Volatility and Convergence in Markets Examined by CFTC
The day-long forum explored market conditions.
Compiled by staff
Published: Apr 23, 2008
High crop prices that no longer converge with future contracts as hedges on agricultural commodities expire are spelling major new financial risks for grain elevators, cotton shippers and farmers. Fear that large floods of capital into the commodity markets from index funds and hedge has disrupted the usefulness of futures markets for traditional hedgers has added to the heartburn. The lack of "convergence" between cash prices and expiring future contracts and the role of the non-traditional investment capital was front and center Tuesday as the Commodity Futures Trading Commission held a day-long session to try to get a handle on the problem.
Tom Coyle, representing the National Grain and Feed Association, testified "traditionally we have had reasonable convergence•today we don't have it." Coyle noted that margin calls on future contracts have escalated to the point that bankers and elevators are facing steep pressure meeting them — some that are running into the millions. Coyle recommended CFTC provide a moratorium on expanding provisions, proposed in 2007, that would allow larger positions for investors that enter the commodity market but who are not hedging physical commodities.
Jim Byrum, of the Michigan Agri-Business Council, pleaded with CFTC commissioners for breathing room for country elevators. He said he did not know of any of the members of his council that were able to forward contract this year's crop because of price volatility and the threat of punishing margin calls. Rather than any major regulatory overhaul in the midst of the current price volatility and market uncertainty, he urged the commission to move toward more transparency on market players who use over-the-counter trades and "swaps" instrument to offset risks. "We need to know who the players are," he said, and their specific market positions. Officials representing investment funds pointed out that their funds provide a means for American investors to diversify their portfolios from stocks and bonds, and that they do not leverage their trades on margin.
To view opening presentations, click HERE.
Source: Feedstuffs
Permalink: Click here
Tagged: cotton
|