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Musings On The True Reason For The CME's Increase In Daily Corn Trading Limits
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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what a corny reason
for a corny season no less.
Too much corn in the hole and it's your ass.
And of course margin limits are NEVER considered for equities. Or bonds. Thats all done behind the curtain and shall not be infringed upon.
commodities went a bit silly today, but i think 1400 On The S&P Coming? http://bit.ly/gOBvRc
We are so fucked. Too bad we can't eat this fiat paper that Burnacountry is showering upon the world.
Cornbread, bitchez!
If only he printed the dollar on rise paper...
APMEX Now Out of Silver Eagles AND MAPLES, Until May 27th!
http://silverdoctors.blogspot.com/2011/04/apmex-now-sold-out-of-silver-e...
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.
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.
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.
Did you pay by personal check? That takes 10 business days to clear.
Yup paid by check (always do) but d-checked and looks like only a couple more days than usual. Mehhh.
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.
As I said before on ZH, the next group to be bailed out will be the farmers from their hedges.
Screw margins, just use real BennieBuks. They come free with each box of Trix.
To da moon baby! And yes you can eat it.
Put some in the ground today.
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)
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???
Maybe go long the dollar and play a temporary bounce?
I think we just had the temporary bounce.
That was it?
Like my first girlfriend used to say.
I hadnt noticed hambone, but what a disaster.
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...
Your average farmer always hedges. Selling forward and locking in a.guaranteed price requires derivatives, the spawn of satan but a farmer's lifeline.
Farming and hedging have gone hand in hand for centuries. It was one of the (many) sources of Jefferson's debts.
Limits should be done away with but taxed like crazy
the manipulation will continue until confidence is restored.
indeed.
The beatings will continue until morale improves and worship is directed towards the ChairSatan.
or until there are actual shortages.
No limits on Coffee and Sugar futures.
Man up grain boys
Grain and orange juice boys are girlymen.
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."
Huge run on euro stops there, shorted 1.4705...off to bed, wake me when im rich.
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.
well there is that speculative play called "General Electric." By all means "go hog wild on that dog" if you wish.
Can someone just raise my taxes already?
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...
If limits and margins were rational and predictable they couldnt be used to benefit insiders.
And Gary Gensler is a "free market conservative." The squid incarnate.
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
In other news, the dollar is sinking. 73.60!
low so far of 73.48...funny dollar would tumble absent QE3???
Or insider trading saying that Ben will announce QE3?
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
just....wow
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.
Cotton, Corn, Silver - this is how the West was won originally and may be again - Go Long Boys!
Daily Limits Suck. If you don't have daily limits you can ALWAYS get out of the trade. The limits themselves increase volatility.
Mmmmm, does this include genetically modified organism corn too?
Eat shit CRIMEX, your toast by July!
http://en.wikipedia.org/wiki/London_Gold_Pool
Scroll down to collapse and read from there.
It's all a conspiracy, man. Ever notice how corn is golden and, and.....
Oh, never mind. GATA wouldn't listen either!
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.
sounds bullish
Excellence, ty Tyler
I love the AG & CDS articles, they are a nice way to diversify out of PM articles :D
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
I don't eat corn.