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Musings On The True Reason For The CME's Increase In Daily Corn Trading Limits

Tyler Durden's picture




 

With stock volatility having morphed over the past year to FX and commodities, along the lines of what had been expected, some of those trading various ags (and other commodities) have had to literally suffer through days of gutwrenching market halts when a given product hits its daily limit for the day. And over the past two months it has been a veritable limit-a-palooza. Which is why we were not surprised to learn that having appreciated the severity of this artificial "limit" rule, the CME is now considering its revision. From Reuters: "The CME Group Inc is considering widening the daily trading limit in Chicago Board of Trade corn futures to 50 cents per bushel, from the current 30 cents, a spokesman for the exchange said Tuesday...The exchange last expanded the daily limit in corn in March 2008, to 30 cents from 20 cents. At that time, front-month CBOT corn futures <Cc1> were trading at $5.60 a bushel and were on their way to a then-record high of $7.65 in June 2008." And since, pretty soon the new, wider range will likely be filled on a daily basis when the market goes all bid or offered, we expect the CME to do away with position limits entirely: a progression diametrically opposed to what the SEC is doing to halt market crashes in regular equity markets. It is almost as if the CME is inviting more volatility into a market (where the exchange makes the bulk of its money based on daily traded vol). But is there more here than meets the eye?

From Reuters:

That peak price was surpassed this month as front-month corn reached $7.83-3/4 on concerns about extremely tight supplies. The U.S. corn supply is forecast to drop to 675 million bushels by Aug. 31, the smallest amount measured as a percentage of usage since the 1930s.

Once a futures contract rises or falls by the daily limit and stays there, trading stops. At that point, the only way to trade the market is through options, in moves that create synthetic futures positions.

In 2008, the move to widen the daily limits for grains followed several consecutive days of limit-up or limit-down moves, fueled by tightening global grain supplies and rising speculative interest in commodities.

Now, analysts said CME wants to head off that scenario. They said the exchange appears to be preparing for more volatility as the growing season for the next U.S. corn crop unfolds.

Preparing? Or Welcoming? And how long until the CME launches limit knock out derivatives? After all, why let a possible bet go to waste?

"I'd say they are trying to be a little proactive, looking at the potential for some volatile trade if we were to have a drought situation develop or something like that," Prudential Bache Commodities analyst Shawn McCambridge said.

"It is more orderly to allow the market to trade and discover the price, rather that go limit the first thing in the morning," McCambridge said.

With tightening stocks of old-crop corn, the futures market has been even more sensitive than usual to weather threats that could reduce yields in the U.S. Corn Belt. Planting is already behind schedule due to wet conditions in much of the Midwest.

Nevertheless, higher daily limits could pose a challenge for grain elevators and other commercial grain users that hedge their inventories by selling corn futures to offset the risk of falling cash prices.

These players could face higher margin calls if a spike in the market, compounded by a wider daily limit, caused a loss in their short futures position.

"The limits they have now seem to be working, and I think going to 50 cents would be a mistake," said Harry Bormann, grain team leader with MaxYield Cooperative in West Bend, Iowa.

"Higher limits mean we have to margin more.... It's going to be a cost to us," Bormann said.

Ah, and there you have it: by inviting not only more vol (read bottom line for the business) but more margin, the CME is exposing speculators to far greater impacts from margin hikes (and drops). Which of course means a far great capacity and ability to kill any commodity rally dead in its tracks. Because if current margin hikes are failing, a topic exposed previously on Zero Hedge, the CME has realized it will certainly need a bigger mousetrap, and far greater visions of overnight fame and fortune.

Expect to see this move followed in all other major commodities.

 

 

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Tue, 04/26/2011 - 17:58 | 1209322 the mad hatter
the mad hatter's picture

what a corny reason

Tue, 04/26/2011 - 19:30 | 1209588 disabledvet
disabledvet's picture

for a corny season no less.

Wed, 04/27/2011 - 00:33 | 1210224 Dr. Porkchop
Dr. Porkchop's picture

Too much corn in the hole and it's your ass.

