Yesterday in Washington, the Commodity Futures Trading Commission (CFTC) held a forum to discuss extreme volatility and price discovery in the ag markets. Representatives from various ag producers were up in arms about increased volatility and the increase of speculative money coming into the market. Mark Keenum of the U.S. Department of Agriculture noted, “increased volatility in futures markets and sharply higher prices have led to higher margin requirements and increased cost of hedging. Cotton shippers and some grain elevators are no longer bidding for future delivery because of risks and costs associated with maintaining hedges. The increasing disconnect between traders and speculators has raised fears that cash and futures markets will face convergence problems if the trend intensifies.”
CFTC Acting Chairman Walt Lukken said the agency is treading carefully on its consideration to raise spec limits for ag commodities. “Given current market conditions and the uncertainty surrounding additional speculative money on these markets, I will be very cautious about moving forward with such initiatives at this time,” Lukken said. The producers at the forum were very much against increasing spec limits. John Popp of the Independent Bakers Association said increasing spec limits puts too much power into the hands of speculative traders. While CME Group is for raising spec limits, CME Group Vice Chairman Charlie Carey said it does advocate the deferred consideration of increases by the CFTC. “We don’t want to be accused of making a situation worse…we understand the marketplace is in a tough spot,” Carey said.
Representatives from the cotton industry blasted cotton futures markets at the InterContinental Exchange (ICE) and called for margin reform. “We have serious problems in the cotton futures market on the ICE exchange. The market is broken, it’s out of whack, and somebody’s got to step in and give some relief. We need to get back to trying to function as a futures market that has some stability. Traders and commercial hedgers need to be treated on a totally different basis than speculators and commodity funds. We need to be margined completely different,” said Billy Dunavant of cotton merchandiser Dunavant Enterprises. Dunavant said that if anything spec limits for cotton should be decreased rather than increased. Joe Nicosia, CEO of Allenberg Cotton Co., executive vice president of LouisDreyfus Commodities and incoming president of the American Cotton Shippers’ Association suggested CFTC include monitoring swap and OTC positions. Many of the participants also suggested more specific reporting in the CFTC’s Commitment of Trader (COT) reports. Tom Coyle of the National Grain and Feed Association stressed the importance of the new COT reports but noted that “there may be confusion on where participation shows.” He suggested that commercial and non-commercial reporting be broken down and more clearly stated on the COT reports.
“If you’re a commercial, but you also have accounts that are index, in your reporting it would show up as a commercial trade. If you’re a hedge fund and you also have a portion of your equity as a long-only fund, where does that show up? Would that be in non-commercial or in index fund?” Coyle asked. He suggested that the CFTC “make sure there’s an adjustment in that so you know which contracts are going where.”
Prior to the forum, CFTC Commissioner Michael Dunn said the response to the new COT reports has been very positive. He said he didn’t want to speculate on whether or not the reports would be expanded, but that expansion could be considered after the forum.
