CME Group Inc. is trying to quickly push through a proposed expansion in daily price limits for its corn futures contract, though the Chicago-based exchange operator faces a growing outcry from grain buyers concerned the move would sharply increase their risks.
According to industry sources, CME seeks an “expedited” approval from the Commodity Futures Trading Commission, the U.S. futures regulator, for the proposal. If approved, the corn contract’s maximum daily price move would rise to 50 cents a bushel from 30 cents.
Typically, such proposals must go through a 45-day public comment period, meaning CME may have to wait until June before making the change to its biggest agricultural contract. It isn’t clear how soon CME, which announced the proposal April 26, wants the proposal approved. CME and CFTC officials didn’t immediately respond to messages.
CME’s proposal caught grain merchandisers by surprise, and over the past week, the reaction from grain elevator managers, livestock feeders and others who buy, store and ship corn has been heavily negative.
Expanding corn’s daily limits would make an already-volatile market subject to even wider price swings, grain and livestock industry officials say, boosting the amount of money, or margin, required to be posted as collateral against losses.
“As a hedger participating in the CME corn futures market to manage risk in our livestock feeding business, it does not appear to be advantageous for the limits to be increased,” Art Sauder, president of Great Bend, Kan.-based Livestock Services, Inc., said in a comment posted on the CFTC’s website: http://bit.ly/la6Po0
“This has the potential to increase volatility, and we are already experiencing a higher degree of price variation in very short-term time periods than the overall market ultimately is pricing,” Sauter continued. “When the level of risk created by risk management programs begins to outweigh the benefits, CME futures will become an ineffective tool for our business.”
Additionally, the potential increase in volatility created by expanded limits would favor speculators who’ve built increasingly large positions in agriculture markets, grain merchants complain. Many speculators move in and out of futures markets relatively quickly, as opposed to commercial traders who hold longer-term positions.
Later today, CME will hold a conference call with the National Grain and Feed Association, which represents U.S. grain merchants, to discuss the proposal, according to industry sources.
The Washington, D.C.-based association has not yet taken a formal position on CME’s proposal, Todd Kemp, the group’s director of marketing, said in an e-mail.
“But we are hearing concern from many elevators that a daily price limit increase could lead to increased volatility and increased financing challenges as margining requirements could increase,” he said.
“At a time when many elevators already are deeply concerned about financing grain purchases and margining, potentially adding to that burden is not a very popular concept,” Kemp said.
As with most futures contracts, trading in CME corn is halted after prices rise or decline by the daily limit. If two or more corn futures contracts settle at the daily limit, the maximum range is temporarily expanded to 45 cents, and then to 70 cents if the market closes with a limit move for a second day.
“In recent months, corn futures prices and volatility have increased significantly,” CME said in the April 26 statement. Expanding the market’s trading limits will “enhance price discovery and risk management in light of current levels of price and volatility,” the exchange said.
Corn futures more than doubled since the middle of last year amid growing concern over tight supplies. In late trading May 4, corn for July delivery rose 5 ¾ cents to $7.29 ½ a bushel. Last month, corn touched a record $7.83 ¾ a bushel.