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Senior Contributor

Limiting Spec Positions

How do you feel about this?  Should the CFTC set speculative position limits to protect traditional commercial users, like you?  I know I'm speaking to a choir of hedgers, but raising this issue for discussion could be helpful for those out there that haven't been following the issue. The CFTC is in the process of developing and publishing an estimated 30 separate rulemakings on the recently enacted Dodd-Frank law.


The latest is the NGFA urging the CFTC to set limits on specs, according to a press release. If not, the NGFA fears a repeat of spec-driven 2008 markets.


The NGFA also wants the CFTC to keep the definition of a bona-fide hedge. And, the ag group is urging the CFTC to only rarely allow speculators a temporary hedge exemption.They also want some 'swap' measures but we won't get into that. Let's keep it simple.


The floor is yours, you have two minutes and we've tried to secure the room heckler-free but no guarantees.


Mike

 

 

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13 Replies
Senior Contributor

Re: Limiting Spec Positions

The whole conversation based on these assumptions is bogus.

 

"Bona fide" hedgers - who don't have the right of delivery, remember?

 

Spec driven market? I believe 2008 had some definite fundamental challenges. Sure the market reacted hard because the market was slow to react to the physical fundamental set up in the first place.

 

Had producers been in a position to deliver (in wheat) I believe it would have been a different market several years out and 2008 might never have happened the way it did. The idea that all classses of participants can be restricted - except for commercials (and insiders) - is absolutely absurd. Build a good trading pit in the first place that everyone can participate in as equals and a lot of the current problems fade away.

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Frequent Contributor

Re: Limiting Spec Positions

I'll agree with everything that Palouser has said. Of course, that doesn't address the issue, or your question.

 

SINCE we are not allowed to deliver which causes most of the problems in the first place, it just seems ludicrous that the only group using the system with no limits at all are index funds. It is quite a system where the Fed can create money out of thin air, loan it to banks at 0% roughly, let them loan it to funds they control at 3%, and let those funds purchase more than the available supply of a foodstuff. Just think about the absurdity of it. It is not sustainable, and the other side of this misallocation of resources will be quite painful to producers and consumers alike (note retail pork prices for example).

 

Don't folks remember $7.50 corn was $3.00 a mere 22 weeks later.

 

As a few of us expected years ago, farmers ability to market is and will continue to be adversely affected. Farmers I know who grow cotton cannot sell new crop since no one will take the margin exposure. Fees for advance marketing at C for corn are 3 times or more what they were in 2008. Many buyers like the local E plant will  not go past July. No banks will give you an unlimited credit line for hedging because the bank regs won't let them.

 

So, in the end, high prices for next year really don't exist. Which brings us back to Palouser's post, which is very much right on the money, the market doesn't really exist anyway since the producer cannot participate.

 

Of course, as an avid supporter of centralized command and control economies, not sure why he needs a makret in the first place??   :-)    Sorry couldn't resist.

 

To be fair, the whole fundamental reason there is a shortage of feed grain and protein  is built upon government subsidies that encourage it to be burned as fuel and not used as food regardless of price. Tyner at Purdue presented data demonstrating the tremendous advantage of using a variable rate e subsidy all the way back in 2006. Of course, the corn growers and brewers buried that proposal pretty quick.

 

So, to close, I'll come back to Palouser's first line, 

"Bona fide" hedgers - who don't have the right of delivery, remember?"

Since the markets as currently regulated do not reliably converge with the under-lying cash, there is no real "hedging" going on from a financial perspective. The first step to fixing this mess is spec position rules. The second would be to end the insane combination of zero interest rates and FED monetization of the debt. All 3 policies create a kind of viral system instability.

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Senior Contributor

Re: Limiting Spec Positions

I posed this CFTC spec limit question to a grain analyst. In his own words, here is his response: 

 

"The NGFA lacks influence and position to gets results.The government and exchanges know that the future is in the expansion of speculative funds to insure we capture the expanding world interest in trading and insure we maintain our position as the worlds preffered exchanges for trade. AG hedging will continue to take a back seat to finantial hedging by Index funds which have hedge status.Index funds have equally as important hedge importance for their finantial portfolios that include grain as farmers who only hedge grain. The future will see a wider spread between cash and futures with eventually two separate trading tiers. This can help the traditional u.s. farm hedger if they break away from the dated patterns of the past and use the new and emerging price patterns to their advantage."

 

Mike

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Frequent Contributor

Re: Limiting Spec Positions

That last line reminds me of the memo I read at our county FSA meeting from Vilsack.  "new and improved system to benefit the ag producer"...

 

even though it thoroughly complicates and reduces chances for compensation vs. the "antiquated" LDP rules.   lol

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Frequent Contributor

Re: Limiting Spec Positions

In short yes.  But there are always ways to get around position limits.  Getting rid of hedge exemptions for index funds and outlawing commodity based ETF's would be a great start.

 

My contention is that when commercial longs (those that want physical) are severely outnumbered by speculative longs (trading and index funds), the market is more speculative driven and less supply/demand driven.

 

Current ratios of Spec longs to Commercial longs:

 

Corn  2.7 : 1

Beans  2.5 : 1

Wheat  2.4: 1

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Veteran Advisor

Re: Limiting Spec Positions

Sounds like your source could apply for a job as a lobbyist for the CME group.

 

Casino Capitalism will end very badly but the opportunity to put it back in check is probably long past.

 

A few producers and end users will gain huge advantage by putting money on the right number but for the most part it will just cause carnage in the productive sector.

 

The one thing I can say in favor of indexes, commodity ETFs etc. is that they serve as the last restraint on monetary policy- that distinction being only by default as the bond market has been effectively castrated.

 

I'd argue that the way to deal with this is systemic-a Tobin tax on financial transactions would provide needed revenue and would disincentivize trading.

 

FWIW, h

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Veteran Contributor

Re: Limiting Spec Positions

The farther the CBOT strays trom tying the trades to delivery the more these trades begin to look like junk bonds with no assets to back them up.  I say tied to delivery, no exceptions.

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Senior Contributor

Re: Limiting Spec Positions

I'd venture to guess the longer this problem is ignored it very likely could go away.  Once some other type of return out there such as the stock market, etc. starts returning more than their hedge portfolio the index funds will flee the commodities at a rapid pace.  Unfortunately, they will probably bankrupt many on each side before and after their exit.  I think we can get past index funds hedging against inflation.  This is not what they are doing in the least.  They have investors looking for returns, plain and simple.  It blew up on them once, and they got bailed out.  Once it blows up on them again, the American people won't be so kind to bail them out again. 

 

It's already starting to happen here with regards to two different markets.  Some end users won't even look at the price of the futures when they give a cash price.  They have started locally to just flat price grain.  It's up to the farmer whether they take it or leave it.  I'd venture to guess this will become a lot more common across the country.   

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Senior Contributor

Re: Limiting Spec Positions

GoredHusker,

I'm intrigued by your last point: Some end users won't even look at the price of the futures when they give a cash price.  They have started locally to just flat price grain.  It's up to the farmer whether they take it or leave it.  I'd venture to guess this will become a lot more common across the country.  

 

Wow, is anyone else seeing this is in their area?

 

Flat-pricing could make the farmer have to work harder for the best price in his area. Not that he/she isn't working hard for it now. I'm just saying, if the local cash price is just going to be some figure pulled out of thin air, the farmer might be wise to widen his selling area a few more miles, don't you think?

 

Mike

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