Twenty-some years ago, the CME came up with the Variable Storage Rate program as a way of keeping physical bushels of wheat (usually) moving through the system.
I argued against it then from a grain merchandising point of view based on the idea it did not solve the lack of demand issue, or slow US production.
Don’t Miss a Day: From crude oil to coffee, sign up free for Barchart’s best-in-class commodity analysis.These days I'm still against VSR as it can skew algorithm systems that possibly use percent of full financial carry in trading equations.
Those of you who have followed me through the years know I can be – what’s a mild word for it – opinionated. Back in the day when people used to know me, I had a number of characteristics assigned to me: Being a curmudgeon, a crank, an endlessly bearish to name but a few. (Given the 2026 edition of Commodity Classic is coming to an end Friday, I’m reminded of a story. At the conference in New Orleans one morning, as I took the stage to speak at a John Deere breakfast meeting my friend and host of the event played The Imperial March from Star Wars[i], also known as Darth Vader’s theme. As luck would have it, I was wearing my black suit that morning.)
I also tended to be argumentative – maybe combative – when it came to panel discussions, a personality trait that eventually saw me relieved of most of those opportunities. Over the years I took the less popular side debating against the sanity of the mantra “Trade wars are good and easy to win”, a memorable evening to be sure, and the con side of the CME’s Variable Storage Rate (VSR) program. Have I softened my stance on these, or other, ag market debates? If you need to ask, spend some time this weekend reading through my other writings on Barchart.
This time around I want to focus on, as the title of this piece states, why I hate the Variable Storage Rate program. Back in the mid to late 2000s I had the opportunity to be part of the initial discussion. The problem being addressed was SRW and HRW wheat futures spreads that consistently covered more than 80% financial full carry, with the occasional trip beyond the 100% level not uncommon. The root cause was the same back then as it is today: The US has ample supplies of wheat and only limited global demand.
With the carry strong, there was no incentive for merchandisers to keep moving the grain. It was more profitable to hedge and roll, the risk being a collapse in basis like what was seen in the late 2000s, the event that proved to be the straw that broke the cockroaches[ii] back. To get wheat moving into the US pipeline, the CME came up with VSR where futures spreads were monitored during different times of the year, and if the percent of financial full carry was too high, the official storage rate would be increased, reducing the incentive to hedge and hold. When the spread covered less full carry, the storage rate would be decreased again.
My argument against the program was, and remains, the changing storage rates skew one of our reads on real market fundamentals. As you know, I view USDA’s supply and demand numbers as – well, you can fill in the blank on your own. Instead, I use National Cash Indexes to track intrinsic value to apply to the economic Law of Supply and Demand, national average basis (the price difference between cash and futures), and futures spreads (price difference between futures contracts). Within the Grains sector, we can measure bullishness or bearishness of the markets’ (corn, soybeans, three wheats) fundamentals by tracking the trends of how much full financial carry (commercial carry) is covered by the spreads.
These days, I look at the Grain markets more as investment opportunities rather than through the eyes of a one-time merchandiser. Given this, when it comes to allocating investment funds to a particular market, I want to have a consistent read on its real fundamentals. The CME’s VSR takes that away from the wheat markets. Let’s look at the latest example.
Both the SRW and HRW March-May futures spreads were tracked from December 19, 2025, through February 20, 2026, a time including the end of the most recent Krampus Countdown[iii]. The HRW spread had an average daily coverage of 56%, greater than the 50% lower limit, so storage will remain unchanged at roughly 8.0 cents per bushel per month. However, the SRW spread averaged 45.5%, below the 50% cut line, so the storage rate will drop back to about 5.0 cents per bushel per month on March 19. What did this do to our read on real fundamentals? Let’s take a look.
At last Friday’s close, the SRW new-crop July-September futures spread closed at a carry of 10.75 cents and covered a neutral 44% calculated full commercial carry. Early Friday morning, the same new-crop SRW spread was showing a carry of 11.0 cents, one tick more than last week’s close, and covered a bearish 68%[iv]. I recently wrote about long-term investments in grain Exchanged Traded Funds (ETFs), including Teucrium WEAT (WEAT) based on the SRW futures market. If algorithms have percent of full financial carry as part of the equation, does VSR change the flow of investment money into the market? Even though the other fundamental reads haven’t changed. It’s a problem.
My solution is simple. Raise the storage rate to the higher level and leave it, keeping it consistent with the rest of the Grains sector. If the nearby spread covers a low level of full financial carry, it tells us – both commercial and noncommercial sides – real fundamentals are tightening. If the spread works its way out to covering 80% or more (the upper end of the CME’s program triggering higher storage rates), it tells us the US has more wheat than it needs. If basis and futures collapse because of it, so be it. As I wrote in a column many years ago, borrowing a line from Jack Nicholson’s version of the Joker, sometimes “This town (market) needs an enema”. Given the proper “incentive”, the market will get cleaned out so it can start the process all over again.
But I lost the debate all those years ago, so we’ll watch SRW spreads get skewed again later this month just as the next tracking period[v] gets under way.
[i] I need to write it into my will that this song plays while they are wheeling my casket down the aisle.
[ii] I consider wheat to be the Cockroach of the Grains Sector, meaning it is almost impossible to kill. The Camel is grain sorghum given it seemingly needs only a couple drinks a year to produce a crop.
[iii] A market even Santa knows, “Don’t be long wheat in December”.
[iv] Based on a Horseshoe Proximity, close is close enough, with 68% close enough to the bearish 70% level.
[v] This one makes even less sense as it tracks the old-crop May – new-crop July spreads, like comparing raisins to grapes.
On the date of publication, Darin Newsom did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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