Grain News
Jan. 23, 2008
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National Grain & Feed Association Urges Commodity Futures Trading Commission to Delay and Study Impacts of Proposed Increase in Ag Futures Speculative Position Limits

Washington, DC—The National Grain and Feed Association (NGFA) January 23 urged the Commodity Futures Trading Commission (CFTC) to delay for at least six to 12 months its proposal to increase significantly speculative position limits on agricultural futures contracts.
In so doing, the NGFA warned the CFTC of major underlying concerns over the predictability of convergence between cash and futures prices during the futures delivery period, as well as problems with hedging and pricing efficiencies, that have dramatically increased the need for grain elevators, feed mills and grain processors to access increased capital to finance margin calls.
"The lack of convergence between cash and futures markets during the delivery period, in conjunction with rapidly rising commodity values, has created huge borrowing needs and financial risks and exposure for the grain-buying industry," the NGFA said in a statement submitted to the CFTC.
"As banks have begun to question hedging performance in futures positions, borrowing lines have been stretched to the limit or beyond…Cash basis levels (the difference between futures and cash market prices for a specific commodity) are widening to reflect much higher financing costs•to the extent financing is even available•that now are being forced into the system.
"Both the overall confidence in the (futures) market and the livelihood and business structure of the cash grain industry are at stake," the NGFA warned.
Established in 1896, the NGFA consists of 900 grain, feed, processing, exporting and other grain-related companies that operate about 6,000 facilities that handle more than 70 percent of all U.S. grains and oilseeds.
The NGFA urged the CFTC to consider the impact its proposal to increase speculative position limits ?C the number of outstanding futures contracts that an individual party is allowed to possess ?C could have in further exacerbating problems with convergence and hedging efficiency.
"While we recognize that the CFTC is not responsible for the overall economic health of an industry, we submit that the agency does have influence over some fundamental factors that influence hedging performance," he NGFA said.
The CFTC' Nov. 21 proposal to increase speculative position limits would apply to wheat, corn, soybean, soybean oil, soybean meal and several other futures contracts traded on all three U.S. agricultural exchanges.
For example, the all-months speculative position limit for corn would increase from 22,000 contracts to 42,400 contracts, with single-month limits increasing from 13,500 contracts to 26,000 contracts.
Soybean all-months limits would increase from 10,000 to 13,300 contracts, with the single-month limit rising from 6,500 to 8,600 contracts.
The wheat all-months limit would increase from 6,500 to 14,500 contracts, with single-month limits increasing from 5,000 to 11,100 contracts.
Under the CFTC proposal, speculative position limits for the current delivery month would remain unchanged at 600 contracts for each of these three commodities.
Consistent with past CFTC practice, limits would be the same across all three agricultural futures exchanges.
In requesting the CFTC to hold its proposal in abeyance, the NGFA recommended that the grain industry, commodity exchanges and the agency collaborate to conduct needed analysis to evaluate the potential impacts higher speculative position limits could have on futures market performance and capital requirements of traditional hedgers.
Such a "waiting period" also would provide time for the development of alternative risk-management and financing tools that the cash grain industry may be able to utilize to offset price risk.
It also would provide time for the CME Group to implement and evaluate the impact of changes to the CBOT wheat futures contract, as well as potential revisions to CBOT corn and soybean futures contracts, the NGFA said.
Specific issues that the NGFA said warrant further analysis are:
• The impacts of increased speculative position limits on agricultural futures market volatility.
• The impacts of increased speculative position limits on cash and futures market convergence in agricultural futures markets.
• The impacts of increased speculative position limits on the capital requirements of the grain, feed and processing industry.
• Whether other regulatory or futures contract changes merit consideration to enhance cash and futures market convergence and improve hedging efficiency.
• Whether alternative risk-management tools either available now or under development could assist traditional hedgers in managing market risks.
One concept that merits study is whether exchange-cleared swaps can be implemented effectively for grains and oilseeds, the NGFA said.
"We look forward to working with the CFTC, the exchanges and others to help ensure that agricultural futures markets remain an effective tool for commercial grain and oilseed hedgers," the NGFA said.
For further information, call Todd Kemp at 202-289-0873, or Kendell Keith at 202-289-0873.

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