On July 19, the Commodity Futures Trading Commission (CFTC) Agricultural Advisory Committee (AAC) held a public meeting.
In his opening remarks, Committee Sponsor Chairman Rostin Behnam said that we are seeing fewer points of access to futures commission merchants (FCMs) for agriculture hedgers, and they need every possible tool they can to manage risks.
Below are some high-level takeaways from the meeting prepared by Delta Strategy Group.
IMPROVING ACCESS TO FUTURES MARKETS
Gerry Corcoran, FIA
- Today’s farmers are not producing for local markets; they are exporting all over the world. Knowing that they can rely on well-regulated futures and options markets gives them the protections they need to participate in global markets. FCMs are an important partner of the ag end-user community. They offer a central point of access to exchanges and clearing houses, offer checks and controls from illicit behavior, and contribute significant financial resources to default funds. The number of FCMs are in decline, and many do not offer clearing services to customers. That said, the existing FCM system is strong and offers equal access to all market participants. The role of introducing broker is important for smaller and midsized ag producers.
- We are committed to providing greater education and risk management tools to the public about futures and derivatives markets to enhance access and understanding. There are high barriers to entry and high cost of compliance in maintaining the safety of customer assets. The number of FCMs, while somewhat low, is stable and there is no indication the number of FCMs is continuing to decrease.
Curt Strubhar, Grain and Feed Association of Illinois
- We are concerned about the decreased number of FCMs willing to take on client business, and even fewer will take on introducing broker business. There are great FCMs available, but we would be particularly concerned if the number of FCMs continue to shrink.
- The current FCM model is far preferable to a non-intermediated model that has been explored at the CFTC. Derivatives markets benefit from the risk controls that FCMs present. The model that was proposed by FTX included an auto-liquidation model that was particularly concerning from a hedging perspective. To over-margin an account to accommodate auto-liquidations would have serious implications for hedgers.
Layne Garlson, Minneapolis Grain Exchange
- We have heard the frustrations surrounding consolidation in the FCM space. There are a number of FCMs that have an account relationship with our clearing member. The burdens of this relationship are not any more burdensome than the requirements the CFTC already places on FCMs. A lot of consolidation is simply the result of Dodd-Frank requirements. We have found that there are still a sufficient amount of FCMs that can service producers regardless of location.
Committee Discussion:
Derek Sammann, CME Group
- Farmers and ranchers form the backbone of the derivatives markets and their functions. If they did not bring their open interest to markets, these markets would not function the way that they need to. We need to expand education to these producers so that they understand how to mitigate their risks.
Buddy Allen, American Cotton Shippers Association
- We see varying access to FCM services for our members that is critical for all derivatives market participants. Different thresholds of participants have different access, and we need to ensure that we are considering all levels of market participants and their access to critical services. We think that hedging is being done less on the farm than it was decades ago, and this trend will continue. We need to expand education and outreach so that producers are aware of their risk management opportunities.
MISSISSIPPI RIVER DISRUPTIONS TO GRAIN FLOWS AND MARKETS
Susan Olson, Action Intel
- Barge freight is a core part of the price discovery for the CIF NOLA basis, the most liquid forward cash market. Following the 2022 drought issue, navigation and bottleneck issues as well as barge fleet access issues became increasingly common in these markets market. Data shows that, in addition to tow size and draft reduction, the number of tows traveling downstream was reduced and began to recover October and November of 2022. Timing of recovery of downstream tow flow corresponds to the timing of drops in spot barge freight. There is a real need for fundamental improvements in infrastructure to improve supply chain resiliency in the face of weather events.
Committee Discussion:
Michael Ricks, Cargill
- Competitive markets are making this situation even more problematic. When we are the price setter, we can move these costs to the eventual end-user, but the U.S. is often not the primary supplier as we see more crops coming out of South America. If we raise our prices, buyers will simply turn to Brazil. This means that our supply chains simply have to absorb these costs, which primarily impacts the farmer.
Buddy Allen, American Cotton Shippers Association
- Infrastructure in our shallow-water port network is critical. We are behind in investment in dredging. Appropriators on the Hill are working on this, but this group needs ot prioritize this issue in advocacy.