Tue, 04/26/2011 - 19:37 | 1209606 SheepDog-One
SheepDog-One's picture

And of course margin limits are NEVER considered for equities. Or bonds. Thats all done behind the curtain and shall not be infringed upon.

Tue, 04/26/2011 - 21:20 | 1209831 bigelkhorn
bigelkhorn's picture

commodities went a bit silly today, but i think 1400 On The S&P Coming? 

Tue, 04/26/2011 - 17:59 | 1209342 America- Some A...
America- Some Assembly Required's picture

We are so fucked. Too bad we can't eat this fiat paper that Burnacountry is showering upon the world.

Tue, 04/26/2011 - 20:20 | 1209718 JPDG
JPDG's picture

Cornbread, bitchez! 

Wed, 04/27/2011 - 03:57 | 1210392 Sudden Debt
Sudden Debt's picture

If only he printed the dollar on rise paper...

 

Tue, 04/26/2011 - 18:02 | 1209347 SilverDoctors
SilverDoctors's picture

APMEX Now Out of Silver Eagles AND MAPLES, Until May 27th!

http://silverdoctors.blogspot.com/2011/04/apmex-now-sold-out-of-silver-e...

Tue, 04/26/2011 - 18:58 | 1209511 Long-John-Silver
Long-John-Silver's picture

Earlier today when I BTFD the only product Apmex had for immediate delivery was the Scratch and Dent Industrial Silver. I bought all of it. Everything else depended on delivery in the future. No thank you. It could be weeks, months, or delivery not possible.

Tue, 04/26/2011 - 19:13 | 1209544 tmosley
tmosley's picture

I assume you mean in the 1oz denomination, because they've got plenty of 5oz and larger stuff (no COMEX bars, though), most for immediate delivery.

Tue, 04/26/2011 - 19:17 | 1209551 hambone
hambone's picture

I ordered 20 APMEX 5 oz bars last week and they have a tentative ship date as of now of 5/2...not so immediate???  I haven't had a delay like this prior to now.

Tue, 04/26/2011 - 22:27 | 1209990 tmosley
tmosley's picture

Did you pay by personal check?  That takes 10 business days to clear.

Wed, 04/27/2011 - 02:07 | 1210335 hambone
hambone's picture

Yup paid by check (always do) but d-checked and looks like only a couple more days than usual.  Mehhh.

Tue, 04/26/2011 - 19:38 | 1209609 SheepDog-One
SheepDog-One's picture

What a farce longjohnsilver, 'PM's have topped out' yet theres none or only junk available to buy, yet the price drops. These arent markets its an asylum.

Tue, 04/26/2011 - 18:05 | 1209371 gkm
gkm's picture

As I said before on ZH, the next group to be bailed out will be the farmers from their hedges.

Tue, 04/26/2011 - 18:17 | 1209416 mynhair
mynhair's picture

Screw margins, just use real BennieBuks.  They come free with each box of Trix.

Tue, 04/26/2011 - 18:23 | 1209417 Dejean Splicer
Dejean Splicer's picture

To da moon baby! And yes you can eat it.

Put some in the ground today.

Tue, 04/26/2011 - 18:22 | 1209419 evrdetermined
evrdetermined's picture

and what is the Zero Hedge position on the Michael Masters opinion of significant speculation in these consumable commodities?  I have been persuaded (in a non-stakeholder kind of way) that financial institutions are the ones pumping capital into futures markets, not farmers.  (to address the comment by gkm)

Tue, 04/26/2011 - 18:32 | 1209430 hambone
hambone's picture

Anybody notice DXY is now taking aim at all time lows - just went through 73.55...not real auspicious

Does this mean we should be looking for another Yen flash crash in near term???

Tue, 04/26/2011 - 18:55 | 1209495 topcallingtroll
topcallingtroll's picture

Maybe go long the dollar and play a temporary bounce?

Tue, 04/26/2011 - 18:59 | 1209514 Long-John-Silver
Long-John-Silver's picture

I think we just had the temporary bounce.

Tue, 04/26/2011 - 21:28 | 1209845 topcallingtroll
topcallingtroll's picture

That was it?

Like my first girlfriend used to say.

Tue, 04/26/2011 - 19:39 | 1209612 SheepDog-One
SheepDog-One's picture

I hadnt noticed hambone, but what a disaster.

