A U.S. Commodity Futures Trading Commission forum on April 22 will examine a smoldering problem in agricultural futures trade.
Traders and academics note there is a growing disconnect between the grain futures market and the cash market.
This is dangerous because futures markets are supposed to be the unbiased forum where prices are revealed in the free exchange between buyers and sellers.
Cash and futures markets are supposed to be linked, with the futures price converging with the cash price as each contract month expires, but that is not happening. The futures are often much higher.
Read Also
Agriculture needs to prepare for government spending cuts
As government makes necessary cuts to spending, what can be reduced or restructured in the budgets for agriculture?
There may be several influences at work, but a key factor is the recent activity of investment funds in agricultural commodities.
These huge pools of money have been attracted by grain shortages and the run up in crop prices. This interest increased as the outlook for other investment classes such as equities dimmed because of the credit crisis in the United States.
The result was that billions of dollars in new money flooded into grain commodity markets unaccustomed to such amounts. The incoming tide of money could not help but lift prices even higher.
The situation helped create the frenzied conditions that characterized the Minneapolis Grain Exchange earlier this year where the market kept rising the daily trade limit, pushing the March contract to $24 per bushel.
A few weeks later, when worries about the U.S. credit crisis caused investment funds to pull back from the market, prices dropped.
Daily price swings are huge by historic standards and often happen without any significant market moving news about supply and demand.
The regular users of the futures market – grain companies, food processors and farmers – were frightened away by the volatility. The market’s usual function as a place to hedge didn’t work.
Also, those with hedges, like grain elevator companies, needed increasing amounts of money to finance margin requirements on outstanding futures contracts. These extra costs added to the already rising cost of food.
In some ways, the activity of investment funds has helped grain farmers. Although in the real world farmers do not sell their grain at the dizzying peaks seen in the futures market, generally grain and oilseed prices have been pushed higher than what the normal analysis of supply and demand would warrant.
But in the long term farmers are hurt when the market system that they, along with grain companies, livestock feeders and food companies, rely upon for efficient trade and moderation of risk, fails in these duties.
The Commodity Futures Trading Commission must listen seriously to these concerns and determine the best way to return order to the markets.
For if the market can no longer command confidence, the whole agriculture and food industry will be hurt by uncertainly, inefficiency and rising costs.
Bruce Dyck, Terry Fries, Barb Glen, D’Arce McMillan and Ken Zacharias collaborate in the writing of Western Producer editorials.
