NGFA Opposes CME Group Proposal to Increase Daily Price Limit for CBOT Corn Futures Contract

The National Grain and Feed Association (NGFA) has notified the Commodity Futures Trading Commission (CFTC) that it opposes a proposal from the CME Group to increase the daily price limit for the CBOT corn futures contract from the current 30 cents to 40 cents per bushel.

In a statement submitted to the CFTC, the NGFA expressed concern that the higher daily price limit could lead to increased volatility in corn futures prices. That, in turn, could result in greater financial pressures in the form of higher margin requirements imposed on commercial hedgers, such as grain elevators, feed manufacturers and grain processors, to maintain futures market positions used to offset price risk when buying and selling agricultural commodities, the NGFA said.

The NGFA acknowledged the CME Group’s revision that scaled back its original proposal that would have increased the corn futures daily price limit to 50 cents per bushel. When modifying the proposal, the CME Group also added a feature that would impose a one-time expansion of the corn daily price limit to 60 cents per bushel on the next business day if the market reached the revised 40-cent limit.

But the NGFA said that despite the revisions, it believed the proposal would result in greater market volatility that could compel commercial grain and oilseed hedgers to reduce the availability of cash-forward contracts to producers “out of economic necessity – an undesirable outcome for producers and anyone engaged in U.S. agriculture.”

Unless the CFTC, which has regulatory jurisdiction over the nation’s futures exchanges, formally takes action to disapprove the proposal, it would take effect automatically following a 45-day review period. The CFTC also may move more rapidly to approve or reject the proposal. The CME Group has said it would implement the change shortly after CFTC approval.

In its statement to the CFTC, the NGFA said increased market volatility that could result from the proposed increase in the CBOT corn futures price limit could:

• Lead to significant new borrowing by commercial hedgers to meet margin calls required to maintain their futures market hedges. The NGFA noted that current higher commodity values already have increased the amount of capital needed to purchase crops from producers, and that pressure on working capital would be exacerbated further by additional market volatility spurred by a higher corn futures market price limit. “There is serious concern that higher daily price limits will escalate the situation, resulting in additional financial exposure that even could lead to industry consolidation or business closures,” the NGFA said.

The NGFA also cautioned that brokerage firms that handle futures market accounts for many commercial hedgers also could respond to greater market volatility by requiring some of their customers to retain more money on deposit than the minimum initial margins required by the CME Group or the minimum currently required by the brokerage firm itself. “In the most extreme cases, introducing brokers or futures commission merchants could restrict smaller accounts from trading certain commodities or limit the size of their positions – even as crops are growing and farmers are seeking to price farther forward,” the NGFA warned.