The Commodity Futures Trading Commission has announced it will convene a public meeting to discuss recent disruptions affecting agricultural markets.
The forum, which will include representatives from USDA, exchanges, traders, merchandisers and producers, will take place at 9 a.m., April 22, at the agency’s Washington, D.C., headquarters.
Topics to be discussed include the lack of convergence between the futures and cash prices, higher margin requirements and their impact on market participants, and the role of speculators and commodity index traders.
The meeting was called in response to requests by organizations representing the cotton and grain industries concerned that the markets were no longer working as originally intended.
In a letter sent to the CFTC, Plains Cotton Grower executive vice-president Steve Verett asked the commissioners to “restore the integrity of this marketplace.”
Noting the huge investment by funds, Verett said, “Speculative interest is an important component of any commodity market that facilitates its primary function of being a price discovery mechanism. Unfortunately the events of the past two weeks (early March) have clearly illustrated that too much of a good thing can also cause bad things to happen.
“Our request to the CFTC, which echoed the concerns of other segments of the cotton industry, was that the CFTC look into the situation and do what it can to insure the functionality of these markets in the future. Everyone recognizes that steps need to be taken to restore balance to the market and reconnect it to the actual buying and selling of cotton in the world marketplace.”
In early March, cotton prices suddenly surged higher than fundamentals would suggest, fueled by commodity index fund investment. But few producers were actually able to contract 2008 cotton at those high prices.
“Nobody wants to forward contract cotton,” Herman S. Kohlmeyer Jr., a New Orleans commodities broker, said at the time. “No one wants to be in the position of having to margin these commitments if the market continues to rally. Things are unhappy for just about every element of the business. What sense can we make of it except to try and keep our heads above water.”
“The cotton market is essentially a ship without a rudder at this point,” says Verett.
The National Grain and Feed Association released a statement last month asking the three U.S. commodity exchanges, the CME Group, the Kansas City Board of Trade and the Minneapolis Grain Exchange to consider ways to ease the financial stress confronting traditional grain and oilseed hedgers, such as providing relief on margin requirements.
The NGFA statement said, “In this environment, the marketplace is ill-equipped to efficiently absorb more investment capital and perform its core function of serving as an efficient tool for businesses hedging physical grain purchases, particularly when virtually all of that investment capital is long-only and a large share of open interest essentially is ‘not for sale’ for long periods of time.”
The NGFA consists of country, terminal and export elevators; feed mills; cash grain and feed merchants, end users of grain and grain products, commodity futures brokers; and allied industries. NGFA consists of 35 affiliated state and regional U.S. grain and feed associations, and two international affiliated associations.
In describing the need for the forum, CFTC Chairman Walter Lukken said, “These historic market conditions, particularly in wheat and cotton, require the CFTC to hear firsthand from participants to ensure that the exchanges are functioning properly to discover prices and manage risk.”
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