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| This thread looks to be about the KC wheat. SRW is experinceing a much narrower basis. IL Riv is about -14N for new crop versus -$1.50 a year ago. Why? It is the spreads and the VSR.
The VSR (variable storage rate) allows the spreads to widen if they are trading at 80%+ full carry on June 1. The have been trading at 80%+ for some time but the trade had this factored in already. Take the July/July spread. It is trading at $1.11 carry to the July11 wich under the OLD storage rates would be about 153% of full carry. This allows the hedger to receive a return on thier space and thus allows the basis to narrow. The VSR helps the short hedger. The producer is a short hedger, and wider carries make the basis do more work and allows for convergence.
Now look at the KC spreads. The N10/N11 spread using 3.25% interest rate is at 101.6% full carry at 70.75 cents. In other words a bushel of SRW will pay the wharehousman more return than a bushel of HRW. Since the HRW spreads cant really widen out anymore the difference has to be made up via the basis meaning the basis he is paying the farmer or country elevator has to widen out since the spreads can not. The KCBOT has NOT adapted to the VSR nor has Min.
There is your answer. In short, the VSR is working for Chicago wheat. The short hedgers need to pressure the KCBOT to adapt to the VSR like Chicago did. Who gets hurt with the VSR? The long, i.e the hedge fund who now has to rol the long out from July to a distant month at a carry versus an inverse. | |
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Historic high basis price on wheat.