Tue, 04/26/2011 - 18:26 | 1209434 Robslob
Robslob's picture

I don't really see your average farmer hedging jack shit...mainly because he is actually working all day?

Money people are evil...because they have no value and know it...

Tue, 04/26/2011 - 18:41 | 1209467 topcallingtroll
topcallingtroll's picture

Your average farmer always hedges. Selling forward and locking in a.guaranteed price requires derivatives, the spawn of satan but a farmer's lifeline.

Tue, 04/26/2011 - 20:16 | 1209711 TheDriver
TheDriver's picture

Farming and hedging have gone hand in hand for centuries. It was one of the (many) sources of Jefferson's debts.

Tue, 04/26/2011 - 18:27 | 1209440 max2205
max2205's picture

Limits should be done away with but taxed like crazy

Tue, 04/26/2011 - 18:32 | 1209442 buzzsaw99
buzzsaw99's picture

the manipulation will continue until confidence is restored.

Tue, 04/26/2011 - 19:29 | 1209591 disabledvet
disabledvet's picture

indeed.

Tue, 04/26/2011 - 19:40 | 1209616 SheepDog-One
SheepDog-One's picture

The beatings will continue until morale improves and worship is directed towards the ChairSatan.

Tue, 04/26/2011 - 19:52 | 1209649 KickIce
KickIce's picture

or until there are actual shortages.

Tue, 04/26/2011 - 18:36 | 1209454 Sutton
Sutton's picture

No limits on Coffee and Sugar futures.

Man up grain boys

Tue, 04/26/2011 - 18:43 | 1209472 topcallingtroll
topcallingtroll's picture

Grain and orange juice boys are girlymen.

Tue, 04/26/2011 - 19:30 | 1209593 disabledvet
disabledvet's picture

absolutely not.  but as a man still looking for a free market "this is a good start."  surprising, actually.  of course "it will result in an immediate increase in price."

Tue, 04/26/2011 - 18:44 | 1209470 scratch_and_sniff
scratch_and_sniff's picture

Huge run on euro stops there, shorted 1.4705...off to bed, wake me when im rich.

Tue, 04/26/2011 - 18:50 | 1209488 topcallingtroll
topcallingtroll's picture

Good call i hope.

I am just dollar, vde, and ewz in my spec money.
I am looking for a breather cuz i dont know what to do now.
Oh yeah...still own BIDU that i documented buying at 145 ish a while back. But i did that just to piss off mosely and sheepdog.

Hell. Maybe its time to quit speculating, put it into a diversified mutual fund and just hang out with my harem.

Tue, 04/26/2011 - 19:31 | 1209597 disabledvet
disabledvet's picture

well there is that speculative play called "General Electric."  By all means "go hog wild on that dog" if you wish.

Tue, 04/26/2011 - 18:48 | 1209480 bob_dabolina
bob_dabolina's picture

Can someone just raise my taxes already?

Tue, 04/26/2011 - 18:49 | 1209482 SWCroaker
SWCroaker's picture

Jeez, if you are going to have any sort of limit, at least instantiate it as a percentage change, that way the limit automatically keeps track with inflation, which is kind of the root cause of the problem, isn't it...

Tue, 04/26/2011 - 18:58 | 1209507 topcallingtroll
topcallingtroll's picture

If limits and margins were rational and predictable they couldnt be used to benefit insiders.

Tue, 04/26/2011 - 19:36 | 1209603 disabledvet
disabledvet's picture

And Gary Gensler is a "free market conservative."  The squid incarnate.

Tue, 04/26/2011 - 19:10 | 1209542 Racer
Racer's picture

All this banksters, supermarkets, ebaying, it all a middle corporation suck the  profits from both sides con to get them to shake hands

They have become too greedy, I am seeing every day that people are not taking part in money transfer as in do something for me and I will do something for you.. or I will give free stuff so I can get free stuff

Society is undergoing a VERY radical shift and it would not have happened if the chairsatan just didn't just gone an got greedy about how gud he wus... he jus got stoopider

Tue, 04/26/2011 - 19:33 | 1209595 lolmao500
lolmao500's picture

In other news, the dollar is sinking. 73.60!

