CHICAGO - Ample supplies of U.S. soft red winter wheat and lackluster demand for the grain will promote big first-day deliveries against the September Chicago Board of wheat contract on Monday, traders and analysts said.

Given current soft U.S. cash wheat markets they estimate initial delivery notices against CBOT September wheat at 3,000 to 5,000 contracts, representing 15 million to 25 million bushels of soft red winter wheat.

Some of those expectations were working into trading on Friday, they said, with September WU9 down 12 cents a bushel at $4.63 at midday.

Wheat has an inherent problem. We have too much of it and what we've got nobody else wants, said analyst Roy Huckabay with The Linn Group, who expects big deliveries.

On the Ohio River near Evansville, Indiana, on Thursday, for example, SRW barges were bid $1.32 to $1.40 under the CBOT September futures. At the big Toledo, Ohio, terminal spot bids were running 70 to 72 cents under CBOT September.

But more is at stake this time for the CBOT and its parent The CME Group (CME.O).

The delivery process will be in a glaring spotlight over the next three weeks, as government regulators have said they will make changes if the stubborn controversy over the CBOT wheat market's lack of convergence persists.

During grain futures delivery period, the futures market acts like a cash market. If futures are higher, traditionally grain has moved into approved delivery points and notices are posted against the contract. That for decades has acted to converge futures and cash prices by the end of the period.

But wheat millers, merchants and exporters have complained for more than two years that the CBOT wheat contract is fundamentally broken -- that is, convergence no longer occurs and so the contract cannot be used for hedging risk.

Without convergence, they say, banks will not use CBOT contracts as collateral for commercial financing.

REGULATORY HEAT BUILDING

The CME has struggled with a solution. Even with enormous deliveries against the July 2009 wheat contract -- 34,448 contracts -- only 237 were new deliveries while 34,211 were redeliveries -- recirculated existing certificates.

So little or no SRW wheat was actually loaded out onto a railcar or barge and moved into the cash market.

This continued lack of convergence is unacceptable, U.S. Commodity Futures Trading Commission Gary Gensler told Congress on July 21, adding that if it continued in September delivery we will consider further actions that are necessary.

Some say the problem centers on the evolution of the CBOT contract into more of an investment vehicle than grain marketing tool.

Holders of wheat certs earn a steady return on their investment given the price differentials between the spot contract and the forward market, a spread reflecting storage costs and interest. As of early Friday, the price difference between CBOT September and December wheat was 28 cents a bushel -- the full cost of financing and carrying a position forward.
If deliveries are put out, they are going to be taken by somebody and put back into the system, said Rich Feltes, senior vice president and director of MF Global Research. For somebody that would take delivery on wheat today and carry it, they can earn 3 percent on their money. That's how wide the spread is.

CBOT made changes to its July 2009 wheat delivery rules aimed at improving convergence. But not enough, Gensler and most grain market analysts said.

Gensler told Congress last month that convergence problem in CBOT wheat rose from an average of about 5 cents in 2005 to 47 cents in 2006, narrowed to 24 cents in 2007, then widened out to $1.07 in 2008.

Even so, the final July Toledo difference was still 83 cents, Gensler told legislators last month. (Editing by Christian Wiessner)

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