UPDATE: CBOT Seeks To Raise Daily Corn Trading Limit To 40 Cents
May 10 2011 - 5:39PM
Dow Jones News
CME Group Inc. (CME) on Tuesday dialed back its proposal to
increase the daily trading limit for U.S. corn futures following
complaints from commercial grain users.
The exchange is seeking to raise the daily limit for corn
futures at the Chicago Board of Trade to 40 cents from 30 cents,
abandoning an earlier proposal to expand the limit to 50 cents. CME
owns the CBOT.
Commercial users of corn, including grain elevators and
livestock producers, largely opposed the proposed 50-cent limit
because they said it would expose them to larger margin calls if
the market surged. They also complained it would increase
volatility by allowing greater swings in prices.
Letters to the U.S. Commodity Futures Trading Commission, which
must approve adjustments in the daily trading limit, reflect
concerns about CME's original proposal. Corn Products International
Inc. (CPO), which supplies sweeteners and starches to food
processors and industrial customers, told the CFTC the current
30-cent limit was sufficient.
"Increased limits will only create hardship for the traditional
CME hedger by creating the potential for much greater daily price
volatility and the absolute need to provide huge amounts of
immediate added funding to meet increased margin calls," wrote Hugh
Parker, the company's director of commodities.
CME said a wider limit is needed because of increased prices and
volatility in the market. Corn futures reached record highs last
month as demand remained strong for low inventories in the face of
surging prices.
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
were trading 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 was
broken last month with the market setting a new, all-time high of
$7.83 3/4 a bushel. The nearby contract closed Tuesday at $7.06 a
bushel.
The exchange reduced the proposed increase "after significant
discussion with customers and representative trade groups," said
Tim Andriesen, CME's managing director of agricultural commodities
and alternative investments. "Wider limits have an impact on many
of our commercial customers," he said in a statement, without
elaborating.
The 40-cent limit seemed to strike market participants as a fair
compromise. Karl Setzer, analyst for MaxYield Cooperative in Iowa,
said "40 cents is much more palatable." MaxYield had written to the
CFTC opposing the 50-cent limit.
Trading stops when a futures contract rises or falls to the
daily limit as a way of controlling risk for market
participants.
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 proposal, price limits would be 40 cents,
with a maximum of one increase to 60 cents.
-By Tom Polansek, Dow Jones Newswires; 312-341-5780;
tom.polansek@dowjones.com
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