Variable Storage Rates (VSR) is a market-based determinant of maximum allowable storage charges for outstanding wheat shipping certificates. It triggers higher maximum allowable storage charges that allow wider spreads when spreads are near financial full carry and lower maximum allowable storage charges when spreads are narrow or inverted. Market participants may follow the daily VSR calculations during the observation period using the "VSR Calculator".

For Chicago SRW Wheat Futures

Nearby spreads that average 80 percent of financial full carry or greater will trigger an increase in maximum allowable storage charges by 10/100s of one cent per bushel per day (approximately 3 cents per bushel per month) following the nearby delivery period. Conversely, nearby spreads that average 50 percent of financial full carry or less will trigger a decrease in maximum allowable storage charges by 10/100s of once cent per bushel per day following the nearby delivery period. Should nearby spreads average over 50 percent of financial full carry and less than 80 percent of financial full carry, the maximum allowable storage charges will remain the same as in the previous period. There is no upper limit for maximum allowable storage charges under VSR, but the minimum rate is 16.5/100s of one cent per bushel per day.

Beginning September 19, 2016, the maximum allowable storage charge increased from $0.00265 to $0.00365 per bushel per day and remains at that level.

For KC HRW Wheat Futures

The Exchange will implement the VSR mechanism with an initial observation period that began on December 19, 2017 and ends on February 23, 2018, evaluating the 2018 March – May KC HRW Wheat calendar spread relative to financial full carry with any changes to the storage rate effective on March 18, 2018. The storage rate will remain at 19.7/100s of one cent per bushel per day until the VSR mechanism triggers a change to the storage rate, at which point the storage rate will become either 16.5/100s of one cent per bushel per day if the storage rate is triggered down or 26.5/100s of one cent per bushel per day if the storage rate is triggered up. The seasonal storage rate currently in place for the Contracts will be suspended in lieu of the VSR mechanism, meaning the rate of 19.7/100s of one cent per bushel per day will remain in place until triggered up or down by the VSR mechanism.

SUMMARY

To improve wheat cash and futures price convergence at futures contract expiration, a variable storage rate, or VSR, mechanism was implemented in Chicago SRW Wheat futures and is planned in the KC HRW Wheat futures with the March 2018 contract expiration. VSR is based on the concept of allowing Wheat futures contract maximum storage charges to increase when nearby spreads average 80% of financial full carry or more over a defined time period and allowing Wheat futures contract maximum storage charges to decrease when nearby spreads average 50% of financial full carry or less over a defined time period.

VSR results in improved cash-futures convergence under various underlying market conditions. The portion of price discovery that occurs in the basis gets transferred into the transparent futures spread markets, resulting in greater liquidity.

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