CME downsizes corn futures expansion in wake of industry complaints

CME Group Inc. has scaled back a plan to expand the daily trading limits for its corn futures contract in the wake of grain industry complaints that the move would make an already-volatile market subject to even greater price swings.

The proposed trading limit expansion was reduced to 40 cents from 50 cents in a proposal CME announced in late April, the Chicago-based exchange operator said in a May 10 statement:http://bit.ly/lEOkXj. Currently, corn futures’ maximum daily move is 30 cents.

CME adjusted the proposal following “significant discussion with customers and representative trade groups,” Tim Andriesen, the company’s managing director for agricultural commodities and alternative investments, said in the statement. A 40-cent limit “is a level we believe balances those two concerns,” he said.

The proposal still requires approval from the Commodity Futures Trading Commission, the U.S. futures industry regulator.

CME said previously that increasing the market’s trading limits would “enhance price discovery and risk management” after corn prices grew increasingly volatile in recent months, reflecting concern over rising demand and shrinking stockpiles.

But the proposal stirred protests from grain elevator managers, livestock producers and others who use corn futures to hedge against adverse price fluctuations and lock in supplies. Grain merchants argued that expanded limits would sharply increase their risks, raising the amount of money, or margin, required to be posted as collateral against losses.

“This has the potential to increase volatility, and we are already experiencing a higher degree of price variation in very short-term time periods than the overall market ultimately is pricing,” Art Sauder, president of Livestock Services, Inc., a Great Bend, Kan. hog producer, said in a comment posted on the CFTC’s website: http://bit.ly/la6Po0

“When the level of risk created by risk management programs begins to outweigh the benefits, CME futures will become an ineffective tool for our business,” he said.

The corn futures contract is CME’s most actively-traded agricultural product. During the first four months of this year, an average of 362,459 contracts – or more than 1.8 billion bushels - traded each day, up 31 percent from the same period in 2010.

Expanded corn trading limits “will put tremendous strain on our balance sheets,” Dave Holm, executive director of the Iowa Institute of Cooperatives, said earlier this month. His group represents the state’s grain elevators.

For example, under the 30-cent limit, an elevator that’s committed to buy 400,000 bushels of this year’s harvest faces a daily margin call of as much as $120,000 if corn prices move against it, Holm said. If the limit is expanded to 50 cents, the elevator’s daily margin call could increase to as much as $200,000.

“Everybody anticipates a volatile summer anyway,” Holm said. “If you expand those trading limits, that just accentuates it.”

Corn futures more than doubled since the middle of 2010 as supply concerns intensified. In trading May 10, corn for July delivery fell ¼ cent to $7.07 ¼ a bushel. In April, corn touched a record $7.83 ¾ a bushel.

CME’s Andriesen, in the statement, said that it’s important to have markets where limit-moves are infrequent and buyers and sellers are have leeway to settle on prices without being subject artificial restraints.

Still, “at the same time, we recognize wider limits have an impact on many of our commercial customers,” he said.

As with most futures contracts, trading in CME corn is halted after prices rise or decline by the daily limit.

Under current rules, if two or more corn futures contracts settle at the daily limit, the maximum range is temporarily expanded to 45 cents, and then to 70 cents if the market closes with a limit move for a second day.

(Source: http://www.cattlenetwork.com/cattle-news/latest/CME-downsizes-corn-futures-expansion-in-wake-of-industry-complaints-121588049.html)