have gone off the board with wider-than-normal basis at their registered delivery locations, with cash prices 25 percent or more lower, according to exchange and cash market data.
Art Barnaby, agricultural economist with Kansas State University, told Reuters that one key factor behind the contract problem is storage.
Many grain elevators’ storage is at capacity, so elevators storing HRW wheat for these contracts believe the 6 to 9 cent per bushel storage cost should be valued much higher because they do not want their storage capacity filled with grain they cannot sell.
Meanwhile, massive global supplies of wheat are keeping cash prices low, especially in Kansas, where farmers harvested record-large yields this year.
Some solutions being discussed for the HRW contract are a doubling of current storage rates or enacting a variable storage rate VSR scheme.