AFIA Comments on Proposed Rulemaking of Conditional Spot-month Position Limits
Proposed expansion would increase volatility and potentially reduce liquidity
AFIA submitted supplemental comments for the Commodity Futures Trading Commission’s Notice of Proposed Rulemaking regarding conditional spot-month Position Limits for Commodity Derivatives.
As a major user of agriculture-based derivatives markets, the U.S. feed industry is greatly affected by price fluctuations in the market. When input prices become distorted and do not accurately reflect supply and demand conditions, the results are felt not only by AFIA members but throughout the supply chain, from farmers and ranchers to consumers at the grocery store.
Spot market position limits are the most valuable tool in maintaining the integrity of commodity futures contracts, which are essential for bona fide users of agricultural commodities. AFIA’s members are concerned with this proposal which would allow speculators in financial contracts, who do not hold positions in the core agricultural commodities futures contracts, to hold up to five-times a core contract’s spot month limit, while also holding up to a quarter of the core agricultural commodity futures contract’s deliverable supplies. This proposal is in conflict with the Dodd-Frank Act in providing position limits, and will not meet the following stated objectives:
1. Diminish, eliminate or prevent excessive speculation;
2. Deter and prevent market manipulation, squeezes and corners;
3. Ensure sufficient market liquidity for bona fide hedgers; and
4. Ensure that the price discovery function of the underlying market is not disputed.
The proposed expansion would increase volatility and potentially reduce liquidity. This could increase costs, which would ultimately reduce the options available to end-users during critical spot month periods, when the rolling, liquidating or making/taking delivery of contracts occurs.
Joel G. Newman, AFIA's president and CEO, stated in the letter, “AFIA urges the Commission to begin with position limit parity between the physically-settled contract and the cash-settled “look alike” contract. This would meet the purpose of the Commodity Exchange Act and the four objectives set forth in the Dodd-Frank Act for speculative position limits.”
AFIA’s 500 member companies produce over 75 percent of the nation’s commercial feed and pet food. As such, the U.S. feed industry is the single largest purchaser and user of feed grains and oilseeds, as well as processed meals and byproducts, critical commodities America’s farmers and ranchers rely on to raise the safe and affordable food consumed by Americans on a daily basis.
