CFTC Agricultural Advis

Committee MeetingJuly 29, 2008

Dave LehmanDirector, Commodity Research and Product Development
© 2008 CME Group Inc. All rights reserved 

Overview

• Last Ag Advisory meeting (Dec 2007)

– Discussed benefits of cleared ag swaps and ethanol swaps– December Corn and Wheat expirations indicated good convergence 

• 6 months of fundamental factors which caused rising pri

etc

– World wheat stocks fell to a 30 year low and U.S. Wheat stocks fell – Input costs increased sharply, led by fuel and fertilizer– Corn, Wheat and Soybean prices increased sharply to record highs

• Focus on contract performance – specifically wheat 

– Price limits were expanded in February and March 2008 in corn

improve market performance

– Wheat delivery instrument changed from a warehouse receipt t

and storage rate increased by 10% to expand effective delivery 

convergence, effective with the July 2008 expiration

– Due to excellent SRW harvest, basis weakened leading up to t

the July – Sep spread moved near full carry, resulting in fewer 

and limited arbitrage between futures and cash markets. 
© 2008 CME Group Inc. All rights reserved 

December 2007 CBOT Soft Red Winter (SRW) Wheat Basis

December 2007 Wheat contracstrong convergence driven by demand and declining world s
© 2008 CME Group Inc. All rights reserved 

Dec 07 to Mar 08 Spread and Percent of Full Carry

The Dec-Mar spread moved from an inversAugust to 100% of full carry in November taround 75% of full carry on First Delivery D
© 2008 CME Group Inc. All rights reserved 

July 2008 CBOT SRW Wheat Basis

July 2008 Wheat contract exhibited poor cThis was the first expiration with the new srates and the use of shipping certificates. is expecting a huge SRW crop, almost 70% last year’s crop with all 2008 Wheat futures expirations trading at or near full carry.
© 2008 CME Group Inc. All rights reserved 

Jul 08 to Sep 08 Spread and Percent of Full Carry The Jul-Sep spread gyrated between inve

and carry in March before moving to full cin late June and falling to just over 80% of carry on First Delivery Day.
© 2008 CME Group Inc. All rights reserved 

Average and Actual 2007/08 CBOT SRW Wheat Deliveries

Wheat deliveries have been below average during 4 of the last 5 expirations.
© 2008 CME Group Inc. All rights reserved 

Index Fund Net Long Positions Have Decreased in CBOT SRW Wheat Futures Ma

Wheat

49%

Jan

2006

49%

Though index fund 

positions as a 

percentage of open 

interest declined 

from 49% to 41% 

over the last two 

years, prices 

increased 151%.
© 2008 CME Group Inc. All rights reserved 

CME Group Actions to Date to Address Wheat Performance Issues• Since last fall, CME Group has been working closely wit

participants and trade associations to gather market feecontract performance

• In April, meetings with market participants held in assoc

Commodity Markets Council to discuss contract performpotential solutions

• In June, CMEG conducted a storage rate survey with Na

Feed Association

• Following the July expiration, CMEG held industry round

wheat market participants to discuss potential changes 

• Roundtable reached consensus to move forward with br

vetting of the following proposals for the wheat contract

– Seasonal storage rates– Additional safety valve delivery points (Memphis and Centra– Consideration of serial futures– Consideration of adding delivery certificates to existing ship– Consider enhanced quality by lowering the vomitoxin limit to – Research potential for index settlement
© 2008 CME Group Inc. All rights reserved 

CME Group Timetable to Address Wheat Performance Issues• During next 30 days, CME Group will be working through 

industry proposals with market participants to draft specimplementation in the contracts

– Seasonal storage rates and additional delivery locations appear to 

support

– Delivery receipts (forced load-out), cash settlement and lower vom

controversial and must be thoroughly researched 

• An industry meeting is planned for September with a bro

market participants to present proposed wheat contract 

• CME Group will also explore a cash settled contract bas

U.S. production. If an index is feasible, a new cash settlbe launched side-by-side with the current contract

• CMEG needs to work closely with CFTC to determine ho

contract changes could be implemented for wheat

– How quickly could seasonal storage rates and additional locations – How quickly could delivery receipts, cash settlement or a lower vom

implemented?
Appendix
© 2008 CME Group Inc. All rights reserved 

December 2007 Corn Basis

December Corn exhibited strong convergence.
© 2008 CME Group Inc. All rights reserved 

Dec 07 to Mar 08 Corn Spread and Percent of Full Carry

The Dec – Mar spread remained consistently between 80 and 90 percent of full carry.
© 2008 CME Group Inc. All rights reserved 

July 2008 Corn Basis

July 2008 Corn did not exhibitstrong convergence at delivery points but did exhibit strong basis appreciation at t

he Gulf.
© 2008 CME Group Inc. All rights reserved 

Jul 08 to Sep 08 Corn Spread and Percent of Full Carry

The Jul – Sep spread moved from parity in March to around 80% of full carry just before firstdelivery day.
© 2008 CME Group Inc. All rights reserved 

Index Fund Net Long Positions Have Decreased in Corn Futures Market

Index Net Long (Short) Positions

as % of OI

Corn 

0%

10%20%30%40%50%60%70%

Though index fund 

positions as a 

percentage of open 

interest declined 

from 27% to 21% 

over the last two 

years, prices 

increased 224%.

Index corn positions as % of 

Nearby corn futures

27%

Jan

2006
© 2008 CME Group Inc. All rights reserved 

November 2007 Soybean Basis

November 07 Soybeans exhibited strong convergence.
© 2008 CME Group Inc. All rights reserved 

Nov 07 to Jan 08 Soybean Spread and Percent of Full Carry

The Nov – Jan spread moved from 60% of full carry in July to 100% in October to around 80% on First Delivery Day.
© 2008 CME Group Inc. All rights reserved 

July 2008 Soybean Basis

July 08 Soybeans exhibitedstrong convergence.
© 2008 CME Group Inc. All rights reserved 

Jul 08 to Sep 08 Soybean Spread and Percent of Full Carry

The Jul – Aug spread was inverted most of the time fromMarch
© 2008 CME Group Inc. All rights reserved 

Index Fund Net Long Positions Have Remained Steady in Soybean Futures Mark

0%

10%20%30%40%50%60%70%

Index soybean positions as % of Nearby soybean futures

Soybeans 

Index fund positions 

as a percentage of

open interest 

increased slightly 

from 24% to 27% 

over the last two 

years while prices 

increased 139%.

24% 

Index Net Long (Short) Positions 

as % of OI

Jan

2006
© 2008 CME Group Inc. All rights reserved 

Agricultural Commodity Stocks Are Extremely Low

10%15%20%25%30%35%40%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 

So

Current ratio versus the 10-year ave

Corn at 13% vs. 22%

Wheat at 19% vs. 28%

Soybean at 21% vs. 22%

World

Stocks-to-Use Ratio
© 2008 CME Group Inc. All rights reserved 

Over Regulating US Commodity Markets Will Encourage Flow to the Already Active OTC Markets and Overseas Exchanges

$0

$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

2005 2006 2007

0200400600800

1,0001,2001,4001,600

2005 

• 65% growth in OTC commodities in two years while over

commodity market is now 58% of global annual volume

• OTC commodity market is estimated at 5 times the size o

commodity market

Annual V

for Exchang

D

Number of contracts inmillions

Overseas MarkeUS Markets

Amounts Outstanding of OTC 

“Other” Commodity 

Forwards, Swaps, and 

Options (including energy)

Amount outstanding in$ Trillions