Illinois River Lock Closure May Spur CME Grain Contract Tweaks

An upcoming river lock repair project in south Chicago has attracted the attention of exchange operator CME Group because the lock's closure could disrupt deliveries against its Chicago Board of Trade grain and soybean futures contracts.

The U.S. Army Corps of Engineers will close the 64-year-old T.J. O'Brien lock and dam on the Cal-Sag Channel for two phases of repairs beginning on Nov. 3 and again on Jan. 19. It is the northernmost of eight locks on the Illinois Waterway system, near the entrance to Lake Michigan.

Each closure will halt traffic there for 47 days and could make it more difficult or costly for buyers of futures contracts to take delivery of grain housed in Chicago since the lock lies within the contracts' delivery zone 1.

The exchange has no plans in place yet to revise its delivery rules but is monitoring the situation, said David Lehman, CME's managing director of commodity research and product development.

Grain analysts said the closure is not likely to trigger a force majeure declaration by the exchange because grain housed in Chicago could feasibly be moved by truck or rail or shipped around the closure via Lake Michigan and the Chicago River via the smaller Chicago Lock.

But CME action cannot be ruled out, particularly if low cash market prices due to heavy post-harvest supplies spur deliveries, they said.

"This comes at a time when I think basis levels are going to be extremely depressed and deliveries may be the best sale for some guys. But I don't see shutting off the northern part of the river as being that important because the biggest share of the crop's going to be south of Chicago," said Roy Huckabay, analyst with The Linn Group.

The delivery period for November soybeans starts Nov. 3 and December corn and wheat deliveries begin on Dec. 1.

Difficulties taking delivery could widen spreads, analysts said. Full carry on the December/March corn spread, for example, is around 18 cents, and the spread itself was near 11 cents on Friday.

There have been no major objections to the timing of the lock project, which was announced this spring, said the Army Corps' Illinois River operations manager, Mike Zerbonia.

A month-long break between the project's two phases will allow cargo backed up by the closure to pass.

Repair work is needed to replace several worn components of the lock, which opened in 1960 and continues to operate with many original components.

If a part of the lock and dam structure known as a sheet pile cell were to rupture, navigation would be halted for at least 60 days, resulting in economic losses of $18.3 million, an Army Corps evaluation found.

While the vast majority of cargo passing through T.J. O'Brien is manufactured goods and energy products, as much as 15 percent of cargo can be food and farm products, according to Army Corps data.

(By Karl Plume; Additional reporting by Jo Winterbottom; Editing by Jonathan Oatis)