Shultz: CME's electronic-only trading has drawbacks for family farmers
The first day of May was a watershed moment for agricultural commodity markets, as it marked the end of live-person pit trading at the Chicago Mercantile Exchange and its subsidiaries, the Chicago Board of Trade, Kansas City Board of Trade and New York Mercantile Exchange.
In March 2020, the trading pits were temporarily closed due to COVID-19. I think we can agree that was a reasonable move; however, these entities have taken that precaution much too far.
While there is one advantage to electronic trading — speed — it also contains drawbacks for family farmers.
Producers are at the mercy of agricultural markets, which are publicly traded. For example, when we negotiate contracts for our calves with a fall delivery date, my feed lot always looks at fat cattle prices on the futures board for spring of the following year. The same feedlot uses the futures board to buy grain that feeds my calves.
I have spoken with commodity brokers in other states and asked their opinions on electronic-only trading. The biggest concern I heard was the lack of a live person between the buyer and seller in the transaction. Currently, fund traders can set their computers with algorithms to constantly buy and sell commodities.
Market dynamics and the rules which govern them have changed over the years. In the 1970s, individual investors were limited to 600 option positions. As time moved forward, the regulations increase to 1,200, then 2,400. Now, an unlimited number of options is the norm. This leads to higher volatility and greater price swings.
The CME is a for-profit company; the more trades conducted, the more revenue for the CME. But, we must keep in mind the market is being moved by people who don’t own any livestock or harvest any grain.
Another problem is the CME Group is nearly a monopoly. There are only two commodity exchanges in the U.S. the CME Group does not own. Atlanta-based Intercontinental Exchange (ICE) specializes in energy markets and the Minneapolis Grain Exchange (MGEX) focuses on grain, but specializes in wheat.
Other U.S. farmer commodities. including livestock and dairy, are only traded with the CME Group. This puts agricultural producers’ financial livelihood in the hands of one company and the rules CME deems profitable for their shareholders. As all agricultural producers have learned, the less competition, the lower farm gate prices become.
If you are a corporation such as General Motors, your stock is traded the same way as commodities. However, GM does not sell pickups and cars through the stock market. They price vehicles at a profit based on their costs.
However, this system does not work the same way for family farms and ranches. It is our production that is sold based on CME prices. Ag producers can ask for a price, but the reality is buyers will look at CME futures prices before making a deal.
I believe it's time for producers to begin talking with their elected officials about the best approaches to protect farmers from abusive markets which allow algorithms to automatically buy and sell commodities at the blink of an eye. I have reached out to both of my senators to help ensure the people who grow food for America’s tables are treated fairly in this new computer-based commodity trading system.
Bruce Shultz is a Vice President for the National Farmers Organization. He can be reached by email at firstname.lastname@example.org.