- Result in the CME Group Clearinghouse increasing initial and variation margins imposed on commercial hedgers to maintain their futures market positions. “If that happens, the financial stresses on hedgers would continue to snowball,” the NGFA said.
- Limit the availability of cash-forward contracts and other risk-management tools grain elevators, grain processors and feed mills are able to extend to farmer-customers, as happened during the rapid escalation in commodity values that occurred in 2008. During that 2008 run-up in futures market prices, the NGFA noted, many firms were able to offer cash-forward contracts only 30 to 60 days in advance of delivery, given extremely large margin requirements imposed to maintain their hedges. “A similar (volatile market) situation could be forthcoming this fall, and we believe increasing the corn contract’s daily price limits – potentially exacerbating an already stressful financial situation through larger margin calls and margining requirements imposed by the (CME Group) clearinghouse – could contribute to limiting producer marketing opportunities,” the NGFA said. “That would be undesirable for the exchange, its hedger customers and certainly for producers.”
- Trigger similar proposals to increase futures market price limits for other commodities, as exchanges seek to maintain long-established price-related relationships across various commodities. The NGFA said any ensuing proposals to increase wheat and soybean daily price limits, for instance, would compound the economic impacts on commercial hedgers and producers.
The NGFA also questioned the rationale used by the CME Group to justify its proposal – the alleged need to widen the corn futures price limit to foster price discovery, given higher commodity values. The NGFA noted that the current 30-cent-per-bushel daily price limit for corn futures is expandable to 45 cents per bushel a few hours after the close of daily open outcry trading when the CBOT electronic evening contracts begin trading. Further, the NGFA said, the current price limits allow an additional expanded limit to 70 cents per bushel on the next trading day – which has been triggered only once since it was implemented in 2008. But the NGFA is concerned that expanding the daily price limit for corn could lead to greater volatility within a newly authorized, wider price range.
“We believe that the current daily price limit levels are working well and as intended,” the NGFA said. “Expanding limits unnecessarily or preemptively causes problems for traditional futures market participants like grain hedgers and producers who rely on the contract for price discovery and risk management,” the NGFA said.