CFTC urged to act on lack of cash-futures convergence

Tuesday, July 29, 2008, 3:23 PM

by Peter Shinn

Brownfield

The Commodity Futures Trading Commission Ag Advisory Committee met Tuesday morning to address the issue of agricultural futures and cash market convergence, the coming together of futures prices and cash prices. With the sharp run-up in ag commodity prices this year, convergence didn't happen for wheat and cotton some months. And that made the hedges of commercial market players worthless.

Exactly why cash and futures prices didn't converge isn't entirely clear. Committee participants Tuesday agreed that increased transportation costs are one reason why.

And Tom Coyle, General Manager of the National Grain & Feed Association (NGFA), told his fellow committee members that NGFA's analysis shows excessive speculation is the reason convergence still isn't happening in the wheat market. Coyle reviewed a range of potential solutions, including seasonally adjusting storage fees, adding optional delivery points and adopting rules allowing the "forced load-out" of wheat contracts in certain situations, among others.

David Lehman, Director of Commodity Research and Product Development for the CME Group suggested the Chicago Board of Trade would begin implementing some of the less-controversial of those solutions itself after an industry meeting in September. But Neal Gillen, Vice President and General Counsel of the American Cotton Shippers Association, told CFTC Commissioner Michael Dunn the CFTC itself must take bold steps to address the breakdown in ag futures markets.

"The Commission has to deal with the obvious and not, you know, make all these fixes here and there in contracts," Gillen said. "I think you've got to get to the overriding issue. That's what the Congress is telling you. That's what the people are telling Congress."

Dunn readily agreed. He suggested the failure of cash and futures markets to converge demonstrated the serious kind of market problem that Congress specifically chartered the CFTC to fix.

"If folks cannot use this for price discovery and cannot use it to mitigate their risk, then we have a fundamental problem that we need to look at," Dunn said.

NFU President Tom Buis told the Committee the producers of agricultural commodities themselves have the most at stake in making sure their futures markets function as intended. And he pointed out the agricultural futures markets wouldn't exist in the first place without farmers and ranchers.

"They're producing the products that all these entities - whether it's hedge funds or speculators or other commercial users - take and either add value or purchase and make money off of," said Buis.

What steps the CFTC will take to address the issues raised by its Ag Advisory Committee Tuesday morning aren't clear. Many Committee members embraced an idea floated by CFTC Commissioner Bart Chilton for an independent study of the problems confronting ag futures markets.

Either way, as Dunn suggested, the CFTC is under pressure to act quickly. Just last week, the House Agriculture Committee approved the Commodity Markets Transparency and Accountability Act and sent it to the full House for consideration. The measure, among other things, would give the CFTC substantial new regulatory authorities over agricultural and energy futures markets.

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