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CME GROUP SIGNALS INTENT TO PROCEED WITH INCREASE IN CBOT CORN DAILY PRICE LIMIT

NGFA Newsletter

The National Grain and Feed Association (NGFA) is reporting that the CME Group has indicated to them that it plans to proceed with its revised proposal to increase the daily price limit for the CBOT corn futures, options and mini-sized corn futures contracts soon after the current review period ends Aug. 8.  The planned action occurs in the aftermath of a July 19 industry meeting conducted by the CME Group at its Visitor’s Center in Chicago, Ill., during which the exchange defended its proposal as necessary to better reflect the underlying value of cash corn and to enable the CBOT corn contract to better serve its risk-management and price-discovery functions.

The CME Group’s revised proposal would increase the price limit from the current 30-cents per bushel per day (which was adopted in March 2008) to 40 cents per bushel per day, expandable one time to 60 cents per bushel per day.  The CME Group’s original proposal, submitted to the CFTC on April 26, had called for increasing the CBOT corn futures and options price limit to 50 cents per bushel per day, expandable by 50 percent (to 75 cents per bushel the first day and $1.10 per bushel the following day) when at least two contracts closed at limit bid or offer on the previous trading day.  That original proposal subsequently was revised on May 10 to the current 40-cent-per-bushel version, but generated overwhelmingly negative reactions from market users.

Outcomes from CME Group’s Corn Industry Meeting: During the industry meeting, CME Group officials outlined five potential options related to the CBOT corn contract.  But they signaled several times that their strong preference for the grain complex ultimately would be to shift to a floating daily price limit – whether established daily, quarterly or over some other time frame – based upon a percentage of underlying cash market values of the commodity. Two of the options discussed during the industry meeting for the CBOT corn contract involved setting price limits daily based upon a percentage of the spot rate, or quarterly based upon a percentage of cash market values over a given period of time.  But David Lehman, CME Group’s director of commodity research and product development, said the exchange has not proposed such an approach yet because of customer concerns that a floating price limit would be complicated.  The other three options discussed during the industry meeting were to: 1) adopt the revised 40-cent-per-bushel price limit proposal; 2) take no action; or 3) invoke circuit breakers to halt trading when daily price limits were reached, and then reopen trading at a higher price limit.

During the meeting, CME Group representatives said the current corn futures price limit is low compared to the underlying cash market values of other grain contracts.  They noted the 30-cent-per-bushel corn daily price limit is about 4.2 percent of the underlying cash market price for corn, while the 70-cent-per-bushel daily price limit for soybeans is about 5 percent of the underlying cash price and the 60-cent-per-bushel daily price limit for wheat is about 8.44 percent of the underlying cash market value.  They also said that at least one of the corn futures contracts had settled at the daily price limit on eight of the 129 trading days as of July 7.

CME Group officials acknowledged market-users’ concerns that increasing the daily corn price limit could result in wider trading ranges and increased volatility.  But they presented charts they said demonstrated that previous increases in daily price limits had not led to greater market volatility.  Further, Amy McCormick, CME Clearing Division’s director of market risk management, said there is no set formula for determining daily price limits for agricultural commodity futures contracts, but that such limits are guided by the magnitude of volatility existing in the market – not the daily price limit. She said the CME Clearing Division strives to have daily price limits provide 99 percent coverage on one-day price moves – the current 35-cent-per-bushel maintenance margin is greater than the current 30-cent-per-bushel daily price limit because of expansion of limits in days following limit-up moves in futures markets.  She reported that, especially for the CME Group’s agricultural contracts, more emphasis is placed in market volatility in recent periods, and that daily price limits have no significant bearing on setting margining requirements.  She concluded by stating that margining to maintain hedges on futures market positions will be greater if the corn market is volatile, regardless of the daily price limit.

CME Group Plans to Proceed: In a subsequent communication with the NGFA on July 27, a top CME Group official said the exchange planned to implement the revised 40-cent-per-bushel price limit proposal shortly after the extended review period ends on Aug. 8.  The date was specified by the CME Group when it filed its amended proposal with the Commodity Futures Trading Commission (CFTC); the CFTC is not expected to object to the proposal by that date, in which case it would be considered approved automatically.

Following the industry meeting, the NGFA issued a statement expressing appreciation to the CME Group for extending the review period and for seeking customer feedback through such venues.  But the NGFA noted that many of the concerns expressed by users of the CBOT futures contracts during the industry meeting were consistent with the NGFA’s previously expressed reasons for opposing both the original and revised corn daily price limit proposal.  In a May 20 statement to the CFTC, the NGFA expressed concerns that the increase would contribute to added volatility in the corn futures contract and impose greater financial stress on the grain-handling, feed and processing industries through larger margin calls.

                                                                     

Despite information presented in the corn industry meeting, the NGFA said it continues to believe that an increase in the corn contract’s daily price limit is unneeded at this time and could have adverse consequences for commercial hedgers who form the core of the CBOT corn contract’s customer base.

 

 

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August 4, 2017

NeGFA Summer Meeting & Golf Outing

York Country Club

York, NE

 

 

 

 

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