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on March 12, 2014

NGFA concerned about CFTC’s proposed changes to hedging, speculative position limit rules

Group fears transactions could be put at risk

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.

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