Tue, 04/26/2011 - 19:34 | 1209604 hambone
hambone's picture

low so far of 73.48...funny dollar would tumble absent QE3???

Tue, 04/26/2011 - 19:47 | 1209642 lolmao500
lolmao500's picture

Or insider trading saying that Ben will announce QE3?

Tue, 04/26/2011 - 20:22 | 1209719 Bear
Bear's picture

All risk assest 'drift up' before announcements ... the bulls are afraid they will miss the big announcement move and this is the biggest announcement of them all

Tue, 04/26/2011 - 19:48 | 1209636 bob_dabolina
bob_dabolina's picture

just....wow

Tue, 04/26/2011 - 19:48 | 1209644 youALREADYknow
youALREADYknow's picture

Shouldn't the best trade in the market then be to simply buy front (or next) month deep OTM calls since the probability of the price reaching extreme levels goes up with trading limits increasing?

I'd imagine the implied volatility would spike on those options if such a decision were made which makes the options price appreciate accordingly. If IV doesn't actually spike, then you technically just bought an undervalued option and it was still a wise decision to make.

Tue, 04/26/2011 - 20:10 | 1209700 Josh Randall
Josh Randall's picture

Cotton, Corn, Silver - this is how the West was won originally and may be again - Go Long Boys!

Tue, 04/26/2011 - 20:40 | 1209748 bigdawg
bigdawg's picture

Daily Limits Suck.  If you don't have daily limits you can ALWAYS get out of the trade.  The limits themselves increase volatility.

Tue, 04/26/2011 - 21:11 | 1209803 AC_Doctor
AC_Doctor's picture

Mmmmm, does this include genetically modified organism corn too?

Eat shit CRIMEX, your toast by July!

Wed, 04/27/2011 - 07:05 | 1210621 Hephasteus
Hephasteus's picture

http://en.wikipedia.org/wiki/London_Gold_Pool

Scroll down to collapse and read from there.

 

Tue, 04/26/2011 - 22:24 | 1209984 Iam_Silverman
Iam_Silverman's picture

It's all a conspiracy, man.  Ever notice how corn is golden and, and.....

Oh, never mind.  GATA wouldn't listen either!

Tue, 04/26/2011 - 23:02 | 1210085 oldmanagain
oldmanagain's picture

I remember ten cent limits and a Labor Day frost.  Couldn't get out for many days even tho limits were changed every few days.  You need the limits not be too small or the resulting pile of back orders just gets worse rather than the pressure getting relieved.  It took weeks.

Currently, supplies are tight and weather can delay plantings which just started. Delayed plantings mean the corn tassels in hotter weather than normal and could be hurt, and, or is vernable to an early frost later.  A late start would mean volatility thru out the growing season.  If the margin is fifty cents then traders can plan for this risk which is much better for their own good.  There has to be enough money in the game or the game can collapse, banks, firms, the trade and the spec.

We have just witnessed the last few years what happens when markets are not funded to cope with the risk involved.  There is a question of course if these were really markets but scams.  No  question about corn however, it is a regulated market and has survived many a calamity.  It is proof it can work.

One should not complain about the margin.  Without it, your winning trade would result in you not being paid.  If you lost, it probably made you take a smaller position, so you are better off.

 

Wed, 04/27/2011 - 00:43 | 1210243 Dan The Man
Dan The Man's picture

 

sounds bullish

Wed, 04/27/2011 - 01:18 | 1210276 LudwigVon
LudwigVon's picture

Excellence, ty Tyler

I love the AG & CDS articles, they are a nice way to diversify out of PM articles :D

Wed, 04/27/2011 - 01:31 | 1210296 mccoyspace
mccoyspace's picture

Hey, no problem. The TBTF people can cover higher margin requirements just fine. As for groups like the MaxYield Cooperative in West Bend, Iowa -- tough luck.

And what do they mean exactly by a 'cooperative' anyway? sounds like socialism.

 

/sarc off

 

Wed, 04/27/2011 - 16:12 | 1213338 suckerfishzilla
suckerfishzilla's picture

I don't eat corn. 

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