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Speculation Distorts Cattle Futures Market

23 December 2010

US - R-CALF USA, along with other members of the Commodity Markets Oversight Coalition (CMOC), consisting of trade groups, faith-based organisations and consumer groups that represent commodity hedgers and commodity end-users, are urging the Commodity Futures Trading Commission (CFTC) to move forward with proposed limits on speculation in the commodity futures market.

The coalition also supports a proposal that would strengthen the CFTC’s market surveillance regime and give CFTC commissioners discretion to act immediately to reduce large, controlling positions in a given commodity.

“We are concerned that speculation – though important to provide the cattle futures market with liquidity – distorts the cattle futures market when it is excessive, thus harming independent cattle producers who depend on the futures market to hedge their risks,” said R-CALF USA CEO Bill Bullard.

R-CALF USA repeatedly has informed Congress and the CFTC in formal comments and in other correspondence that the cattle futures market has become overly volatile and disassociated with supply and demand fundamentals.

“Rather than to provide true price discovery, the live cattle futures market has become a device that enhances the ability of dominant market participants to manage, if not outright manipulate, both live cattle futures prices and cash cattle prices,” Mr Bullard said.

“Speculators now outnumber hedgers 4-to-1, the opposite of where we were 10 years ago,” said Sean Cota, a coalition member and president of Cota & Cota, a home heating company in northern New England. “When massive speculative money pours in, including from index funds, commodity prices surge.”

Coalition members have long argued that commodity markets were established to serve not speculators but hedgers, who rely on these markets to discover prices for key commodities such as cattle, feed grains and energy, and to hedge against price risks associated with their businesses.

“Speculation is a means to that end, not an end in itself,” Mr Cota said.

In a congressional hearing last week, the coalition called the proposed limits on speculation an important first step and said it would provide the CFTC with suggestions during the comment period on how the rule might be improved and implemented to better protect hedgers and consumers.

“We also believe that effective speculative position limits imposed on all feed grain commodities markets would alleviate the transference of market distortions from the feed grains futures market to the cattle futures market,” he concluded.

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