CHICAGO (Dow Jones)--Kraft Foods Inc. (KFT), operator of the largest soft wheat mill in North America, has urged federal regulators to reject a proposal from the CME Group Inc. (CME) aimed at narrowing the gap between cash wheat prices and wheat futures.
The exchange's proposal is "inadequate" because it doesn't guarantee the convergence of cash wheat and Chicago Board of Trade wheat futures, a critical tool for hedging, the food giant said. The markets are supposed to come together as futures contracts go into delivery, but cash wheat prices have remained at a significant discount to futures lately.
Without convergence, Kraft said it and "many other commercials, including farmers, are unclear about wheat the CME wheat futures contract represents." Company executives made their comments in a letter to the Commodity Futures Trading Commission, which regulates U.S. futures markets.
"We know it does not represent the value of U.S. soft red wheat and it also does not represent any other world soft wheat market," Kraft said about the CBOT wheat contract. "What it does represent to Kraft at this juncture is unquantifiable risk and a hedging instrument that is not representative of the real value of the underlying physical market."
Soft red winter wheat, used to make pastries and snack foods, is the type of wheat traded at the CBOT, a unit of the CME. The CBOT wheat contract is a global benchmark for wheat prices.
CME issued its proposal to improve wheat convergence earlier this month amid pressure from frustrated market participants. The exchange has recommended adding delivery points, implementing seasonal storage rates and lowering the allowable level of vomitoxin, the by-product of a fungus that can sicken humans and animals if ingested.
The CFTC must approve changes to the futures contracts and is accepting comments on the CME's proposal until Oct. 3. Kraft's letter was dated Wednesday.
"Simply increasing storage rates and adding deliverable space will have little impact on convergence," the letter said. "In recent years, action by the CME has already included higher storage rates, shipping certificates and lowering vomitoxin maximums. In our view, more of the same is not the optimal solution."
Kraft said the CME could ensure convergence by imposing "forced load-out," a system of delivery certificates that would force holders of long positions in CBOT wheat to load out physical grain from delivery elevators. The idea of compelling longs, who make bets that prices will rise, to take physical delivery "may have the best potential of achieving convergence," the company said.
Kraft said the CME is "clearly moving in the right direction" by seeking changes to improve convergence. However, the company said "the effort should be directly at achieving convergence and not just improving convergence," the letter said.
Contacted about Kraft's complaints, a CME spokeswoman said the exchange was reviewing the letter and did not have an immediate comment. CME officials have previously said the proposal to add three delivery territories, including facilities on the Ohio and Mississippi rivers, would improve convergence by providing greater access to delivery points and bringing additional capacity on to the contract.
Seasonal storage charges should also help improve convergence, according to the CME. Changes to the storage rates include introducing seasonal premium charges, to be increased from July through November to 8 cents per bushel per month, up from the current level of 5 cents per bushel per month from December through June.
Kraft, headquartered in Northfield, Ill., said it operates the continent's largest soft wheat mill in Toledo, Ohio. The company also said it is one of the largest single processors and consumers of soft wheat in North America.
Source: Tom Polansek, Dow Jones Newswires; 312-341-5780; tom.polansek@dowjones.com