CFTC Looks at Futures Volatility

MATTHEW ENIS

WASHINGTON — The U.S. Commodity Futures Trading Commission hosted an agricultural forum here last week in an effort to gather opinions from farmers, commodity traders and government officials as to what factors may be contributing to current volatility in the agricultural futures markets.

“Commodity prices across the board are at levels not experienced in many of our lifetimes,” said Walt Lukken, acting chairman of the CFTC. “In the last three months, the agricultural staples of wheat, corn, soybeans, rice and oats have hit all-time highs. During the last year, the price of rice has increased by 118%, wheat by 95%, soybeans by 88%, corn by 66% and cotton and oats by 47%. These price levels, combined with record energy costs, have put a strain on consumers as well as many producers and commercial participants that utilize the futures markets to manage risk and discover prices.”

Presenters blamed a range of issues for the run-up in prices. As beef, pork and poultry producers are well aware, federal mandates for ethanol production have caused demand for corn to mushroom in recent years, forcing the price of the crop higher. Drought in Australia — typically a major agricultural exporter — has led to shortages of wheat and rice in Southeast Asia and, subsequently, the rest of the world. Soybeans and cotton have lost millions of acres to corn in the U.S. And, rising energy costs are affecting everything.

Yet there has also been a growing concern that the markets themselves are playing an outsized role in the price of these staples, as investors — seeking refuge from a declining dollar and a floundering stock market — have suddenly overwhelmed the commodity exchanges with non-commercial speculation.

“Some argue that increased participation in futures markets by investors is driving prices above levels that can be explained by economic fundamentals and is creating a lack of convergence between futures and cash prices,” noted Jill Sommers, a CFTC commissioner. “Others point out that convergence problems may be due to futures contract terms or conditions or delivery cost and capacity issues. Whatever the cause, it appears that increased futures price volatility and uncertainty about basis relationships has raised the cost of hedging.”

In a forum that certainly did not suffer from a lack of opinions, one cotton farmer railed against the current trading system during an early question-and-answer session, arguing that it was the job of the CFTC and other government agencies to stabilize the markets for commercial purposes, even if that meant finding a way to separate out non-commercial traders. Another farmer argued that higher prices for crops were allowing farmers to make a living during a time when everything is more expensive for their families, as well.

Others argued that non-commercial speculation may not be a cause of these skyrocketing prices at all, noting that large institutional investors, such as pension funds and retirement funds, have been historically averse to heavy investment in commodities, which are always somewhat volatile.

Notably, Gerald Bange, who serves on the World Agricultural Board for the Office of the Chief Economist of the U.S. Department of Agriculture, emphasized the supply-and-demand aspect of the problem. World wheat consumption, he said during a presentation, has exceeded production in six of the past eight years, and stockpiles of grains and soybeans are being drawn down at alarming rates around the world. Soybean use, for example, currently exceeds production by 400 million bushels per year.

Although the outlook was grim, the CFTC said it will make its data and its meetings more transparent. This forum was available for free via webcast and toll-free teleconference, and members of the public were invited to submit questions via email.

“We may already be working under or fast approaching a new paradigm of higher agricultural prices,” said Michael Dunn, a commissioner for the CFTC. “The way we did business in the past may not be the way we do business in the future.”