11/03/14: NGFA voices major concerns to CFTC over proposed changes to hedging, speculative position limit rules

Grain (Photo credit: Kamil Porembiński)

The National Grain and Feed Association (NGFA) has expressed major concerns with the Commodity Futures Trading Commission's (CFTC) proposed regulations that would redefine what constitutes "bona fide"  hedging and potentially increase speculative position limits for users of agricultural futures markets dramatically.

In a recently submitted statement, the NGFA said that under the CFTC's proposed rule, "we fear that a number of common hedging transactions used for business risk management in the grain, feed and processing sector, but not enumerated in the proposal, could be put at risk."

NGFA's comments, which are available online, were made in response to the CFTC's proposed rule to establish speculative position limits for futures and swaps on various commodities.

In its statement, NGFA said its members "rely on a consistent and predictable approach to bona fide hedging and position-limit policy decisions made by the CFTC," and that their risk-management strategies are not structured as an investment or speculative tool.  Rather, NGFA said, grain handlers, processors, feed manufacturers, exporters and agricultural producers rely on futures markets to manage business risk.

NGFA said the CFTC's proposal to change the definition of what constitutes a bona fide hedge could create uncertainty and invalidate several commonly used hedging transactions, including locking in futures spreads, hedging basis contracts and delayed-price commitments, and anticipatory hedging of commercial transactions and processing or storage capacity.

"To redefine bona fide hedging now in ways that may reclassify certain transactions long considered bona fide hedges by both the industry and the CFTC - as the proposed rule seems to suggest - would have far-reaching consequences for agribusiness hedgers and for U.S. agricultural producers," the NGFA said.  Doing so would lead to a "markedly reduced ability for grain elevators, feed manufacturers, processors and other businesses to hedge their physical commodity risk and force grain and oilseed purchasers to lower bids to farmers, reduce liquidity, and restrict use of tools widely used by farmers and ranchers to manage their risk."

The CFTC's proposal also would establish new methodologies for determining speculative position limits for agricultural commodities, and for the first time establish such limits for many non-agricultural products.

Agricultural commodities, such as corn, soybeans and wheat, specifically enumerated in the Commodity Exchange Act long have operated under federal speculative position limits, which NGFA supports.  But NGFA said that under the new methodology envisioned by the CFTC proposal for determining federal speculative position limits, the spot (current delivery month) month-based formula of 25 percent of deliverable supply could, in some cases, increase by nearly 10 times current spot-month limits.  Meanwhile, the CFTC's proposed speculative position limits for all-months-combined for enumerated agricultural commodities could result in increases of as much as 79 percent for soybeans and 62 percent for corn.

"We believe strongly that a 'one-size-fits-all' approach is unlikely to provide the right solution for commodities as diverse as energy, metals, financial products and agricultural commodities," NGFA said.  "Even within the agricultural commodities, grain and oilseed markets display characteristics different from other agricultural commodities.  We urge the CFTC to recognize these unique characteristics - functionally and in terms of market size and participants."

For this reason, NGFA recommended for both spot-month and all-months-combined that designated contract markets, such as the CME Group and Minneapolis Grain Exchange, be authorized to reduce such speculative position limits for specific contracts so as not to repeat problems regarding convergence of futures and cash market values that roiled the industry several years ago.

In its statement, NGFA also:

Strongly supported maintaining current "legacy" speculative position limits for enumerated agricultural commodities in the spot month and establishing limits in the deferred months that will facilitate an orderly transition to spot-month limits.
Urged the CFTC not to proceed with its proposal to establish different speculative position limits for the three wheat futures contracts - CBOT soft red winter, KCBT hard red winter and MGEX hard red spring.  "Varying limits could have unintended and undesirable effects in terms of competition among the contracts for growth and liquidity," NGFA said.
Opposed additional reporting requirements for bona fide hedgers.  For instance, NGFA said the CFTC's proposal to require users of commodities to submit a written form 10 days prior to the date when potential market positions would need to be taken under anticipatory hedges would be burdensome and unworkable.  "The CFTC must recognize that risk-management decisions need to be market- and business-driven, not centered on satisfying a government filing requirement that may not be timely or appropriate," NGFA said.

For further information, see NGFA's 20-page statement, which also includes numerous examples of bona fide hedging transactions.

The NGFA, established in 1896, consists of more than 1,050 grain, feed, processing, exporting and other grain-related companies that operate more than 7,000 facilities and handle more than 70 percent of all U.S. grains and oilseeds. Its membership includes grain elevators; feed and feed ingredient manufacturers; biofuels companies; grain and oilseed processors and millers; exporters; livestock and poultry integrators; and associated firms that provide goods and services to the nation's grain, feed and processing industry. The NGFA also consists of 32 affiliated State and Regional Grain and Feed Associations, and has strategic alliances with Pet Food Institute and North American Export Grain Association.