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NGFA Risk Management Committee Conducts
Conference Calls with Lenders, Hedge Funds
on Current Futures Market Situation
In its continuing proactive efforts to address current volatile commodity futures markets, the National Grain and Feed Association ( NGFA) Risk Management Committee conducted separate conference calls recently with representatives of investment funds and commercial lenders to discuss capital requirements confronting commercial hedgers and the potential use of alternative commodity investment tools in lieu of futures ownership.
In addition, a small delegation consisting of representatives of the Risk Management Committee and Country Elevator Committee is scheduled to meet March 18 in Chicago with CME Group representatives to discuss further the need to enhance futures market performance and convergence in CBOT grain and oilseed futures contracts, as well as the financial strain being imposed on commercial hedgers through margin requirements on outstanding futures contracts.
During a March 6 conference call with representatives of about 10 commercial lending institutions, lenders indicated they are not aware yet of a trend requiring elevators to liquidate inventories to reduce hedged inventory exposure, but said they have increased scrutiny given increasing futures market prices and margin requirements. The lenders suggested that elevators analyze and be prepared to report to their lenders the concentration of hedged grain inventory risk, such as producer-customers with the largest outstanding futures contracts and the degree to which elevators are actively communicating with those accounts about margin requirements and the expectation of delivery. The lenders also encouraged elevators to consider additional steps to manage counterparty risk, such as including a provision in futures-based cash grain purchase contracts obligating producers to contribute a cash performance guarantee to help cover buyers’ financial exposure and/or requiring producers entering into such contracts to obtain federal crop insurance to mitigate the risk of non-delivery.
As a result of these recommendations, the NGFA is preparing sample grain-purchase contract clauses that members could consider using to require producers to share a portion of costs under certain conditions, as well as to stipulate producer purchase of federal crop insurance as a prerequisite to entering into futures-based cash grain contracts. It is the NGFA’s intent to unveil these sample contract clauses during the 112th annual convention, after they have been reviewed by the appropriate NGFA committees and legal counsel. The NGFA also plans to develop a counterparty risk primer that elevators and other commercial hedgers can use to explain to producers the hedging and margining requirements inherent in futures-based cash grain contracts, as well as the importance of contract performance.
During a March 4 conference call with investment funds, the NGFA’s Risk Management Committee explored whether funds desiring to own commodities would be interested in purchasing over-the-counter swaps or agricultural trade options in lieu of futures contracts. While the funds initially expressed a reluctance to take unsecured, subordinated positions in such instruments, several issues were identified that, if resolved, might enhance the attractiveness of such instruments to funds, including aggregating/securitizing country elevator business and working to minimize counter-party risk from producers.
During the March 18 meeting with CME Group representatives, the NGFA plans to discuss: 1) the CME Group’s progress in implementing changes to CBOT grain and oilseed futures contracts recommended by the NGFA’s futures task force that might enhance convergence; 2) potential benefits of basis swaps and exchange-cleared swaps to commercial grain hedgers; and 3) whether there are ways to provide relief on margining requirements to commercial grain hedgers. Among the CME Group representatives scheduled to attend the meeting are officials from the CME Risk Group that determines margin requirements for grain and oilseed futures contracts.
NGFA staff members also are continuing ongoing discussions with the Commodity Futures Trading Commission (CFTC) about concerns over futures market performance and financing pressures on commercial grain hedgers. In addition, the Risk Management Committee is examining the potential for changes to CFTC rules governing agricultural trade options and similar risk-management tools that might provide alternatives to futures contracts.
There were these other related developments:
CME Group, KCBT Propose Further Increases in Daily Price Limits, Effective March 28: The CME Group and Kansas City Board of Trade (KCBT) on March 10 announced plans to further increase daily price limits for grain and oilseed futures and options contracts. The changes would take effect March 28, if approved by the Commodity Futures Trading Commission (CFTC). The CME Group proposed to increase corn daily price limits to 30 cents per bushel from the current 20-cent-per-bushel limit; soybeans to 70 cents per bushel from the current 50-cent-per-bushel limit; and soybean oil to 2.5 cents per pound, up from the current 2-cents-per-pound limit. In addition, the CME Group proposed that daily price limits expand by approximately an additional 50 percent for two consecutive days following limit-up moves. This additional 50 percent expansion of price limits would apply to wheat, mini-sized wheat, corn, mini-sized corn, soybeans, mini-sized soybeans, soybean meal, soybean oil, oats and rough rice futures following a session in which the price of two or more futures contract months within the first five to eight listed non-spot contract months (depending upon the commodity’s crop year), or the final contract month of a crop year, closes at limit bid or limit offer. Daily price limits would revert to their previous levels following a given trading session in which no futures contract month for the given commodity closes at limit bid or limit offer. The premiums on options would be subject to the same daily price limits as the underlying futures contracts. The KCBT proposed to adopt the same price limits for its wheat futures and options contracts.
Both exchanges said price limits will continue to be removed on the current contract month beginning on the second business day preceding the first day of the delivery month.
CME Group Submits Petition to CFTC to Increase Storage Rates, Loadout Charges for CBOT Corn, Soybean Futures Contracts: The CME Group on Feb. 26 submitted a petition to the CFTC to increase the storage and load-out rates for CBOT corn and soybean futures contracts. The proposal, which mirrors the recommendations submitted to the CME Group by the NGFA’s Risk Management Committee, would increase the corn and soybean futures contract storage charge from the current 15/100ths of a cent per bushel per day (approximately 4.5 cents per bushel per month) to 16.5/100ths of a cent per bushel per day (approximately 5 cents per bushel per month) to more closely align with commercial storage rates. The new storage rates also would be identical to the CBOT wheat futures storage rate, which is to increase beginning with futures contracts offered in July 2008. The CME Group also proposed to increase the CBOT corn and soybean futures contract load-out charges from the current 4 cents per bushel to 6 cents per bushel to more closely reflect increased commercial rates. The proposed new load-out charges for corn and soybean futures also would be identical to the rates applicable to CBOT wheat futures.
If subsequently approved by the CFTC, the CME Group said it intended to implement the changes starting with the November 2008 soybean futures and December 2008 corn futures contracts. “Implementation at the beginning of the crop year is designed to obviate any pricing impact of these amendments upon open (futures contract) positions,” the CME Group noted. “Together, these changes should improve the performance of the corn and soybean futures contracts by better reflecting the underlying cash markets and improving the incentive and efficiency of the delivery market by encouraging (firms regular for delivery) to buy-in the cash market and sell-in the futures market when the basis is weak.”
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08.08.08
Summer Meeting & All-NGF Golf Scramble
Quarry Oaks Golf Club, Ashland
Nebraska Grain and Feed Association
1233 Lincoln Mall, Suite 200
Lincoln. NE 68508
Phone: 402-476-6174
Fax: 402-476-3401
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