UPDATE: CFTC Approves CME Plan To Raise Daily Corn Trading Limit

The Commodity Futures Trading Commission on Tuesday approved a controversial proposal to increase the one-day trading limit for U.S. corn futures.

Regulators approved CME's request to raise the limit for daily gains or losses at the Chicago Board of Trade to 40 cents from 30 cents following an extended review period. The exchange pursued the increase despite opposition from grain users because it said historically high prices called for a larger limit.

Corn futures reached a record high in June as demand for low inventories stayed strong in the face of high prices. They have since pulled back 15% due to easing concerns about supplies.

"We believe increasing daily price limits will result in less-frequent limit moves and will help ensure that our markets provide the most effective means for price discovery and risk management markets," said Dave Lehman, CME's managing director of commodity research and product development.

CME's proposal ran into stiff opposition from farmers, grain elevators and food companies, who said the increase was unnecessary. They complained the larger limit would increase volatility in the corn market and expose hedgers to bigger margin calls if prices surge--concerns CME said were unfounded.

CME dialed back the proposal in response to initial objections. It originally proposed to increase the daily limit to 50 cents.

Market participants continued to criticize the plan after it was approved, saying it was a play by CME to increase trading volume. They said CME wanted to expand the one-day limit because trading stops when a futures contract rises or falls to the limit as a way of controlling risk for market participants.

"The powers that be think there's some sort of lost volume there that they can capture" with an increased limit, said Jerry Gidel, analyst for North America Risk Management Services, a brokerage in Chicago.

The exchange last widened the limit for corn in March 2008 with an increase to 30 cents from 20 cents. Corn futures at the time traded around $5.50 a bushel and ended up climbing to a record high of $7.65 a bushel in June of that year. That record fell this year, with the market reaching a new, all-time high of $7.99 3/4 a bushel in early June. The nearby contract traded Tuesday around $6.82 a bushel.

Under current rules, the daily limit can temporarily expand to 45 cents from the base limit of 30 cents if two or more futures contract months settle at the daily limit. The limit can expand again to 70 cents if the market finishes at the daily limit for a second day. Under the new rules, price limits will be 40 cents, with a maximum of one increase to 60 cents.

The new limit takes effect Aug. 22.

-By Tom Polansek, Dow Jones Newswires; 312-341-5780, tom.polansek@dowjones.com

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