Poor Convergence Performance of CBOT Corn, Soybean and Wheat Futures Contracts: Causes and Solutions

Abstract:     
Poor convergence performance of CBOT corn, soybean, and wheat futures contracts since late 2005 has been a major source of concern to market participants, regulators, and elected representatives at the state and national levels. After careful review of available evidence, it appears that recent storage rate changes for CBOT corn and soybean contracts were sufficient to address convergence problems is these two markets. The corn and soybean delivery system is functionally sound at the present time because it is located within substantial commercial flows of the commodities. Nonetheless, convergence performance for these two markets should continue to be closely monitored, particularly in light of the downward trend in corn and soybean shipments on the Illinois River. Recent and upcoming storage rate changes for CBOT wheat contracts are also expected to help improve performance of this contract. However, a major change in delivery terms is needed in order to address the underlying structural problems in the CBOT wheat contract. The underlying issue is that historic delivery locations are no longer in the main commercial flow of wheat. Recently approved additions to the delivery locations for wheat are unlikely to address the structural problem because new locations are viewed as “safety-valve” areas that will be used for delivery only when market conditions are unusual.

Keywords: corn, soybeans, wheat, CBOT, delivery, convergence

JEL Classifications: Q11, Q13

Working Paper Series