Search Site   
News Stories at a Glance
Deere 4440 cab tractor racked up $18,000 at farm retirement auction
Indiana legislature passes bills for ag land purchases, broadband grants
Make spring planting safety plans early to avoid injuries
Michigan soybean grower visits Dubai to showcase U.S. products
Scientists are interested in eclipse effects on crops and livestock
U.S. retail meat demand for pork and beef both decreased in 2023
Iowa one of the few states to see farms increase in 2022 Ag Census
Trade, E15, GREET, tax credits the talk at Commodity Classic
Ohioan travels to Malta as part of US Grains Council trade mission
FFA members learn about Australian culture, agriculture during trip
Timing of Dicamba ruling may cause issues for 2024 planting
   
Archive
Search Archive  
   
Panel investigating markets volatility

By ANN HINCH
Assistant Editor

WASHINGTON, D.C. — Is outside speculation to blame for widening bases between cash and futures prices in the commodities market? Is the major reason rising fuel costs? Is it a combination of the two – or something else?

Steve Wellman believes transportation costs may have great effect on the lack of convergence between cash and futures prices. A 27-year corn and soybean farmer on 1,800 acres in Syracuse, Neb., he admits, “I don’t have answers on why these things are happening, but everybody has ideas why.”

Times are frustrating for growers – who are having trouble getting contracts with grain elevators and processors beyond 60 days – because their capital costs have doubled in the past year or two, and he noted “we see these (high futures) prices out there for our commodities … and there really isn’t any avenue to lock in those prices.”

That frustration spurred a meeting the Commodity Futures Trading Commission (CFTC) called in Washington, D.C., on April 22. The CFTC will accept written public comments until May 7.

As treasurer with the American Soybean Assoc. (ASA), Wellman attended to listen to several presentations from government officials, economists and representatives of other farm organizations, as to their data and experiences with widening market bases. The ASA has not formed an opinion on the cause of nonconvergence, but did recently put together a Market Performance Working Group – of which he is chairman – to examine the issue.

CFTC Acting Chairman Walt Lukken noted in the past year wheat has increased in price by 95 percent, soybeans by 88, corn by 66 and cotton and oats by 47 percent. Rice shortages have sparked worldwide worry; its price has risen 118 percent.

“These price levels, combined with record energy costs, have put a strain on consumers, as well as many producers and commercial participants who use the futures market to manage risk and discover commodities prices,” Lukken said. “It is tempting to shoot first and ask questions later” with respect to making rule changes in the market.” But, “It’s critical we understand the problem fully and get it right, and make sure the cure is not worse than the disease.”

Lukken said the CFTC is considering proposals to raise speculation limits for certain ag commodities and to create a regulatory exemption from speculation limits for risk management purposes. This does not mean the commission will take action; in fact, he emphasized it will be “very cautious” about moving forward with such initiatives because of concern about additional speculative measures putting more pressure on the market.

“Most people think, ‘Well, you have to have a price bias;’ we do not,” said R. David Gary, deputy director of CFTC external affairs.
He said the CFTC oversees trading of futures and options and its concern is not to set prices, but to make sure those markets reflect supply and demand playing out in the cash market.

Gary added there is concern in the ag community about the validity of commodities futures as a hedging mechanism for farmers and the businesses they supply.

Ron Kindred, who has corn, soybeans and a small beef herd on 2,100 acres in Atlanta, Ill., said many farmers feel the commodities market has become more of a haven for index fund investors and less of a hedging tool for producers.

He noted growers used to be able to contract with elevators and processors two or three years out – not just within 60 days.
Shawn Hackett, president of Hackett Financial Advisors, said index funds are new to the market because until recently, those investors had no interest in commodities – then again, there was no expectation for $6-plus corn as well as ever-climbing demand.
“(Commodities had) been in the bear market for 30 years,” he pointed out.

Index traders treat commodities as another class of assets in which to invest, according to Dave Kass of CFTC’s surveillance team.
Just as precious metals or real estate is attractive when their markets are doing well, commodities are valued now for the same reason.

He said at first it attracted European investors and those managing pension funds, but other U.S. traders are catching up.

“Any time you go through a tectonic shift in the behavior in markets … there’s going to be a certain period of time where people are uncertain what the new rules will be,” Hackett opined. “The whole system is being turned upside down by this physical demand from Asia … and this investor demand” within the last five years.

Hackett believes the market will self-correct without the CFTC instituting further regulations, and already sees evidence in that last year, it was the corn and wheat prices that were having trouble converging, and now they are not – though, soybean prices are.
If prices go so high that end users can’t afford to buy grain, those prices will fall on lower demand, he explained; the laws of supply and demand remain as ever.

“Even the smartest and brightest around can’t tell you why we’re not seeing convergence,” Hackett said, adding he thinks it’s a threefold problem: increase in demand for grains, “incredible” investor demand through index funds and “incredible” strain on elevators in the form of meeting more expensive margin calls through commodities exchanges.

To learn more online, visit www.cftc.gov and click on the link for “Agricultural Forum.” High-speed users may watch video of all or part of last week’s six-hour meeting.

To submit a written comment by May 7, e-mail ag forum@cftc.gov or call 202-418-5000 for specifics regarding U.S. Mail.

4/30/2008