• Long-term investors in the commodity sector should weigh decisions based on reads on real supply and demand. 

• Both winter wheat futures markets are nearing the end of the latest CME “evaluation period” for Variable Storage Rates.

• Given what we see in futures spreads, particularly for the HRW market, long-term investment money will likely go elsewhere. 

As you know, both sets of winter wheat futures are nearing the end of their latest Variable Storage Rate (VSR) tracking periods. This one began on Wednesday, March 19 and runs through Friday, April 25. This “evaluation period”, as the CME phrases it, has been tracking the hybrid (old-crop/new-crop) winter wheat May-July futures spreads. The program is set up to track the “running average percent of Full Carry”. If on the end date (April 25) this running average is 80% or greater, then the Maximum Premium (Storage) Charge will increase on Monday, May 19. (Storage rates would decrease if the running average is 50% or less and stay the same if between 50% and 80%.) Given the soft red winter (SRW) market has already seen a storage rate increase while the HRW market has not, we are dealing with two different possibilities:

• The official storage rate for SRW would increase to $0.00365/bushel/day, or roughly $0.11/bushel/month. The rate as of today (April 16) is $0.00265/bushel/day or approximately $0.08/bushel/month. The May-July spread is showing a running average of 66.7% (through April 15).
• The official storage rate for HRW would increase to $0.00265/bushel/day. The rate as of today is $0.00165/bushel/day, or roughly $.05/bushel/month. The May-July spread is showing a running average of 84.6% (through April 16). 

What is the CME’s VSR program? Back in 2010 (or so), the reads on real supply and demand for wheat in general, the SRW market in particular, had fallen apart. Basis (the price differential between the market’s cash value and futures contracts) had collapsed. If I recall, calculations at the time were well beyond $1 under futures, and the latter was going down as well. The combination had the National SRW Index priced in the low $4.00 to upper $3.00 range. As an example, at the end of May 2010 the Index was priced near $4.02, theoretically putting available stocks-to-use at roughly 51.4% (based on today’s metrics). At the same time, futures spreads routinely covered more than 100% calculated full commercial carry. The market was broken. Few wanted to sell the cash commodity they were holding, fewer still were interested in buying. 

I recall having a conversation with one of the better-known cash grain experts at the time. We were debating the then idea of variable storage rates from the CME, and I asked his permission to include our point-counterpoint discussion in my next Weekly Column. (He agreed. If I recall, the piece was well-received.) He was in favor of VSR and would eventually be placed on the committee to oversee the construction of the program that still exists, and has been expanded, today. I was against VSR and am still not fond of the program on the grounds it distorts what the market, through futures spreads, shows us about supply and demand. 

But the CME wasn’t interested in that fundamental aspect of the futures market. It needed trade, and to do that the stalemate on the commercial side had to be broken. So, the VSR program came to be with the new-crop July 2010 futures contract before being expanded to the HRW market with the March 2018 futures contract. (Reportedly. I thought HRW moved into the program earlier than 2018, but my memory isn’t what it used to be.) Since then, it has been one evaluation (or tracking) period after the other resulting sometimes in storage rate increases, sometimes in storage rate decreases. If I happen to miss one of these changes, then my analysis of this fundamental read can be incorrect. 

Have I come around to everyone else’s way of thinking? If you have to ask, then to borrow a line from another movie, 2008’s The Dark Knight, “Have you met this guy?!”, meaning me, of course. That being said, given the seemingly perpetual bearishness of winter wheat fundamentals, I do think storage rates should be raised, but not subject to decreases when the next tracking period rolls around. As it stands today (again, April 16), the official storage rate for HRW will increase while the storage rate for SRW remains unchanged, putting them both at $0.00265 next month. For the record, this is equal to the storage rate for corn and soybeans. 

As a long-term investor, how should winter wheat’s VSR situation affect interest? To begin with, one of the keys to any investment position in commodities is Market Rule #6: Fundamentals win in the end. If a market is so fundamentally bearish our reads on supply and demand have to be adjusted just so trade can happen, that is not inviting to long-term investment money. On the other hand, if official storage rates were set and left, until changed unilaterally, similar to corn and soybeans, and futures spreads responded by covering less calculated full commercial carry, it would be more attractive. At that point, though, we would have to keep a few other truths about the wheat sub-sector in mind: 

• The To-Too-Two Comparison: While the 3 wheat markets are all wheat, they each have their own fundamentals and can act differently.
• The Krampus Countdown: Don’t be long wheat in December. (This makes it difficult for long-term investors in wheat, period.)
• The Wheat Reality: One bushel of wheat left over is too many.

Regarding the Wheat Reality: At the end of March the National Cash Indexes for the 3 major classes of wheat ($CSWI) ($CRWI) ($CRSI) continued to show cumbersome available stocks to use of 44.0% (HRS), 44.6% (HRW), and 45.8% (SRW). Since then, the HRW Index has decreased by another 2.0 cents. This tells us all we need to know about fundamentals and investment opportunities.