Preventing price swings by separating market speculators from risk management tools

Farmers and grain elevators will soon be working with new rules to prevent massive price swings caused by speculators in the market. RFD-TV’s Emily Buck learned more about the long-delayed provision from the 2010 Dodd Frank Act.

The Commodity Futures Trading Commission is set to implement position limits on sixteen new metal, energy, and agricultural commodities, plus updated limits on nine more ag products.

Commission Chairman Heath Tarbert says that they focused on the idea of bonafide hedges and separating the speculators from farmers looking for risk management tools.

According to Tarbert, “This rule has been ten years in the making, because earlier versions of it really failed to distinguish between those that were purely speculators, hedge funds and financial institutions, and those like grain elevators, producers, manufacturers, as well as individual farmers and ranchers... who were actually trying to hedge their risk.”

Previous versions of the rule have failed four times, with one attempt struck down by the courts. He says that the commission listened to the industry to create this rule.

“One of the reasons they support it is because it does rely, to some extent, on the exchanges and their expertise,” he states. “They are closest to American agriculture, so they are watching the markets and working with market participants everyday.”

The rule would also streamline the process for unenumerated hedges led by the futures exchange.

“We asked the exchange to take the first cut at that and if the exchange approves it, then it goes to us for a ten day review,” he notes. “That’s why the exchanges are involved, and to my view, that’s not relying on the exchanges, that’s leveraging their expertise and their day-to-day interaction with America’s agriculture community.”

He says that the change will create new opportunities for industries.

“Someone for example, let’s say the cotton industry, that relies on anticipatory merchandising, they have a lot of merchandise,” he adds. “They know they are going to sell it but haven’t sold it already, and you know they are going to sell it but they don’t know the price they are going to sell it. Well now, they have the ability to hedge that risk and they have never had it before.”

The position limits will come in over a two year time period, but the rules of unenumerated hedges will be active within 60 days of publication in the Federal Register.