April 4, 2008

ASA forms grain futures market observation group
 

The American Soybean Association (ASA) has formed a group to observe price volatility and changes in the market in order to assist farmers to effectively manage risk in the futures market, according to ASA in a press release on Thursday.

The group, consisting of ASA board members, is called the market performance-working group and will make recommendations to the board of directors.

While farmers welcome higher crop prices, soy producers have become increasingly concerned about the lack of convergence between futures and cash prices, and whether fund participation in markets and related volatility has resulted in a larger than normal basis. The fact that many elevators have stopped offering bids for grain beyond 60 days, often called "hedge-to-arrive" contracts, is part of this market volatility, the ASA said in the release.

"Farmers are losing their ability to pass off risk due to lack of convergence between futures and cash prices, the lack of effective delivery mechanisms, and the halting of deferred bids by many elevators. For farmers and other traditional hedgers, we need to improve futures market performance so that they once again can be used as effective hedging tools," said ASA board member Scott Fritz in the release.

CBOT corn, soy, soy oil, and wheat futures have set all-time highs this year and have built on bullish fundamentals amid new demand sources from overseas and from biofuels since last year. The rising prices have attracted the interest of non-traditional speculators such as index and hedge funds, and that in turn has pushed prices higher.

The volatility and surge in grain and oilseed prices have produced increased risks for traditional hedgers, with the high cost of hedging forcing some smaller commercial elevators to lift some hedges, as banks are less willing to extend credit to hold short hedges, analysts said. The high volatility for prices has meant higher margins at futures exchanges and thus has raised prices for elevators needing to hedge.

Many Midwest elevators aren't doing long-range contracts out into 2009 that will tie up capital, as the risk assessments limit marketing opportunities for forward contracting in volatile markets where there is tremendous uncertainty looking forward.

As part of the new group, Fritz met Thursday in Chicago with representatives from the CBOT, Minneapolis Grain Exchange, Kansas City Board of Trade, CME Group, and the Commodity Markets Council. The meeting was organized by the CMC and the exchanges to gather input from market participants on how to improve futures market performance.

Topics discussed included changes to delivery procedures, expansion of delivery territory, capping index fund hedge exemptions, and other possible actions or mechanisms to improve market performance.