Nontraditional market participants are finding their way in the "commercial" category of the Commodity Futures Trade Commission's weekly "commitments of traders report." The National Grain and Feed Association is calling for a separate category for futures marketing activity of fund traders, swap dealers and other "non-commercial interests" in CFTC's weekly reports.
Currently, part of the volume of futures market activity of nontraditional participants is imbedded in the "commercial" category of the report, but market users have no way of knowing how much. Traditionally, the "commercial" category has reported the activity generated by grain elevators, processors and other commercial users that use futures markets to hedge price risk.
The NGFA notes that total open interest - the total number of futures contracts that have not been liquidated by an offsetting transaction or fulfilled by delivery during the delivery month - of Chicago Board of Trade wheat futures represented nearly 105% of the size of the U.S. wheat crop in early 2006. By comparison, open interest never exceeded 40% - and rarely exceeded 30% - of U.S. wheat production from 1995-2004, the NGFA notes.
The NGFA says open interest volume over the last two years has increased by 130% for corn, 92% for soybeans and a staggering 219% for wheat.
"For some time, the rising open interest on the long side of commercial positions has been misinterpreted as being related to export activity and end-user buying," notes NGFA Risk Management Committee Chairman Rod Clark, general manager of CGB Diversified Services, Mount Vernon, Ind. "Most of the marketplace has had little access to this information, and many traders were unaware of this 'nontraditional' hedging until this issue came to light. Even now, the scope can only be estimated and inferred by much of the market."
The association said the current lack of transparency over which segment is influencing futures price movements can lead to faulty and uneconomic business decisions. For instance, the NGFA said that grain elevator managers who mistakenly assume a futures flat price rally is being driven by increased demand may underestimate commercial storage requirements or make faulty basis or logistics decisions. Meanwhile, producers may miss sales opportunities, incur increased basis risk or, in the case of the current wheat futures market, be misled to believe the market is signaling a need for more acres to be planted to wheat.
If the CFTC revises its commitment of traders report to better differentiate between futures market activity of commercial versus nontraditional hedgers, the NGFA says, "market participants will use these data to assess whether prices are being driven by hedging in the underlying cash market; by speculative interest that may be shorter term; or by investment interest (generated by funds and swap dealers) that may tend to be longer term….This will be one factor used to determine when decision-makers enter or exit (futures market) positions, when to recommend that others enter or exit, or whether to trade at all."
The NGFA also emphasized that its support in April 2005 for a substantial increase in speculative position limits proposed by the CBOT was predicated upon the CFTC and the exchange reciprocating by providing more detailed information regarding the types of trading activity, including that generated by "non-traditional" hedgers "that were expected to add both tremendous volume and liquidity, as well as increased volatility, to the market." The association said there is "no doubt" that the increased participation in futures markets by nontraditional hedgers "is responsible for a portion - probably a large portion - of the volume growth."
"Publicly available information allows all market users - commercials, farmers, funds and speculators - to better interpret market signals and make appropriate decisions on buying, selling, pricing and hedging," the NGFA concludes.