The Commodity Futures Trading Commission (CFTC) got an earful from hedgers during an April forum in
Washington
D.C.
to collect information on price discovery and record spikes in volatility in the agriculture markets. Producers didn’t hold back, urging the CFTC to look at the increase in speculative money coming into the market. “The market is broken, it’s out of whack, and somebody’s got to
step in and give some relief,”
said Billy
Dunavant
of cotton merchandiser
Dunavant
Enterprises. “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.”
Mark
Keenum
of the U.S. Department of Agriculture noted that 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,”
Keenum
said, adding that the situation has raised fears that cash and futures markets will face convergence problems.
The CFTC seems to realize the increasing burden that speculative money has put on traditional hedgers, as Acting Chairman Walt
Lukken
said the agency will hold off on its plans to increase spec limits. “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,” he said.
Putting spec limits on hold is the right decision, says Bill Biedermann, senior vice president at Allendale. “Speculative money versus the actual cash industry money involved in the markets is out of balance, and giving the speculator more room to trade would create an even bigger imbalance,” he says.
Elaine Kub, analyst for DTN, says, “Any effort to discourage speculators is a double-edged sword. If the CFTC doesn’t allow the exchanges to be as friendly to big speculators as they want to be (raise the limits as high as they see economically prudent), this could chase funds into OTC transactions, exchange regulated or not, that will just cloud
ag
futures markets’ transparency,” she says.