The American Feed Industry Association urged the Commodity Futures Trading Commission this week to implement a proposal that would uniformly enforce speculative position limits, enhance transparency, and improve the regulation of all individuals who trade certain energy commodities.
AFIA, the world’s largest organization representing the makers of livestock feed, pet food and related ingredients, expressed its members’ views on this matter in formal comments submitted to the agency, characterizing the CFTC proposal as a “very positive step forward for the specified energy contracts.”
For nearly two years, AFIA has engaged consistently in the process of studying the complex issues surrounding the trading of energy and agricultural commodities by entities that engage in highly speculative trading activities.
Many of these speculative traders are large Wall Street banks. These speculative traders take an unusually large number of positions within markets for certain commodities, causing highly volatile price swings when they enter and exit.
AFIA made a number of recommendations to the CFTC in the summer of 2008 regarding possible ways to rein in excessively risky trading behaviour as it relates to commodities commonly used or found in the agricultural community.
The CFTC subsequently embraced a portion of those recommendations. AFIA’s latest comments to the CFTC’s Notice of Proposed Rulemaking, published in the Federal Register on Jan. 26, 2010, continue the association’s engagement on these matters.
“AFIA and the feed industry understand the value and need for speculators and for the speculative role in efficient markets,” said Joel G. Newman, AFIA president and CEO, “but we want to make sure large speculators don’t consolidate and abnormally affect the market. No one speculator or group of speculators should be able to control a large percent of any market.”
“We not only support the new framework for speculative position limits,” said Newman, who submitted the comments on behalf of AFIA members. “We also believe it should be applied to ag commodities in a similar manner, as well as to Wall Street bank index funds.”
Feed represents approximately 70% of the on-farm cost of raising livestock and poultry, according to AFIA.
“With the majority of our industry’s input supplies priced directly on or in reference to regulated commodities markets, we depend significantly on an efficient and well-functioning futures market for both price discovery and risk management,” AFIA wrote in its comments.
AFIA’s comments said the association “applauds the CFTC proposal to implement an integrated speculation position limit framework that would include federal position limits on certain energy commodities, as well as aggregate and exchange specific position limits.
“This is a solid first step toward our mutual goal of ensuring these commodity markets and products effectively serve their primary role of providing commercial true hedgers reliable tools to manage their economic risks.”
Federal speculative position limits are “necessary to ensure large concentrations of speculative monies do not create an artificial increase or decline in demand with the subsequent result of creating extreme volatility in the contract market price, as experienced in 2008,” Newman wrote.
AFIA also said position limits “should be accompanied by stringent transparency rules to ensure […the CFTC…] is able to more quickly identify schemes and devices that seek to evade such limits.”
AFIA urged the CFTC to apply its proposal on energy commodities to agricultural commodities. “Grains and other agricultural commodities have a finite supply and these markets require speculative limit provisions to provide end users with effective and efficient risk management tools,” AFIA wrote.
“In addition, energy contracts and corn contracts are directly linked by the evolution of the ethanol industry, and this type of direct link is sure to expand as the biofuels industry expands its feedstock base.
“Also, there are other agricultural commodities with direct or very close links. For example, volatility in corn or soybeans can quickly inject uncertainty into livestock prices and the various beef, pork and dairy risk management tools.”
AFIA also urged the CFTC to take three additional steps in this area:
- The CFTC should propose rule-making that would result in applying the same framework of regulations to grains and other agricultural commodities;
- The CFTC should seek additional congressional authority to apply the proposed framework to Commodity Index Funds; and
- The CFTC should seek congressional authority to regulate the over-the-counter commodity markets trading in U.S. commodity markets, thus installing regulatory oversight, reporting and transparency for all U.S. commodity market trading and positions.
“These additional steps would provide bona fide hedgers with a clear, comprehensive road map and ensure commercial hedgers will have an effective and efficient tool they can depend on for both price-discovery and risk-management [purposes] today and in the future,” AFIA concluded.