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CFTC Ruling Could Have Crop Price Impact

August 29, 2011
By: Ed Clark, Top Producer Business and Issues Editor
 
 

How the Commodity Futures Trading Commission (CFTC) ultimately rules on hedge fund activity could have an impact on crop prices. The government is on a hunt to restrict speculation in commodity markets, and that could make it more difficult for crop prices to rally.

That’s the view of Bill Biedermann of Allendale Inc., a market research and brokerage firm in Crystal Lake, Ill. Biedermann believes that potential action on the issue by CFTC may be more important than the new farm bill.

The reason is that speculators and hedge funds, which could end up restricted by CFTC actions, provide liquidity to the market, one source says. Without that liquidity, it could be more difficult for crop rallies to occur.
 
One illustration Biedermann gives as to the importance of hedge funds is that at one point during 2010, funds owned up to 52% of soybean futures contracts on the Chicago Board of Trade. So far, the government has reduced what it regards as excessive speculation on energy contracts, to create more orderly marketing. "Now the government has soybeans as its target," Biedermann says. The Obama administration has publicly stated that it intends to eliminate excessive speculation, Biedermann says. That could restrict hedge funds to own just a certain number of contacts.
 
In late May, the CFTC’s Agricultural Advisory Committee (AAC) held a hearing on issues related to the Dodd-Frank Act, including position limits, hedge exemptions, the swap dealer definition, end user exception and margin requirements for uncleared swaps. The AAC also heard a presentation on recent activities in agricultural markets.
 
A measure included in the FY 2012 Agriculture Appropriations bill, however, would exempt producers, processors and merchants of agriculture commodities from margin swap requirements imposed by the Dodd-Frank derivatives—provided this is their primary business and that the swaps were made to mitigate commercial risk to their commodities.
 

 

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COMMENTS (3 Comments)

Vincent - Reinbeck, IA
Well said Honkers. Why didn't Ed Clark the TPs business editor even think to mention that fact? Those margin calls are a huge factor and will be more so when the cost to rent money goes up.
5:51 AM Aug 30th
 
honkers - Malta, MT
I think the liquidity issue has gotten a little out of hand. In 2008 every bushel of soft red winter wheat produced in this country was traded 24 times.Also in the same year Spring wheat traded on the Minneapolis exchange rallied to $25.00 per bushel.Now if you produce spring wheat as I do, you might have determined that $15.00 per bushel was a large profit and sold 50000 bushels at that price. However in order to pay the margin calls to keep your sale you needed $500000.00. Not many producers have the ability to play this game. You may have lost the contract after $250000.00 of margin call losses, and also lost your original hedge of $15.00 per bushel. When you actually harvested the crop that fall and sold the grain the market was only $9.00 per bushel for a net price to the producer of $4.00 per bushel. This is a little more liquidity than many producers can afford. This commodity futures market has been nothing less than a huge roulette wheel controled by a few hedge fund sharks.
12:14 PM Aug 29th
 
honkers - Malta, MT
I think the liquidity issue has gotten a little out of hand. In 2008 every bushel of soft red winter wheat produced in this country was traded 24 times.Also in the same year Spring wheat traded on the Minneapolis exchange rallied to $25.00 per bushel.Now if you produce spring wheat as I do, you might have determined that $15.00 per bushel was a large profit and sold 50000 bushels at that price. However in order to pay the margin calls to keep your sale you needed $500000.00. Not many producers have the ability to play this game. You may have lost the contract after $250000.00 of margin call losses, and also lost your original hedge of $15.00 per bushel. When you actually harvested the crop that fall and sold the grain the market was only $9.00 per bushel for a net price to the producer of $4.00 per bushel. This is a little more liquidity than many producers can afford. This commodity futures market has been nothing less than a huge roulette wheel controled by a few hedge fund sharks.
12:14 PM Aug 29th
 



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