Increased corn trade limit sparks volatility concerns for some

By Kris Bevill | August 12, 2011

The Commodities Futures Trading Commission has approved a request from the CME Group to increase the daily trading limit on corn by 10 cents per bushel. Beginning Aug. 22, the daily limit will be 40 cents per bushel, up from the current daily limit of 30 cents per bushel. The new limit will be expandable to 60 cents per bushel when at least two contracts close at limit bid or limit offer on the previous day, according to a statement issued by CME Group.

The National Corn Growers Association opposed the limit increase and stated that corn growers are likely to suffer as a result of the approval. “We believe this rule change could negatively impact farmers by needlessly increasing market volatility and adding unnecessary risk,” NCGA President Bart Schott said in a statement. “NCGA understands that both non-commercial traders and speculators play a valuable role in the futures market, but we also understand the importance of daily price limits, which serve as a check against irrational price limits.”

The most recent prior increase to daily trading limits on corn was in 2008, when the limit was increased from 20 cents per bushel to the current 30-cent limit. In a letter sent to CFTC chairman Gary Gensler on May 11, Schott pointed out the painful results of extreme volatility in the corn market that year for grain elevators, stating that many exhausted their lines of credit and, in some instances, were forced into liquidation. “As a consequence, elevators dramatically spread the basis, added new fees for certain marketing tools and curtailed bids for future grain contracts,” Schott said in the letter, adding that those responses to volatility are still in place today.

The ethanol industry suffered a painful shake-out in 2008 which was blamed in large part on sky-rocketing corn prices and disastrous hedging strategies. But at least one analyst believes the latest limit increase will not result in the same dire consequences. Jerry Gidel, an associate at North America Risk Management Services Inc., said many factors contributed to high corn prices in 2008, including floods in Iowa and the demise of financial markets as a result of the subprime mortgage catastrophe, among other things. Ethanol producers may be able to engage a bit more hedging when the daily limit increases again, but it probably won’t lead to the same volatility in corn prices that was experienced in 2008, he said. “It might go up a little, but it comes down to weather impacting the market and the political and economic issues that always factor in,” he said.

The CME Group said it requested the increase partly to provide a means for price discovery and risk management. David Lehman, managing director of the commodity research and product development segment of the CME Group, said in a statement that increasing the daily price limits will also result in less frequent limit moves. But Schott asserted that farmers will be noticeably affected by the change. “It is unacceptable to base this real world decision impacting farmers nationally on ephemeral theories on price discovery,” he said.