Making the Futures Markets Better

January 31, 2007

At its recent convention in Denver the conference attendees nominated policy statements to be presented to the membership for approval. Among those was one dealing with the commodity futures markets. The proposed policy resolution states:

Whereas R-CALF USA supports all action by Congress or the CFTC (Commodity Futures Trading Commission) that would improve the futures markets, therefore be it resolved that R-CALF USA support action that

1. Provide the greatest transparency possible.
2. Address the causes of volatility in the market unrelated to the underlying commodity fundamentals.
3. Establish the pre-eminence of the original purpose of the markets as a risk transfer device for producers and users.

Admittedly, there may be other items added to the list. However this list presents issues that should be agreeable to nearly all participants in the futures markets. Transparency is always desirable in any market. It gives assistance to regulatory enforcement and helps counteract informational asymmetry.

Market volatility unrelated to the underlying fundamentals involves markets where the speculative component of the market is too large. Market moves end up being based on decision by technical chart watchers. That divorces the futures price from the commodity itself, leading to a fluctuating basis where the current month futures prices can widely differ from the current cash price. This situation is detrimental to true hedgers.

Whatever the decision to improve the futures markets, they should be guided by the reminder that these markets were developed in the first place to help producers and users of commodities. When for any reason that purpose is diminished then the futures become something their creators never intended them to be.

We support this proposed resolution and expect that it will pass muster with the R-CALF membership. Regardless, these principles make perfect common sense and should guide Congress and the CFTC in their decisions.