Yes, there's been a big conference going on hosted by CFTC: April 23, 2008 Regulators Back Away From Changes to Commodity Hedging By DIANA B. HENRIQUES WASHINGTON â Faced with widespread complaints from the agricultural industry, federal regulators are backing away from two proposals that would have allowed institutional investors to expand their stake in the turbulent commodity futures markets. With the explosive increase in crop prices, those markets are attracting a flood of capital from hedge funds, pension funds and commodity index funds. Those index funds have become a popular way for individual investors to speculate on the soaring prices in food, fibers and fuel markets. The proposed rule changes would have raised the size of the market stake that financial speculators could hold, and exempted commodity index funds from those higher limits. But Walter Lukken, acting chairman of the Commodity Futures Trading Commission, announced at a packed hearing on Tuesday that those ideas are being put on hold. âGiven current market conditions and the uncertainty surrounding additional speculative money in these markets, I will be very cautious about moving forward with such initiatives at this time,â Mr. Lukken said. The CME Group, owner of the Chicago Board of Trade, had originally supported the rule changes but agreed that a moratorium was appropriate. âWe donât want to be accused of making a situation worse,â said Charlie Carey, the CME Group vice chairman. âWe understand that the market is in a tough spot.â Farmers rely on the futures markets and related options markets to hedge against future declines in crop prices. Many blame new institutional investors for the increasing volatility in the market, though several pension fund executives and money managers disputed that theory at the hearing. But as volatility rises, for whatever reason, futures and options become more expensive and less reliable as hedging tools. Almost every speaker at the commission hearing â wheat farmers, cotton growers and shippers, grain elevator owners, rice producers â expressed alarm at the wild price swings and escalating hedging costs. âPeople are scared to death to hedge,â said Diana Klemme, a vice president at the Grain Services Corporation, a consulting and brokerage firm in Atlanta. Executives from the cotton industry noted that their market nearly came to a standstill in early March when prices and volatility rose to historic levels, in spite of news that should have been bearish for the market. Billy Dunavant of Dunavant Enterprises, a global cotton merchant in Memphis, was one of several industry speakers who called on the commission to investigate the possibility of market manipulation in cotton trading during that period. All the farm industry speakers expressed concern about whether banks, in the midst of a tight credit market, would continue to provide the farm industry with the credit it needs to meet the higher costs of maintaining their hedge positions. The commission was told about a âvery solidâ grain elevator in Kansas that lined up a $15 million line of credit last fall to finance margin calls on its hedged positions and has just learned that it will actually need $80 million in credit for this season. Esther L. George, a senior vice president at the Federal Reserve Bank of Kansas City, was cautiously encouraging about the future availability of farm credit. Because of the increased volatility in crop prices, the bankâs staff has surveyed lenders in its region to assess their exposure to commodity loans and their willingness to make credit available. While there were some reports of distress â one elevator needed an eightfold increase in its lending limit, Ms. George said â most bankers reported that loan repayments were strong and they had money available to make more loans as needed. But lenders throughout the farm belt, faced with the same market volatility their customers see, are likely to give much closer scrutiny to their borrowersâ risk-management skills and ask a lot more questions about available collateral, bankers at the hearing agreed.
It would be nice if a true expert on commodity trading would weigh in here. It is my understanding that creation of a forward contract results in storage (usually) of the actual commodity. Unless demand grows apace, this should result in a glut at some future date and consequently prices should fall, and perhaps fall precipitously, depending on the extent of prior speculation, and the excess of supply over demand. For some commodities, the volume of storage space immediately available is limited and thus the rate of futures speculation may become limited by the rate at which storage can expand. In fact i think that was a factor in the fall of crude prices we saw late last December. We all know that where Wall Street is involved markets are sometimes not legitimate. For example, though it is not legal, we still have situations in which the number of shares held short exceeds the number issued! (the problem of naked short selling) Could it be that forward contracts are being created without a corresponding commitment of the underlying commodity? If so then all bets are off regarding how far commodity prices can rise. The present administration in Washington has been asleep for 8 years regarding regulation of the financial markets. When the credit crisis alarm went off, at least a few regulators woke up, but i'm sure that some just rolled over for a little more snoozing.