By DOUG SCHMITZ
Iowa Correspondent DES MOINES, Iowa — A growing number of agricultural leaders opposing the CME Group, Inc.’s proposal to the Commodity Futures Trading Commission (CFTC) that would increase the daily price limit for corn futures contracts from 30 to 50 cents – or to an expandable 60 cents – per bushel.
In a May 19 letter to David Stawick of the CFTC’s Office of the Secretariat, Iowa Agriculture Secretary Bill Northey said he had concerns about the proposal to amend the Chicago Board of Trade (CBOT) Rule 10102.D and wasn’t convinced it was necessary to raise the daily trading limits right now.
“I would urge you to decline the request to increase the daily price limits at this time,” he told Stawick. “For most participants, this proposal runs counter to the basic premise of using the futures markets to reduce risk.
“While values are lofty at the current time, corn futures traded under $4 as recently as July and August of last year. Similarly, after reaching record levels during the summer of 2008, values retreated to more typical levels very quickly.”
As a result, Northey said this proposal is attempting to create “a permanent ‘solution’ to what may be a temporary situation.
“I believe these levels should be sustained for a much longer time period before proposed changes such as this would be justified,” he said.
While the CFTC couldn’t be reached for comment, in making the decision to propose increased daily corn price limits, Chris Gram, CME spokesperson, said the exchange talked with a number of market participants and customers.
“From a historical perspective, increases in price limits don’t necessarily result in higher margins,” he said. “Of the last three price limit increases in corn, margins have not moved higher in the two months following implementation and have actually moved lower around one month following implementation.”
CME’s April 26 original submission requested approval to increase price limits in CBOT corn futures and options from 30 cents per bushel per day, expandable to 45 cents and then to 70, to 50 cents per bushel per day, expandable to 75 cents and then to $1.10.
“Too many corn futures contracts have been hitting their daily price limit, resulting in the loss of price discovery, transparency and risk management in the futures market,” Gram said. “The current price limit of 30 cents per bushel is only approximately 4.4 percent of the futures price, which is historically low, and this is preventing the market from performing its intended functions of price discovery and risk management.”
CME later requested the CFTC revise the limit to up to an expandable 60 per bushel. “After listening to concerns from some segments of the corn futures market, the Exchange would like to revise submission 11-161 and request approval to increase price limits in CBOT corn futures and options to 40 cents per bushel per day, expandable to 60 cents per bushel per day,” CBOT officials said in their May 10 request.
Another concern for Northey is the potential for higher margin requirements and margin calls, as well as the increased volatility the proposal would create. For example, the cost of borrowing for most hedgers would be increased by 33 percent under this proposal, Northey said.
“Traditional corn hedgers today rely on the price discovery mechanism that the CBOT provides, and simply getting out or sitting on the side of the market is not a realistic option as it is in the case of speculators,” he said.
“This proposed action would unquestionably cost our traditional hedgers a lot of money and could reduce active participation in the market. This action creates a still greater barrier to market entry and effective risk management.”
As a hedger participating in the CME corn futures market to manage risk in his livestock feeding business, Art Sauder said it wouldn’t be advantageous for the limits to be increased.
“When the level of risk created by risk management programs begins to outweigh the benefits, CME futures will become an ineffective tool for our business,” said Sauder, a pork producer and president of Livestock Services, Inc. in Great Bend, Kan.
Steve Young, a grain merchandiser for Grainland Cooperative in Holyoke, Colo., whose company handles about 15 million bushels of corn per crop year from its members and owners, said, “The futures markets are not to fluctuate wildly with every rumor or forecast, but to give the market a place to lay off risk and help with reasonable price discovery.”
In the end, the proposal would hurt both merchandisers and producers, said Glen Semple, vice president of commercial lending at Farm Credit Services of Illinois in Mahomet. “This proposal will increase the cost of doing business through higher margin requirements, higher interest costs due to larger borrowings, higher unused commitment fees charged by lenders and will reduce the willingness of merchandisers to offer forward contracts to producers due to the higher price volatility,” he said.
The Exchange recently met with the National Grain and Feed Assoc. Risk Management and Country Elevator committees to explain the rationale for increased corn price limits and to consider their feedback |
