The CME Group made it clear at a meeting on July 19 that the exchange would go ahead with plans to raise the daily trading limits on corn futures despite strong opposition from many grain-handling companies.
The CME's request to raise the trading limit to 40 cents from the current 30 cents is under review by the Commodity Futures Trading Commission (CFTC) until Aug. 8. Industry comments to the CFTC are to end on Wednesday but the CME said it was accepting comments until Aug. 8.
Following a spirited discussion at the Chicago Board Of Trade (CBOT), David Lehman, a CME managing director, said "from strictly an economic standpoint, the daily price limits should be based on a percent of price, but that won't happen now."
The current daily trading limit for corn futures <0#C:> is 30 cents per bushel, expandable to 45 cents, then again to 70 cents. And CME, the world's largest derivatives exchange, has proposed to the Commodity Futures Trading Commission that the corn limits expand to 40 cents and then to 60 cents.
CME held a feedback session in the historic CBOT building visitors gallery late on Tuesday and all corn industry participants were invited, including the media.
Charles Carey, a CME vice chairman, told Reuters that trading limits are necessary to avoid panic and to avoid driving away business.
"Corn limits are too low now compared with wheat and soybeans. The market can handle a 40-cent limit," Carey said.
CBOT corn prices are roughly at $7 per bushel with a 30-cent limit, soybeans nearly $14 and a 70-cent limit while wheat prices at about $7 have a 60-cent per bushel limit.
CME Group said the increase in corn limits is a preventative measure to guard against expected volatility now and in the future and was proposed by the CME management and Board of Directors.
Industry complaints about the proposed limit increase centered about concern of potential escalating margin requirements and lack of capital to do business with the expanded limits.
"Margin requirements reflect the volatility in the market, not necessarily the price limits," said Amy McCormick of the CME risk management division countering the complaint.
Chicago Cash merchandiser Glenn Hollander expressed concern that commercials and end-users might be driven away by the expanding daily trading limits.
CME officials acknowledged that most of the feedback letters that have been sent to the CFTC largely opposed the increased price limits.
But "the industry will have to increase capitalization to do business," Lehman said.
Country elevators and others that buy grain hedge their price risk by selling futures. When prices rally as short hedgers face higher margin calls. For large positions, the extra capital demands can run into the millions of dollars.
The number of corn contracts that settled at or above the initial price limit in 2011 were at 68 while only nine soybean contracts settled at limit and five wheat, according to CME data.
CME last raised corn limits to 30 cents from 20 cents in March 2008, during another period of extremely volatile price swings when corn soared to a then record high.
In 1946 the corn limit was 8 cents per bushel, expandable to 12 cents, in 1973 it was 10 cents expandable to 15 cents, in 1993 it was 12 cents expandable to 18 cents and in 2000 it was 20 cents per bushel and wasn't expandable.
In March 2008 the limit was 30 cents per bushel, expandable to 45 cents then expandable again to 70 cents.
Copyright 2011 Reuters.