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Fighting for the U.S. Cattle Producer

By Staff | Dec 28, 2010

R-CALF USA, along with other members of the Commodity Markets Oversight Coalition (CMOC), consisting of trade groups, faith-based organizations and consumer groups that represent commodity hedgers and commodity end-users, is urging the Commodity Futures Trading Commission (CFTC) to move forward with proposed limits on speculation in the commodity futures market.

The coalition also supports a proposal that would strengthen the CFTC’s market surveillance regime and give CFTC commissioners discretion to act immediately to reduce large, controlling positions in a given commodity.

“We are concerned that speculation though important to provide the cattle futures market with liquidity distorts the cattle futures market when it is excessive, thus harming independent cattle producers who depend on the futures market to hedge their risks,” said R-CALF USA CEO Bill Bullard.

R-CALF USA repeatedly has informed Congress and the CFTC in formal comments and in other correspondence that the cattle futures market has become overly volatile and disassociated with supply and demand fundamentals.

“Rather than to provide true price discovery, the live cattle futures market has become a device that enhances the ability of dominant market participants to manage, if not outright manipulate, both live cattle futures prices and cash cattle prices,” Bullard said.

“Speculators now outnumber hedgers 4-to-1, the opposite of where we were 10 years ago,” said Sean Cota, a coalition member and president of Cota & Cota, a home heating company in northern New England. “When massive speculative money pours in, including from index funds, commodity prices surge.”

Coalition members have long argued that commodity markets were established to serve not speculators but hedgers, who rely on these markets to discover prices for key commodities such as cattle, feed grains and energy, and to hedge against price risks associated with their businesses.

“Speculation is a means to that end, not an end in itself,” Cota said.

In a congressional hearing last week, the coalition called the proposed limits on speculation an important first step and said it would provide the CFTC with suggestions during the comment period on how the rule might be improved and implemented to better protect hedgers and consumers.

The proposal comes as prices for energy and food-related commodities surge to levels not seen since the bubble in 2008, and as the CFTC considers rules to limit speculation as required by Congress under the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act.

Current federal law requires the CFTC to establish speculation limits for energy and metals by Jan. 17, 2011,

and for agricultural commodities by April 17, 2011. The law requires the CFTC to establish limits to prevent excessive speculation as an “undue burden on interstate commerce” and to prevent “sudden or unreasonable fluctuations or unwarranted changes in the price” of commodities.

“We strongly support the new law as well as this new proposal and believe both are necessary to correct the distortions to the cattle futures market created by excessive speculation,” Bullard added. “Limiting speculative positions by index funds and other trading entities that have no specific interest in the underlying commodity and that bear no risk relative to the commodity’s production or consumption must be achieved if the futures market is to achieve its purpose of serving as an effective, economic risk management tool for U.S. cattle producers. In addition, the dominant meatpackers, with an interest in moving the market in a direction favorable to them, must be limited in their ability to engage in excessive speculation.

“We also believe that effective speculative position limits imposed on all feed grain commodities markets would alleviate the transference of market distortions from the feed grains futures market to the cattle futures market,” he concluded.

For more information on the coalition, visit www.nefiactioncenter.com/commoditymarkets.php.

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