Monday, August 10, 2009

CFTC focus should be on more than energy complex

The focus of much of the CTFC discussions has been the energy markets and position limits but the users and market mechanics of other commodities could be as or more important. Speculative traders who are associated with commodity indices can have an impact on prices from their long-only activity. The wheat contract can be a case in point where we are not seeing convergence of the futures with cash. See: Pressure builds to fix broken CBOT wheat contract.

http://www.forbes.com/feeds/reuters/2009/08/07/2009-08-07T181257Z_01_N07404627_RTRIDST_0_WHEAT-CONVERGENCE-ANALYSIS-REPEAT.html

There are a number of reason for the lack of wheat convergence. Perhaps the most important is the delivery point problem that is caused by the changes in marketing and exporting of grains. Chicago is just not that important for the delivery process of wheat. The CBOT has to make adjustments. The work of Scott Irwin from the University of Illinois is always even-handed and thoughtful on these matters. The lack of convergence is also diminished because of the mix of long and shorts which can be a regulatory issue. Both of these have to be addressed soon in order to have a better working futures market.

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