From the February 01, 2008 issue of Futures Magazine • Subscribe!

Ag spec limits increase pain

The CFTC proposal to increase spec limits on agricultural futures, in some case doubling the limits, has pitted traditional agricultural hedgers vs. just about everybody else.

“We know that the index funds have had an effect on the volatility of the market and this volatility is simply not good for the consumer because they are the ones who pay for it in the end,” says David Brown, chairman of the American Bakers Association commodities taskforce and vice president for Sara Lee. “We are getting away from the intent of the exchanges, which was to put the physical buyers and sellers together in a forum where they could hash out forward prices with one another. We don’t want it to become a casino. We want them to remain a responsible mechanism of price discovery.”

In his comment letter to the CFTC, John F. Popp, chairman of the Independent Bakers Association writes that the proposed levels would allow positions of as many as 11,100 contracts (55.5 million bushels) of wheat per month, which is 11% of the entire crop of spring wheat, and that funds already own half of the entire U.S. wheat crop. “It is obvious that the real purpose of this proposal is to allow speculators to gain even more control over the markets and make huge profits on the backs of consumers who are already paying higher food prices.”

Daniel W. Basse, president of AgResource Company, agrees with the spec limit increases. “It’s an issue of transparency. Let’s face it; everybody can do better than the spec limits just by going OTC. With that in mind, expansion of the limits makes good sense,” he says, adding that the changes will allow the market to see who is behind big market moves.

“It’s a good thing for the retail investor in the sense that this will allow or encourage more of the large players, like the index funds and the people who will make them available, to get involved in commodities,” says Elaine M. Kub, analyst for DTN.

Shawn McCambridge, senior grain analyst for Prudential Bache Commodities LLC says fund positioning has become a market fundamental and increasing spec limits is healthy for the market. “It brings in additional volume and liquidity,” he says, adding, “On the other side, it gives dominant players even more dominance, which can separate price from traditional market fundamentals.

The proposed increase is the natural result of commodities growing as an asset class, acknowledges Jerry O. Gidel, analyst for North America Risk Management Services Inc. “Everybody loves the speculators when they help bring you an extra buck, but they don’t like the speculators taking it away from them,” he says.

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