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Speculative Limits being Evaluated

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AFIA president, CEO testify on speculative position limits


World-Grain.com, December 16, 2010

by World Grain Staff


  ARLINGTON, VIRGINIA, U.S. — The Commodity Futures Trading Commission (CFTC) should meet its congressionally set January 2011 deadline and set at least interim speculative position limits for bona fide hedgers and speculators in the nation’s futures markets, the American Feed Industry Association (AFIA) President and Chief Executive Officer Joel G. Newman told a U.S. House Agriculture Committee subcommittee in testimony on Dec. 15.


Newman was one of five industry witnesses invited to testify before the House Committee on Agriculture’s Subcommittee on General Farm Commodities & Risk Management at a hearing to review implementation of the Dodd-Frank Wall Street Reform & Consumer Protection Act, and the CFTC’s progress in setting mandated speculative position limits in the nation’s futures market.


“We support effective speculative position limits that work for both the bona fide hedger and the speculator,” said Newman. “However, there is rarely the perfect solution to a complex issue, and waiting for the ‘perfect solution’ for setting speculative position limits will only delay the much needed transparency and controls in these commodity markets. Therefore, we support the implementation of interim limits, which can then be adjusted by CFTC if data confirms the need, over an extended period of time.”


Newman testified that future market open interest is historically comprised of 70% to 85% hedgers and 15% to 30% speculators. In 2008, this reversed, with market open interest comprised of 26% hedgers and 74% speculators. Today, speculators continue to outnumber hedgers.


The magnitude of this scenario is clear in the numbers, Newman explained. In 2003, index speculator investment in 25 physical commodities was $13 billion; in 2008 these investments jumped to $260 billion – a 1,800% increase. In 2010, these investments remain at $265 billion, with three index funds representing 94% of these investments.


AFIA applauds the subcommittee and full House Agriculture Committee for calling the hearing to review the CFTC’s progress on speculative position limits.


“Your individual and collective interest in making sure progress toward implementation is welcomed by AFIA’s members,” Newman said. 













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Price controls as dangerous to economy.


Futures market and derivative financial instruments usually very complicated investments to understand per the  financial firms hype and repackaging to attract more customers willing to gamble.


My take on the whole financial mess of home mortgage derivative market (a parallel to any futures market)......it was to complicated and a complication that benefited the financial house. Just like insurance contract, most have no idea of actual risk upon normal real world circumstances.


This is were the Feds power would be of benefit. The regs should forbid such. They should certify or have an approval process of any financial instrument to ensure it is in simplest terms for sale. The product should be labeled a consumer product than can harm citizens.


The investment firms grow rich trading and risking your money. Firms love to repackage and hype new investments....but that is artificial generated investments, just a repackaged to hype advertising and generate more trading wealth for them.


Banking and investment firms should have their feet tied to simple investments with low burden of cost. Financial instruments that are rock solid honest and easy enough for an 8th grader to understand.  Public should be able to invest with full faith of consumer information upon honesty and certified integrity of proven products.


Banking and financial industry should not be spending the most upon Capitol Hill to be awarded most favorite lobbyist. Neither should they be the 3rd biggest sector of our GNP. They shuffle money and create no real wealth.


Corn futures work to balance the corn market, by increasing costs now because investors are betting the future demand will be high as compared to supply. The bet artificially increases corn supply and limits corn use now, instead of later when reality hits.    The investors are punishing consumption, but they also award suppliers and work to pull more supply into the market. Can they manipulate the market to impose high costs to corn consumers and pull that extra money into their income? Ya, it's called a economic bubble. An artificial hyped up economic bubble that will cause much economic harm. Were going to see much of this activity with market of less resources. Oil, corn, housing, internet companies, precious metals, rare earth metals, food, water, energy, etc.... How to fight that? With good good consumer info, market info, and criminal law upon collusion practices or other illegal practices of market manipulation.


Ask the question should the store vendor allow his bottled water go to market price in a temporary shortage and emergency? Or should he maintain the price and quickly sell out to hoarders. I would argue , the best use of precious resources is to allow them to float upon marketplace as this condition will greatly encourage resupply and usher in rationing all on its own. Not everyone will get water, but water will be put to best use and not resold upon black market. Raise the price until you sell zero, then lower price for slow steady sales. Limit one bottle per person.

