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Making derivatives markets work for American agriculture

Heath P. Tarbert
CFTC

America’s farmers and ranchers are at the heart of our rural economy. Yet for the past six years, U.S. agricultural production has faced turbulence.

From natural disasters to low commodity prices, farmers and ranchers are forced to spend considerable time thinking about how to mitigate risk and insulate themselves from potential losses. Farm bill programs and crop insurance are an important part of that equation, but so are the derivatives markets.

As chairman of the Commodity Futures Trading Commission, the regulatory body that oversees our derivatives markets, I am committed to making sure the agricultural sector can rely on futures prices and effectively hedge risk. That was originally — and always will be — the very cornerstone of the Commodity Exchange Act.

One of the CFTC’s core values is clarity. Simply put, markets and their participants deserve regulatory certainty. To that end, at the top of the CFTC’s priority list is bringing certainty to the lingering, thorny issue of position limits.

For nearly a decade, the CFTC has grappled with setting limits on speculative positions in our agricultural and energy futures markets. These limits would cap positions that speculators — but not people with real hedging needs — can take in the futures markets on products such as wheat, corn, soybeans, cotton, and cattle or energy sources like oil and natural gas.

If correctly calibrated, these limits could prevent corners or squeezes, which are nefarious tactics to manipulate the market by intentionally driving up or down prices during the last days of a contract. Position limits also could reduce the likelihood of chaotic price swings created by excessive speculation, or when prices reflect the gamesmanship of traders rather than real supply and demand.

The CFTC’s upcoming position limits proposal incorporates lessons learned from past mistakes. Prior proposals faltered in large part because they did not offer flexibility to the farmers, ranchers and end-users of the products that our futures markets are meant to serve. The new proposal will offer a workable solution that protects our markets while letting those markets serve the drivers of our economy — namely American businesses. This effort is guided by two overriding goals.

First, the proposal is designed to ensure that any market participant with a genuine need to exceed position limits can do so. The exception to the position limits rule is as important as the rule itself. By making what is known as the “bona fide hedge” exemption to position limits flexible, we can ensure that our nation’s farmers and ranchers can continue to do what they do best: feed America and much of the world.

Second, the proposal will leverage the good work done by derivatives exchanges over the past 30 years administering their own position limits. Exchanges interact with market participants daily and understand their hedging strategies. And exchanges can act more quickly, and with less red tape, than the government. Requiring producers to wait while the government makes a decision can mean missing out on real business opportunities. Where we all already agree that a position is a bona fide hedge, the government should not be getting in the way.

In doing my job, I am reminded of President Eisenhower’s maxim that the government’s proper role “is that of partner with the farmer — never his master.” The CFTC will uphold its end of that partnership by ensuring that our derivatives markets continue to work for America’s farmers and ranchers. I look forward to releasing our position limits proposal later this month, and to working with the agricultural community on this rule and other proposals in the months ahead. ❖

— Tarbert is chairman and chief executive of the Commodity Futures Trading Commission. The views expressed in this column are his own and do not necessarily reflect the views of the commission or CFTC staff.


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