R-CALF: Group Asks CFTC To Reform Regulations For Cattle Futures Market

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R-CALF USA believes the commodities futures market is fundamentally broken and is no longer functionally capable of serving as an effective, economic risk management tool for U.S. cattle producers. Rather than to provide true price discovery, the live cattle futures market has become a device that enhances the ability of dominant market participants to manage, if not outright manipulate, both live cattle futures prices and cash cattle prices, according to formal comments filed by R-CALF USA on Monday with the Commodity Futures Trading Commission (CFTC) regarding its proposed rulemaking on Federal Speculative Position Limits for Referenced Energy Contracts and Associated Regulations (Proposed Rulemaking) published at 75 Fed. Reg., 4144-4172 (Jan. 26, 2010).

“Many R-CALF USA members monitor closely the live cattle futures market because of its direct impact on live cattle cash prices, and some R-CALF USA members continue to use the commodities futures market in an effort to manage their risks associated with the cost of producing and feeding live cattle,” the comments state. “And, some R-CALF USA members have ceased using the commodities futures market altogether due to the inexplicable volatility in the market, aberrations in the market that they attribute to manipulation, and their belief that the futures market is no longer responsive to fundamental supply and demand signals.”

The group said evidence the live cattle futures market is no longer functionally capable of serving as an effective risk management tool for U.S. cattle producers includes data that show the physical hedgers’ share of the long open interest in the live cattle futures market declined from 67.6 percent in 1998 to only 11.7 percent in 2008.

“Such a drastic decline in the physical hedgers’ open interests in just a 10-year period in these commodities show either or both that commercial (i.e., bona fide hedgers) interests are now avoiding the futures market (which they would not do if the market served an economically beneficial function) and/or speculator interests have now besieged the markets once dominated by actual sellers and buyers of the commodities,” the comments state.

R-CALF USA said the ongoing distortions to the cattle futures market created by excessive speculation can be rectified by limiting speculative positions by index funds and other trading entities that have no specific interest in the underlying commodity and bear no risk relative to the commodity’s production or consumption.

To achieve the goal of effectively preventing excessive speculation in commodities markets, R-CALF USA said it was inclined to agree with the general rule of thumb that speculators should never represent more than 50 percent of open interest, because at that level, speculators will dominate the price discovery function, due to the aggressiveness and frequency of their trading. R-CALF USA believes 25 percent would provide sufficient liquidity, while ensuring that physical producers and consumers dominate the price discovery function.

Additionally, R-CALF USA believes that effective speculative position limits imposed on all feed grain commodities markets would alleviate the transference of market distortions from the feed grains futures market to the cattle futures market.

“The CFTC must ensure that the cattle futures market is always dominated by bona fide hedgers,” the comments continue. “In addition, the CFTC should strictly curtail, if not completely eliminate, the practice of allowing passive speculation in the commodities futures market by entities that hold large market positions without any interest in the underlying commodity and without any risk relative to the commodity’s production or consumption. We further believe it important that the CFTC recognize the two types of excessive speculation that has invaded the cattle futures market: 1) the excessive speculation by one or more dominant market participants with market shares sufficient to engage in market manipulation (this can include dominant beef packers acting speculatively as discussed above or any other concentrated/dominant speculator), and 2) the excessive speculation by those without any vested interest in the underlying commodity and without any risk relative to the commodity’s production or consumption (including both active and passive speculators). Both of these types of excessive speculation contribute to market distortions that are harmful to bona fide market participants, as well as to consumers who ultimately consume products derived from these commodities.

R-CALF USA also recommended that daily market price limits be restored to levels that minimize market volatility. “The previous daily market limit in the cattle futures market of $1.50, which could still be adjusted upward following extended periods of limit movement, resulted in far less volatility than the current $3.00 daily market limit.”

And, R-CALF USA said it wanted to reform the practice of allowing cash settlements on futures contracts in lieu of actual delivery of the commodity, a practice that effectively lowers the cattle futures price on the day of contract expiration.

“We look forward to working with the CFTC to eliminate manipulation and other practices that have caused artificial price distortions in the commodities futures market and relegated the cattle futures market to an ineffective tool for price discovery and risk management for U.S. cattle producers,” the comments conclude. “We appreciate the CFTC’s Proposed Rulemaking that acknowledges many of the key factors that have contributed to the commodity futures market’s perverse outcome and we encourage the CFTC to take the additional steps recommended above to ensure that the commodities futures market can function as a meaningful price discovery and risk management tool for the U.S. cattle industry.”



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