In remarks at an agricultural commodities conference, CFTC Commissioner Brian Quintenz affirmed his commitment to making sure the futures markets work for the agricultural community. Although the CFTC can’t control the historically low commodity prices that are severely challenging farmers and ranchers, the agency is looking at outreach to help agricultural producers deal with complex markets and working to ensure they can hedge their risks unimpaired by price convergence anomalies or other market integrity issues.
"It has taken generations of hard-working, creative, and aspirational thinkers to build today’s futures industry. I am committed to ensuring this longstanding tradition continues for America’s next generation of farmers," said Quintenz in prepared remarks at the first-ever Agricultural Commodity Futures Conference at Kansas State University.
Agricultural community concerns. The American farmer is expected to see a decline in net farm income for the fifth consecutive year due to steep declines in commodity prices and global supply and demand factors. While the CFTC does not set commodity prices, Quintenz outlined work the agency is doing to make sure the agricultural futures markets remain a viable hedging tool to help manage price vicissitudes.
- Market integrity. The CFTC promotes price convergence between the futures and cash markets so hedgers can trust that amounts lost on futures hedge positions will be offset with gains in the cash markets. Quintenz explained that although the CFTC does not itself design futures contracts, the CFTC requires exchanges to monitor convergence and works with them to resolve any problems. Recently, exchanges have adjusted the design of certain contracts by adding or removing delivery points, in the case of the CME Live Cattle futures contract, or implementing a market-based storage rate, in the case of CBOT’s Hard Red Winter Wheat contract.
- Market complexity. Quintenz has heard from some agricultural producers that they no longer feel comfortable using futures markets to hedge their risks because the markets have become so complex. Quintenz supports Chairman Giancarlo’s request to CFTC’s Office of Customer Education and Outreach to help assess whether there are information gaps that may be addressed with information and transparency. Some have also expressed concerns about market structure issues related to automated trading, including matching engines, order book visibility, the amount of message traffic, and the timing effect of speculation-induced price moves. Quintenz welcomed the automated trading subcommittee of the Technology Advisory Committee, which he sponsors, to explore these topics.
- Market access. Many agricultural producers are family-owned. As futures commission merchants (FCMs) continue to consolidate—dropping from 154 to 55 FCMs in the last 10 years—some of the remaining larger FCMs are limiting the services they offer to smaller, less-active clients. Quintenz is concerned that smaller end-users will lose their ability to hedge their risks in the futures markets. Although the consolidation is due to many factors, including many not under the CFTC’s control, one factor the CFTC has some influence over is FCM capital requirements. In particular, Quintenz believes the supplemental leverage ratio (SLR) penalizes banks and could jeopardize the viability of porting customer positions in the event of a clearing member default, given the punitive capital charges the accepting FCM would face. He stands ready to help on this in any way he can, he said.
Innovation spurs productivity. Despite these challenges, America’s farmers remain the most productive in the world, spurred by American technological innovation and ingenuity, said Quintenz. Data analytics, machine learning, and facial recognition are all improving yields.
Blockchain technology has shown promise in modernizing supply chain management and title transfers, in turn optimizing profits. For example, the Louis Dreyfus Company recently completed the first agricultural deal using blockchain, processing the sale of 60,000 tonnes of U.S. soybeans to China. Eliminating paperwork involving letters of credit and inspection documents cut processing time to about one-fifth of their paper-based process. Blockchain can also give consumer-facing information, as for example last Thanksgiving when Cargill used blockchain to let families to track their turkeys back to their original farms and read comments from the farmers themselves.
"America’s farmers and ranchers tirelessly dedicate themselves to the future success of their farms and ranches," said Quintenz. "So must we, the regulators, as well as the futures exchanges and market intermediaries, work tirelessly to ensure the vibrancy of our futures market, so that it remains a reliable, efficient hedging tool for the Ag industry and so that all of the intelligence and sweat which farmers and ranchers put into their product does not go to waste."
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