A new vision for agriculture
momagri, movement for a world agricultural organization, is a think tank chaired by Christian Pèes.
It brings together, managers from the agricultural world and important people from external perspectives,
such as health, development, strategy and defense. Its objective is to promote regulation
of agricultural markets by creating new evaluation tools, such as economic models and indicators,
and by drawing up proposals for an agricultural and international food policy.
A look at the news

The CME Group tackles volatility in the US cattle market

February 15, 2016


Price hyper-volatility remains one of the major concerns of international markets, to the extent that Stanley Fischer, the Fed’s Vice Chair, recently acknowledged that if the situation persists, it could impact US economic growth. For the second-ranking official of the US Federal Reserve System, the extreme market volatility can be partly explained by “growing concerns on the global economic outlook” linked to “the impact of lower oil and commodity prices.” In the United States, the volatility of beef prices, especially on the Chicago futures market, was unparalleled in 2015. The situation has led the National Cattlemen’s Beef Association (NCBA) to address a letter on January 13, 20161 to the Chicago-based CME Group, the world’s largest futures contract operator. In this document, cattle farmers outlined that the recorded price fluctuations made it difficult––or even impossible––to cover risks in futures markets. They feel that the price fluctuations recorded did not match any of the market fundamentals, and are thinking about price manipulation practices.

To address this anxiety-provoking situation, the CME Group recently proposed to limit the number of orders that traders will now place in the beef futures market for the purpose of fighting excessive price volatility. The maximum number of orders to be placed by traders will therefore be made based on volumes actually traded.

In addition, the negotiations on futures contracts will be limited to 4.5 hours per day to increase the portion of operations made by commercial operators. Circuit breakers will also be implemented to block transactions when prices drop unreasonably, and a joint task force between the CME Group and the NCBA will be initiated. According to the CME, these measures will improve the management of cattle prices, and limit the risks of misuse in high-frequency trading markets.

In fact, some practices reported in futures markets could resemble a market abuse, especially when they lead to an artificial and/or abnormal price setting. One of such practices at issue here––spoofing––consists in loading up buying or selling order books, and then withdrawing orders right before they are fulfilled. The goal was to profit from the robot trading operations that are incorporating the data in order books, and thus can lead to excessive fluctuations, which are put to advantageous use by some operators.

Yet while this CME Group initiative is welcomed, it does not seem to be sufficient to tackle the speculative distorting practices in futures markets, and their impact on the instability of agricultural prices. A leading member of the NCBA, Colin Woodall says, “the impact of automatic trading remains unresolved. While markets require liquidities, they must also prove their effectiveness as a risk management tool.” Woodall also states that it is precisely this very function that seems to be missing.

As useful as speculation can be to bring adequate liquidity to cover market risk when it is reasonable, it becomes a destabilizing factor when it becomes excessive. Confronted to a chaotic system marked by endogenous and exogenous uncertainty, uncontrolled speculation can act as an amplifying factor for agricultural price volatility. The implementation of specific regulation measures, the improvement of directives on position limits, or the transparency of operations by financial regulators, are then becoming imperative.


1 The complete text of the letter is available from:
http://www.beefusa.org/CMDocs/BeefUSA/Media/NCBAlettertoCMEreHFT.pdf


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Paris, 13 December 2018