Next month’s meeting of the agricultural advisory committee of the Commodity Futures Trading Commission (CFTC) will give the food industry one last chance to make the case for imposing limits on the activity of index funds in the wheat futures market, activity many manufacturers blame for recent unprecedented market volatility.
Speaking to FoodNavigator-USA.com ahead of the May 19 meeting, American Bakers Association (ABA) senior vice president, government relations & public affairs Lee Sanders said the ABA was pushing hard for the CFTC to impose position limits on non-commercial hedgers in commodity markets.
The increased presence of speculators in these markets “dramatically undermined” their utility to producers and users of wheat, she claimed.
Index funds do not behave like commercial hedgers
While index funds have been allowed to buy contracts in the wheat market since the mid 1980s, she explained, “they never really did so until around 2004-2005. In 2003, index funds investment in the wheat market was about $15bn. In 2008, it was over $200bn, adding to the dramatic volatility in the market in that same year.”
Index funds do not behave like traditional speculators, which buy low and sell high, she said, nor are they true commercial hedgers, that is, producers or users of wheat. Instead, they buy contracts and hold onto them, “effectively keeping their billions in the market and not reacting to supply and demand factors that would typically tell market participants to buy or sell”.
And the markets were not created as a vehicle for investment, she pointed out. “The true intent was to allow producers and wheat users to price their goods efficiently and manage risks associated with price changes.”
However, the level of involvement of index funds in wheat contracts was now so significant that it was rendering the markets useless to industry, she said. “Index Funds owned 342 percent of the soft red winter wheat contracts available on the Chicago Board of Trade and 44 percent of all wheat contracts traded on all three exchanges.”
The ABA does not want to prevent index funds from participating in the market, just to limit their activity through imposing contract limits, she said.
“The comment period [for the CFTC to look at this issue] has closed and the CFTC is now evaluating the thousands of comments received. Per the Dodd/Frank financial reform bill, the CFTC is supposed to finalize any rule by May 17, 270 days after the enactment of the bill. But, there are efforts underway in Congress to move this deadline back to allow for further consideration.
“There is a CFTC Agricultural Advisory Committee meeting on May 19, and it is ABA’s hope that this meeting be used as an opportunity to discuss the position limit issue.”
Exchanges increasingly poor medium for price discovery
As to its chances of success, the ABA was more confident now than it had been in the past, although bakers were taking nothing for granted, she said.
“For decades the wheat markets functioned properly, with traditional market participants weathering fundamental supply and demand concerns across the world. But now, with the influx of index funds in the markets, the exchanges are much less effective as a medium for true price discovery.”
In ABA’s view, index funds are erroneously defined by the CFTC as commercial hedgers, which means they have received exemptions from contract limits.
“ABA strongly urges the CFTC to move forward with removing the hedge exemption status from all index funds operating within the wheat futures markets, keeping the limits at the current level, while ensuring that index funds cannot receive such exemptions in the future,” said Sanders.
“Designating all index funds as non commercial participants will allow the markets to once again react appropriately to fundamental factors.”