Will corn and soybean futures exist two years from now? That's not a prediction. It's merely a question because the ingredients for the grain futures markets to no longer exist are being stirred in the bowl as this is written.
In college I was taught — and still believe — that the function of the futures market was twofold.
First was the one of price discovery and the second was to allow producers and buyers a means of hedging their risk in the market. I am not at all sure that either function works anymore.
FOR THE LAST two years our company has been pounding the drums that the impact of index funds would be a double-edged sword. Farmers loved them as long as they kept pushing prices higher, but as we warned many times, if and when crude oil prices — which made up the majority of the fund assets — turn down, the funds would be forced to sell grain futures in order to keep the funds balanced. That is exactly what has occurred since June this year and now we are paying the price.
When it comes to price discovery, how is it at all possible to have an indication what a commodity is really worth when almost the entire long position is held by speculative index funds? It's not normal buyers buying this market that use it. As a result, the futures market has become one gigantic crap game and the people (farmers) who need to be playing the game the most are in the process of leaving the table.
What can be done? At this stage, I'm not really sure. For those of you in management positions with organizations such as the Corn Growers, Farm Bureau, etc., use every opportunity to let the CFTC know that you are concerned about this problem.
New regulations are not what are needed — we need to enforce the old ones that we've had for a long time. To allow one index fund to be long 1.4 billion bushels of corn on a speculative position when the position limit for speculators is 22 million is totally absurd. We need speculation in markets, but not to this extreme level. We also need markets where the cash and futures converge so that it is a useful tool for today's producers. Just my thoughts.
WHERE DOES THIS LEAVE US?
Some farmers may state that they're happy they can finally get that Chicago Board of Trade shut down. As the old saying goes, “be careful what you wish for.” I am a very strong proponent of the grain futures market because it has allowed farmers to have flexibility in pricing for many years.
If any of you have ever raised commodities where you do not have the flexibility of pricing in the futures and are limited to only two or three potential buyers, chips or potatoes being good examples, you are at the mercy of two or three companies. And the volatility in those markets would make the grain market seem tame.
You could well assume that without the futures market, grain prices being offered to farmers will be lower, not higher.
Richard A. Brock is president of Brock Associates, a farm market advisory firm, and publisher of The Brock Report. For a trial subscription and information on Brock services, call 800-558-3431 or visit www.brockreport.com.