C.F.T.C. forum to consider volatile commodity futures markets

by Jay Sjerven
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WASHINGTON — The Commodity Futures Trading Commission scheduled a public meeting on April 22 to discuss recent events affecting the agriculture markets, including the lack of convergence between the futures and cash prices, higher margin requirements and their impact on market participants, and the role of speculators and commodity index traders.

"These historic market conditions, particularly in wheat and cotton, require the C.F.T.C. to hear firsthand from participants to ensure that the exchanges are functioning properly to discover prices and manage risk," said Walt Lukken, acting chairman of the C.F.T.C. The forum is scheduled to begin at 9 a.m. and will be held in the agency’s Washington headquarters.

The C.F.T.C. indicated the forum will include representatives from the U.S. Department of Agriculture and stakeholders such as the commodity exchanges, traders, merchandisers and producers. It will take place against a backdrop of worries about unprecedented volatility in commodity markets and differing views on how the C.F.T.C. should exercise oversight.

Industry associations representing commercial users of agricultural futures markets applauded the announcement and said they intend to voice concerns about two agency proposals that in their view could aggravate what already is a difficult operating environment for commercial users of agriculture futures markets. The first proposal would increase federal speculative position limits in agriculture futures, and the second would exempt index funds and pension funds from federal speculative position limits.

The C.F.T.C. has the authority to impose limits on the size of speculative positions that traders may hold or control in futures and futures equivalent option contracts for designated agricultural commodities. The purpose of the limits is to protect agricultural markets from excessive speculation that, in the words of the Commodity Exchange Act of 1936, could cause "sudden or unreasonable fluctuations or unwarranted changes in the price of such commodity," which, in turn, could impose an undue and unnecessary burden on interstate commerce.

The agency on Nov. 21 proposed an increase in speculative position limits in single-month and all-months-combined positions in all agricultural commodity futures except oats. The C.F.T.C. said its proposal was based on its "experience in administering these limits" and the increases would be in accord with the maximum levels permitted under an open interest formula described in relevant agency regulations.

In a Jan. 17 letter to the C.F.T.C., Robb MacKie, president and chief executive officer, American Bakers Association, and Lee Sanders, A.B.A. vice-president of government relations and public affairs, said they believed the C.F.T.C. proposal to raise speculative position limits runs counter to the goals of the agency because it may increase the threat of market manipulation and cause unreasonable fluctuations within the commodities market.

Mr. MacKie and Ms. Sanders pointed out daily trading ranges and market volatility increased at alarming rates in the last several months and they attributed these changes to increased speculative position limits implemented in 2005.

"Implementing a new increase could exacerbate this situation," they asserted.

Mr. MacKie and Ms. Sanders said if speculative limits were increased, hedging margins likely would continue to increase, requiring small businesses to allocate more financial resources to this portion of their business to the detriment of their core business requirements.

"This could possibly force a country elevator, small flour miller or regional baker to alter its hedging strategies to the point where it will look at alternative hedging mechanisms or forego hedging in the agricultural futures markets altogether," they said.

Raising the speculative position limits also could increase the risk of a few speculators controlling large portions of the market, Mr. MacKie and Ms. Sanders said.

"If these new speculative limits are enacted, a single speculative entity could purchase or sell over 20% of last year’s soft wheat crop, over 7% of last year’s hard wheat crop and over 16% of last year’s spring wheat crop," Mr. MacKie and Ms. Sanders asserted. "This proposal moves away from the original intent of the exchanges, which was to allow commodity producers to sell their product to entities, including bakers, who use the physical product."

The National Grain and Feed Association said it opposed "at this time" the C.F.T.C. proposal to create an exemption from federal speculative position limits in the case of "risk management positions" held by index and pension funds.

"In this environment, the marketplace is ill-equipped to efficiently absorb more investment capital and perform its core function of serving as an efficient tool for businesses hedging physical grain purchases, particularly when virtually all of that investment capital is long-only and a large share of open interest essentially is ‘not for sale’ for long periods of time,’" the N.G.F.A. said.

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