NGFA praises US commodities watchdog’s derivative markets rule, while highlighting holes in proposal

By Jane Byrne

- Last updated on GMT

© GettyImages/Nerthuz
© GettyImages/Nerthuz

Related tags NGFA Corn futures market CFTC Grain

The current proposal from the US Commodity Futures Trading Commission (CFTC) on speculative positions come much closer to a workable approach for the grain, feed, and processing industry, says the NGFA.

Price and availability, especially in today’s volatile marketplace, are two important factors that drive feed manufacturers’ purchasing decisions.

The CFTC​ is a commodities watchdog, helping the US safeguard its agricultural and energy derivative markets, which were created as risk mitigation tools for farmers during unforeseen circumstances, such as extreme crop loss during a bad weather event or a poor harvest.

In essence, the watchdog helps the industry hedge commercial risks inherent to agricultural production, processing and marketing by limiting speculative investors outside of the agriculture community from dominating and influencing commodity markets to their investment advantage, which comes at the detriment to bona fide users of agriculture commodities, such as oil, corn, wheat and many others.

The Commission is trying to implement speculative position limits across a range of commodities and futures contracts, something it has attempted several times previously – during the almost 10 years since the Dodd-Frank financial reform legislation became law, with the US National Grain and Feed Association (NGFA) working closely with CFTC over the years to resolve contentious issues that existed in earlier proposals of the rule. 

Hedging effectiveness

Todd Kemp, senior vice president and treasurer, NGFA, told FeedNavigator:

The current proposal is a significant improvement over some previous versions for several reasons.  First, rather than put decision-making responsibility at the CFTC for actions like bona fide hedging determinations and hedge exemptions, this proposal allows exchanges like CME Group to make such decisions – with appropriate CFTC oversight, of course.  The exchanges know their contracts, their markets, their customers best. They have historical knowledge, experience and personnel to make timely decisions, and the Commission still will have ultimate authority to review and, in rare instances when necessary, to overturn exchange decisions.”

In addition, the new rule expands the range of bona fide hedging strategies that are enumerated in the rule to cover risk management strategies commonly used in the grain, feed, processing and export industry, he explained. That “will enhance hedging effectiveness; and it removes some outmoded rules that have constricted price discovery and risk management and thereby limited the predictability of cash/futures convergence.”

Fear of increased volatility in grain and oilseed future contracts

Even though the NGFAs believes there is a lot to like in the CFTC proposal, Kemp outlines a few remaining areas of concern. 

“First, there are extremely large proposed increases in non-spot month speculative position limits that we fear could open up the grain and oilseed complex futures contracts to increased volatility.  To address the problem, NGFA has recommended to CFTC that the final rule maintain relatively smaller single-month position limits to prevent nearby non-spot month contracts from becoming overwhelmed by volume from non-traditional participants.

“We also have asked the Commission to add one additional commonly-used risk management strategy to the final rule as an enumerated bona fide hedge; and we have recommended that the period for CFTC review of exchange decisions on hedge exemptions be shortened from ten business to two business days for known hedging needs to match up with the proposed two-day review for sudden or unforeseen hedging needs.”

The American Feed Industry Association (AFIA) also monitors CFTC rulemaking to ensure there is a fair marketplace for the purchase of commodities for manufacturing feed and pet food and nominated that as one of its priorities for the next 12 months​ in a post yesterday.

In the early 2000s, several foreign entities purchased large quantities of wheat, which drove up the price of the crop as the availability decreased, sending the agricultural community into frenzy.

Since then, AFIA has been working as part of a broader CMOC to urge the CFTC to more forcefully monitor and limit speculative activity to avoid future scenarios that can exacerbate price volatility and unhinge markets from real world supply and demand fundamentals.

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