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I felt the market was far more efficienct when it was in the pre-2007 state with mostly hedgers (corn farmers, elevators (sellers) that were hedging the crop to move and on the other side (buyers) such as livestock producers, ethanol plants, soy crush plants, industrial and food plants, etc. with only about 25% investors outside of the producer/user group. Here the main reason why (true for fossil energy too)-- when volatility rises too much not only do the banks that finance everyone from the producer to the user get spooked and pull back on their capital- even more capital is required to doing a proper hedge to take away risk to seller or buyer.


Example: School board wishes to lock down current budget year fuel costs so that they can not have risk of overrunning their budget. 6-7 years ago one could go into the options market and find an "in the money" calls for an average of 3-4 cents spread from next month thru 12 months out. This would lock down the futures risk side for a tiny amount of "insurance money". Today one likely could not find even an "out of the money" option for 30-40 cents unless it was so far out of the money as to be useless. I blame most of this on the speculators who are trader paper barrels 3-6 X in volume over the real barrels or bushels used. WHEN FUTURES/OPTIONS CAN NO LONGER BE USED FOR PROTECTION IN REAL TRADE DUE TO THE CAPITAL REQUIRED -- THEN REAL RISK EXISTS TO THE INDUSTRY WHO NEEDED IT IN THE FIRST PLACE AND --IT BECOMES MERELY A TOOL FOR WEALTH BY MEGA INVESTMENT HOUSES.


I never had an issue with the 25% level of speculative investors- they provided liquidity when it came time to unload a hedge AND at that 25% level even provided some added protection against manipulation. BUT- now they are the manipulation that has taken it too far. I would rather see them invest in companies (brick and mortar) than short term commodity.

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Yes, this manipulation of market per big money leverage does happen. Some bad financial managers very keen in exploiting a good supportive and normal devices for profit. Like a Ponzi Scheme or a chain letter some benefit immensely while the fools loose all. Private firms or the billionaires like Soros think just a game to savage market for their benefit. Sororos damaged United Kingdom monetary, doing as much damage as gun toting invaders.


We are slowly realizing the damage clever white collar criminals do. We should learn the lesson "nothing different than getto guy robbing a bank as compared to a clever white shirt with a calculator trying to take short cuts". Both should go to jail. In fact when a company or person pulls a large salary, they often justify and explain they deserve high compensation as they are burden with much trust and responsibly to the public. If these folks whom benefit from our trust instead cheat society...they should be head to 2x the punishment and maximum shame.  Politicians should be held accountable to the max. We need to quit investigating our political opponents for political gain and sway to just as easy investigate our political constituency.  Good for the nation to support a rigid moral justice system (code of law). Not so good to just calculate the political benefit or merely award your side of the political aisle no matter. This, sadly the normal national politics.


Futures, are like you post, a nice calming effect upon markets. They never envisioned titanic money manipulating markets....this the zone Attorney General traditional operated. Trouble is these enterprises are so confusing....easy to evade justice. Laugh, they have to pull in testimony from experts to have a clue. A day late, dollar short, and soon their focus shifts. Sooo, better to have a dirt simple system with maximum sunshine and reporting where the problem becomes obvious.

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Someone is trying to manipulate market with that much swing in speculative money. Those investment firms with $100s of billions can accomplish some market mischief. They like volatility, something the futures market was designed to minimize and protect from. Corn probably susceptible to this as a consumable and limited supply based on growing conditions.


"Therefore, we support the implementation of interim limits, which can then be adjusted by CFTC if data confirms the need, over an extended period of time."


Hope they don't forget to update and learn a better method.....usually the regulation industry falls asleep until business and consumers yet again demand action upon a tragedy. We should fire the regulators and hold them even more accountable upon disaster. Instead media runs to their defense and sympathy saying always not enough money or fed employee workforce. Take that excuse away priority number one.......same with our political oversight. We should do as Japan and demand a house cleaning when they fail at the job. Politics is not a career path to cronies that are exceptionally good salesmen.


The Attorney General should prosecute financial investing that attempts to artificially manipulate markets. This is a attack to destabilize normal trading and investing. Analogous to yelling fire in crowded theater. Same with hyping investors to make bad investment (risky). Those futures trades should have a fed warning communicating the criteria and intent of the investment vehicle and warning to to those whom exploit the mission. So, speculators not only fear loss of money, but if getting greedy will have to fear threat of Attorney General placing the fisticuffs on them.

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