Economist examines hedgers concerns with proposed CFTC rules

By Susanne Retka Schill | December 11, 2014

Commodity hedgers are facing another round of changes in position limits. The comment period has been reopened for the Commodity Futures Trading Commission’s last proposal on position limits for agricultural commodities according to a notice published in the Federal Register on Dec. 4. University of Illinois ag economist Paul Peterson pointed out that this is the eighth time since 2010 that the public has been invited to comment on some aspect of position limits and the fourth time for much of this particular proposal.

Peterson reviewed the purpose of position limits and some of the reasons behind the drawn-out process of developing new rules, along with the importance of the issue in a Dec. FarmDocDaily post, “Position Limits and Potential Impacts on Hedgers.” Links are provided to earlier articles examining the development of the attempts to reign in excessive speculation.

“Commodity position limits - the maximum number of futures contacts that can be owned or controlled by an individual or entity - are the primary tool used by regulators to control futures market speculation,” he writes. While aimed at speculators, the limits also apply to hedgers. Most grain producers never have futures positions large enough to bump up against those limits, he points out, but it does affect companies in the marketing chain, grain elevators and ethanol producers, among others.

In earlier comment periods, the strongest objections have come from commercial hedgers. "At the present time, most uses of futures by commercials in connection with the management of price risks are considered to be hedging,” he explains. “But the CFTC's proposal would restrict the use of anticipatory hedges.”  Also contentious is the proposal that futures positions taken by separate divisions within a company would be aggregated into a single company-wide futures position total.

A third issue surrounds the CFTC’s desire to create a uniform rule across all 28 commodity markets. “However, the impact on agricultural markets would be anything but uniform,” explains, “resulting in substantial position limit increases across the board for certain commodities - notably grains - but substantial decreases for other commodities - primarily livestock and dairy.” A fourth issue is the potential impact of these new rules on liquidity.

“There is a fine line between preventing market disruptions and driving away liquidity,” Peterson concludes. “Developing viable futures markets is a difficult task, and great care must be taken by all sides to strike a reasonable balance between market safety and market effectiveness.”

The comment period will close on Jan. 22. Commits may be submitted through the agency website, Comments for the position limits proposal should be identified by RIN 3038–AD99 and comments on the aggregation proposal identified by RIN 3038–AD82.