NGFA opposes proposal on CBOT corn futures

by World Grain Staff
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WASHINGTON, D.C., U.S. — The National Grain and Feed Association (NGFA) has notified the Commodity Futures Trading Commission (CFTC) that it opposes a proposal from the CME Group to increase the daily price limit for the CBOT corn futures contract from the current 30¢ to 40¢ per bushel.

In a statement submitted to the CFTC, the NGFA expressed concern that the higher daily price limit could lead to increased volatility in corn futures prices. That, in turn, could result in greater financial pressures in the form of higher margin requirements imposed on commercial hedgers, such as grain elevators, feed manufacturers and grain processors, to maintain futures market positions used to offset price risk when buying and selling agricultural commodities, the NGFA said.

The NGFA acknowledged the CME Group’s revision that scaled back its original proposal that would have increased the corn futures daily price limit to 50¢ per bushel. When modifying the proposal, the CME Group also added a feature that would impose a one-time expansion of the corn daily price limit to 60¢ per bushel on the next business day if the market reached the revised 40¢ limit.

But the NGFA said that despite the revisions, it believed the proposal would result in greater market volatility that could compel commercial grain and oilseed hedgers to reduce the availability of cash-forward contracts to producers “out of economic necessity – an undesirable outcome for producers and anyone engaged in U.S. agriculture.”

Unless the CFTC, which has regulatory jurisdiction over the nation’s futures exchanges, formally takes action to disapprove the proposal, it would take effect automatically following a 45-day review period. The CFTC also may move more rapidly to approve or reject the proposal. The CME Group has said it would implement the change shortly after CFTC approval.

In its statement to the CFTC, the NGFA said increased market volatility that could result from the proposed increase in the CBOT corn futures price limit could:

  • Lead to significant new borrowing by commercial hedgers to meet margin calls required to maintain their futures market hedges. The NGFA noted that current higher commodity values already have increased the amount of capital needed to purchase crops from producers, and that pressure on working capital would be exacerbated further by additional market volatility spurred by a higher corn futures market price limit.

  • The NGFA also cautioned that brokerage firms that handle futures market accounts for many commercial hedgers also could respond to greater market volatility by requiring some of their customers to retain more money on deposit than the minimum initial margins required by the CME Group or the minimum currently required by the brokerage firm itself.

  • Result in the CME Group Clearinghouse increasing initial and variation margins imposed on commercial hedgers to maintain their futures market positions.

  • Limit the availability of cash-forward contracts and other risk-management tools grain elevators, grain processors and feed mills are able to extend to farmer-customers, as happened during the rapid escalation in commodity values that occurred in 2008. During that 2008 run-up in futures market prices, the NGFA noted, many firms were able to offer cash-forward contracts only 30 to 60 days in advance of delivery, given extremely large margin requirements imposed to maintain their hedges.

  • Trigger similar proposals to increase futures market price limits for other commodities, as exchanges seek to maintain long-established price-related relationships across various commodities.
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