In response to significant outcry from grain buyers, the CME Group this week revised its proposal to increase daily price limits for corn futures and options to $0.40 per bushel, down from its initial proposal of $0.50 per bushel.
Currently, the corn price daily limit for futures and options is $0.30. In recent months, corn futures prices and volatility have increased significantly, and in the first quarter of 2011 alone, 36 corn contract months settled at limit bid or limit offer, compared to 36 corn contract months settling at limit bid or limit offer in all of 2010.
The CME is proposing to raise the corn price limit to ensure that the market trades while allowing for price transparency and that limit moves are infrequent so as not to prevent price discovery, says Tim Andriesen, CME Group managing director, agricultural commodities.
Yet grain buyers, livestock feeders and other commercial customers have expressed concern that expanding corn’s daily limits would make an already-volatile market subject to even wider price swings by boosting the amount of money, or margin, required to be posted as collateral against losses.
“The proposal to increase the daily limit on corn futures contracts will require hedgers to hold much higher levels of working capital and arrange larger lines of credit in order to be in position to withstand the increased price volatility,” says Glen Semple, vice president of commercial lending with Farm Credit Services of Illinois, which has grain elevators as customers. “This proposal will increase the cost of doing business through higher margin requirements, higher interest costs due to larger borrowings, higher unused commitment fees charged by lenders, and will reduce the willingness of merchandisers to offer forward contracts to producers due to the higher price volatility.”
Semple also believes raising the corn price daily limit will widen the basis between cash and futures prices to account for the increased costs.
Some commodity groups, like the Iowa Corn Growers Association, believe that this proposal will result in a considerable increase in speculation, which could wreck the delicate balance between the current spec activity and actual trades which are backed up by delivery of a commodity on contract.
Livestock producers who rely heavily on the ability to hedge grain and soy protein inputs in order to adequately manage operating margins also are opposing the increase in price limits and margin risks.
“The current trading limit of $0.30 per bushel works to regulate speculative runs in grains. Increasing the daily trading limit would make volatility a significantly larger concern and day to day margin requirements even more cumbersome,” says Clark Irwin, senior vice president, commodity purchasing, Tyson Foods.
“We recognize wider limits have an impact on many of our commercial customers,” Andriesen says, acknowledging the negative reaction to the proposal from grain merchandisers.
The CME is awaiting approval from the Commodity Futures Trading Commission, the U.S. futures regulator, for the proposal.