Presentation by 

Jeff Borchardt, President, KCBT 

“Coordinating Actions on Wheat Price Limits” 

CFTC Agricultural Advisory Committee Meeting 

July 29, 2008 

I appreciate the opportunity to brief the Committee on the events leading up to and 

the actions taken earlier this year by the Chicago Board of Trade, Kansas City 

Board of Trade & Minneapolis Grain Exchange in coordinating increased wheat 

futures price limits. The actions taken by the exchanges were necessary and 

prudent to restore the markets’ price discovery and transparency functions. We 

applaud the Commission for recognizing the need for swift action to alleviate the 

constraints on trade and for working closely with the exchanges to approve the 

increased price limit provisions on a fast-track basis. 

The run up in wheat prices from April 2007 to February 2008 is attributed to 

several factors in what has been commonly referred to as a “perfect storm” of 

events, namely: 

• The Easter weekend hard freeze and subsequent flooding in the winter wheat 

belt; 

• Second consecutive year of severe drought in Australia coupled with 

production declines in both Canada and the EU; 

• Projected world grain usage outpacing production gains; 

• USDA forecasts of US wheat stocks at 60-year lows, global wheat stocks at 

30-year lows, and the lowest world grain stocks to usage ratio since the 

USDA began tracking this data in 1960; 

• Weaker US dollar resulting in increased wheat exports and reduced domestic 

stocks; and 

• Export bans or tariffs instituted by other governments, most notably, Russia, 

China, India & Argentina, resulting in the US becoming the “reliable global 

supplier” of wheat. 

As the price of wheat increased over 2007 and into 2008, the three grain exchanges 

began experiencing an increasing frequency of price limit moves, particularly after 

wheat reached $8.00 per bushel in September of last year. The MGEX hit limit on 

16 of 21 business days in January of this year and each business day in February 

leading up to the price limit change. The consecutive limit move days of February 

4-8 on all three wheat exchanges encumbered the markets’ ability to discover price 

and conduct trade. Something had to be done quickly for the critical price 

discovery function to resume. 
Later in the week of February 8, the three exchanges began discussions of a 

coordinated increase in daily price limits. All agreed that a coordinated price limit 

effort would best serve the industry because of the significant inter-market 

spreading that goes on between the three wheat markets and also to lessen 

confusion that might result from the markets having differing limit provisions. As 

a result, the three exchanges filed for identical increased price limits provisions: 

• An initial price limit of 60¢ per bushel; 

• Expanded limit provisions that increase by 50% each time the price limits 

are reached; 

• The trigger for expanded limits - when 2 or more contract months within a 

crop year (or the remaining month of a crop year) close at limit bid or offer; 

and 

• Expanded limits remain in effect until no contract closes limit bid or offer 

for 3 consecutive business days. 

When the markets opened on February 11 with the new 60¢ price limit, price 

discovery resumed. The new price limit provisions worked well and the three 

wheat markets were once again able to conduct business under either the initial or 

expanded limits. 

After a few weeks of experience with the new price limits, the wheat markets 

compared notes and discussed minor changes to the limit provisions. The catalyst 

for this discussion was input and suggestions offered by commercial market 

participants and FCMs. Among the changes discussed were: 

• Capping the expansion provisions so that institutions financing the margins 

requirements would have a better idea of the maximum daily amount that 

would be required to fund variation margin; 

• Setting the trigger for expanded limits based on contract months where the 

majority of open interest and trade resides, thereby eliminating the 

possibility that lesser liquid back months cause the expansion of price limits; 

and 

• Contract (decrease) the price limits as quickly as they expand, resulting in 

additional flexibility in regulating margin requirements and current limits 

that are more reflective of actual market pressures. 

As a result of these discussions, CBOT & KCBT agreed to move ahead with 

coordinated price limit amendments. MGE determined that they were better 

served by the existing price limit provisions due to the continued extreme volatility 

in HRS wheat. 
CBOT & KCBT filed for and received approval from the Commission for price 

limit amendments that became effective on Friday, March 28, 2008. The changes 

covered all three areas addressed by the industry input: 

• Capping the expanded limit provisions at $1.35 per bushel; 

• The trigger for expanded limits – when 2 or more of the nearest 5 non-spot 

contract months (or the remaining contract month in a crop year) close at 

limit bid or offer; and 

• Any day that the market is under an expanded price limit level and does not 

close limit bid or offer, the market reverts back to the preceding price limit 

level. 

 

In summary, the coordinated action taken by the three wheat exchanges in 

February worked well to resume the price discovery and price transparency 

functions that are paramount to our markets. The coordinated effort provided the 

marketplace with a relatively uniform set of price limit rules to apply in order to 

minimize the possibility of significant inter-market spread disconnects and 

maximize convenience in application. 

The effective resolution of this market predicament is a laudable example of 

exchanges, regulators and industry working together to recognize and very quickly 

address a significant market issue.