The American Feed Industry Association (AFIA) hails the Commodities Futures Trading Commission (CFTC) for its prompt processing of its recent Federal Register release on the new position limit structure for physical commodity futures and swaps, as called for in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
The US feed industry is the single largest purchaser and user of major classes of agricultural commodities, including feed grains, oilseeds, processed meals and byproducts.
As a result, AFIA is also a major user of agriculture-based derivatives markets, including both exchange-traded futures contracts as well as over-the-counter products.
These derivative products allow companies to not only hedge their exposure to price fluctuations of these commodities, but also determine the prices of inputs and goods produced.
When input prices as reflected in futures markets become distorted and fail to accurately reflect true supply and demand conditions, or become unduly volatile, the pain is felt throughout the supply chain from feed manufacturers, to farmers and ranchers, to consumers at the grocery store.
AFIA supports CFTC’s proposed approach of relying substantially on currently existing federal and exchange-set position limits, which have been in place for decades and have largely provided a stable market for both bona fide end users and their speculative counterparts, for agricultural commodities to establish limits under the new system.
However, AFIA is concerned by any approach that would raise these limits and specifically recommends CFTC should:
Maintain the existing spot-month position limits for agricultural commodities beyond the initial transition period.
Maintain the “legacy” limits on a permanent basis for non-spot months.
Significantly reduce the proposed “conditional spot month position limits” which would allow extraordinary, large speculative positions in sensitive markets.
Limit influence index funds
AFIA is pleased with CFTC’s 2009 decision to withdraw the two “no action” staff letters that provided Wall Street firms an exception to speculative position limits for index fund investments based on “passive long” positions.
The organisation believes these index fund positions played a large role in distorting price levels in the past and AFIA believes they may continue to do so today.
Since 2009, Wall Street firms have expanded to $206 billion–almost the same as at their 2008 peak –and today dominated by three funds that control 94% of the total.
AFIA urges CFTC to address this continuing concern by completing the setting of limits on over-the-counter markets as proposed in this rulemaking package.
Phase out process
In addition, CFTC should set a realistic phase-out process for any of the “grandfathered” positions that exceed the new limits.
The pre-existing positions that exceed the implemented position limits must not be allowed to be held indefinitely.
Finally, AFIA supports the “look through” reporting requirements that will identify individual investors and determine whether they meet the bona fide hedging exemption, per the proposed new definition.