A Chance for Change
July 1, 2011
by Dan Malovany
Standing on the battlements of the commodities pricing war, Hayden Wands faces squarely into the winds of volatility now battering baker and snack food manufacturer alike. Mr. Wands, chairman of the American Bakers Association’s Commodity and Agricultural Policy Committee (CAPC) and director of procurement for Earthgrains Baking Companies, Downers Grove, IL, testified before the Senate on investigations regarding how index funds increase volatility and cause convergence problems in the wheat market, but that’s only been a part of his volunteer job working as chairman of one of the association’s newest committees.
Mr. Wands and CAPC, which was formed just two years ago replacing the previous Commodity Task Force that was started as an ad hoc group in 1986, have been monitoring how opportunistic speculators affect wheat markets, how institutional users alter wheat prices and how Congress and the federal government can provide relief to the entire industry on this crucial issue.
This interview with Mr. Wands launches a new, exclusive series from Baking & Snack
magazine on how ABA’s key committees affect their members’ bottom lines and why more bakers should become involved in these efforts to control their destiny on a wide variety of critical issues. Baking & Snack: In the short run, what is CAPC’s top priority for this year? Hayden Wands
: The committee’s top priority is addressing market volatility, with sugar reform running a close second. This year, we will also begin preparing for the 2012 Farm Bill that will encompass the conservation reserve program, sugar policy, nutrition programs and the future of agricultural research. Realistically, what are the chances of accomplishing meaningful change that will help stabilize or reduce volatility in commodity prices?
The chances are higher than in the recent past, although there is still a lot of work yet to do. With the continued volatility in the wheat market, as well as the continued problems with the larger and more visible energy markets, regulators and members of Congress will continue to call for actions to limit the abilities of index funds and speculators to impact the markets. Did passage of financial regulatory reform in 2010 improve the chances of placing limits in the futures market through the US Commodity Futures Trading Commission (CFTC)? Why or why not?
Yes. CFTC, per the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, must move forward with new position limit regulations impacting the over-the-counter (OTC) and futures markets by the end of June 2011. While this bill mandates such limits, the wheat futures market already operates under certain contract limits, and unless index funds are either defined as speculators or have their hedge exemptions removed, this rule will not have the desired impact in the wheat market. Currently, index funds are categorized as commercial hedgers, similar to bakers and wheat producers, through being granted hedge exceptions from contract limits by CFTC in the past. How would CFTC regulations affect index funds in the wheat markets? What other groups support ABA’s efforts in this segment of the market?
ABA believes that CFTC should:
• Implement contract limits on all index funds operating within the wheat futures markets
• Maintain existing limits at the current level
• Remove existing hedge exemptions that index funds erroneously receive due to misclassification.
Implementing these regulations would reduce volatility in the commodities market through removing the massive positions of the index funds. No other grain chain organization has a position similar to ABA on this issue. Other farm groups have spoken out against funds in the market, but there is no formal coalition focusing solely on issues within the wheat market. Additionally, what can be done to set margin requirements to keep hedge funds and other speculators from manipulating the market? What are the chances of excluding commercial end users from these margin requirements?
Altering margin requirements does not address the core issue. Today’s increased volatility requires commercial end users such as bakers to shift more of their financial assets toward margin requirements and away from improving/upgrading their businesses. Increased margin requirements on index funds would not dissuade them from remaining in the agricultural futures markets. What conditions would make the wheat market less interesting to big-fund investors? Why?
Consistently large crops, both in the US and the world, flat to declining world demand for food and energy, no extreme weather incidences around the globe and the lack of geo-political uprisings — but we will witness none of these dampening conditions in the foreseeable future. Normal weather, demand and supply conditions would bring normalcy to the marketplace. How much volatility is actually caused by index funds, hedge funds and other groups that are not actual commercial end users like the baking industry?
By their mere presence in the wheat markets, the index funds, or “massive passives,” treat these markets as an asset class, rarely reducing their length regardless of the price movement. Sequestering that large amount of the open interest causes extreme volatility in the balance of the freely traded open interest. With the current discussions on reducing federal spending, what are the realistic chances of getting meaningful reform — or even the elimination — of the current sugar program?
With the influx of new members of Congress being elected because of promises to reduce the size and spending of government, ABA believes the chances of reforming the sugar program to make it much more consumer- and baker-friendly are better than they have been in many years.
Even though the sugar program technically is a no-cost government program (i.e., no subsidies or direct payments to sugar growers), the cost impact of the program on consumers and bakers is dramatic — more than $4 billion dollars a year. This cost argument resonates with the current Congress, and ABA believes that the House and Senate Agricultural Committees will have to reform the current sugar program in the next farm bill to ensure its final passage. What other agriculture or commodity subsidy programs might come under the knife because of deficit-reducing budgetary proposals?
The Conservation Reserve Program (CRP) may be further reduced. In 2008, CRP was reduced from 39 million acres to 32 million acres. CRP costs billions to operate each year, and Rep. Frank Lucas (R-OK), chairman of the House Agricultural Committee, has already mentioned that CRP may be put on the chopping block to reduce expenditures in the next farm bill. What are the chances of getting the government to open up non-environmentally sensitive acreage that’s currently protected by CRP?
Chances are slim under the Obama Administration, although some acreage will be opened up to allow grazing. This being said, acreage within CRP may be further reduced in the next farm bill due to budget constraints.