Moves to impose position limits on non-commercial hedgers in commodity markets mark an important step in the right direction to tackle volatility in wheat futures, says the American Bakers Association (ABA).
Its comments came as the Commodity Futures Trading Commission (CFTC) voted in favor of implementing contract limits on index funds investing in the wheat futures markets, investment activity many bakers blame for recent unprecedented market volatility.
“ABA’s position all along has been for the removal of hedge exemptions on index funds and redefining them as traditional speculators,” said Cory Martin, ABA senior manager of government relations.
“The new rule will place limits on index funds, which will prohibit their ability to buy and hold hundreds of thousands of contracts, with some exemptions remaining.”
Index funds do not behave like commercial hedgers
In ABA’s view, index funds have been erroneously defined by the CFTC as commercial hedgers, which means they have received exemptions from contract limits.
While index funds have been allowed to buy contracts in the wheat market since the mid 1980s, they only started to do so in earnest in 2004-5, ABA senior vice president, government relations & public affairs Lee Sanders told FoodNavigator-USA earlier this year.
“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% of the soft red winter wheat contracts available on the Chicago Board of Trade and 44% of all wheat contracts traded on all three exchanges.”
The ABA did not want to prevent index funds from participating in the market, just to limit their activity through imposing contract limits, 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.”