What Lies Behind the CFTC's Revocation of Exemptions in Agriculture Position Limits?

Last week, many analysts that were looking for some clue as to whether the CFTC will establish reasonable position limits in gold/silver futures markets and additionally not grant bullion banks (i.e. HSBC (HBC) and JP Morgan (JPM)) exemptions to these position limits in the near future were encouraged by the below CFTC press release.

Washington, DC – The U.S. Commodity Futures Trading Commission today announced that it is withdrawing two no-action letters that provided relief from federal agricultural speculative positions limits set forth in CFTC regulations (17 C.F.R §150.2). “I believe that position limits should be consistently applied and vigorously enforced,” CFTC Chairman Gary Gensler said. “Position limits promote market integrity by guarding against concentrated positions.” In CFTC Letter 06-09 (May 5, 2006), the agency’s Division of Market Oversight (DMO) granted no-action relief to DB Commodity Services LLC, a commodity pool operator (CPO) and commodity trading advisor (CTA), permitting the DB Commodity Index Tracking Master Fund to take positions in corn and wheat futures that exceed federal speculative position limits set forth in CFTC Regulation 150.2. Subsequently, in CFTC Letter 06-19 (September 6, 2006), DMO granted similar no-action relief to a CPO/CTA employing a proprietary commodity investment strategy that includes positions in Chicago Board of Trade corn, soybeans and wheat futures contracts. Among other things, DMO’s no-action position in both cases stated that any change in circumstances or conditions could result in a different conclusion. DMO has previously stated that the trading strategies employed by these entities would not qualify for a bona fide hedge exemption under the Commission’s regulations. DMO will work with each of these entities as they transition to positions within current federal speculative limits. The withdrawal of these no-action positions is very specific and limited and does not affect any other no-action or regulatory positions taken by the CFTC or its staff with regard to these entities or other market participants.

However, in my estimation, there is absolutely no indication in the above press release, as some gold/silver analysts extrapolated, that the CFTC intends to truly restore honesty and integrity to the gold/silver futures markets. Remember, Gary Gensler is a company man, having spent 18 years at Goldman Sachs (GS).

Furthermore, during Gensler’s nomination process, Senator Bernie Sanders attempted to block Gensler from becoming the CFTC commissioner, because in his words, Gensler “had worked with Senator Phil Gramm and [former US Federal Reserve Chairman] Alan Greenspan to exempt credit default swaps from regulation, which led to the collapse of AIG and has resulted in the largest taxpayer bailout in US history.” Sanders also disliked Gensler because of Gensler’s support of the Gramm-Leach-Bliley Act, which destroyed many of the important financial regulations that were enacted to protect American citizens from the financial crisis that has manifested itself today. So is it really logical to assume that a person that has always catered to the interests of big banks at the expense of a nation’s best interest would all of a sudden change his allegiances towards that of the everyday man and woman? Excuse me for remaining skeptical of Gensler’s motives, but skeptical I am.

Here is my take on what the position limits Gensler imposed on wheat, corn, and soybeans are really about, and why commodity ETFs that focus on these particular commodities (PowerShares DBA, for example) will temporarily flounder. Today, according to the United Nations, more than 1 out of every 7 people in the world go to bed hungry due to rising food prices. The largest contributor to rising food prices is Central Banks’ monetary policy of devaluation of currencies worldwide. In turn, this has spurred food riots in 30 different countries.

Last week, I thought of the travesty of the headline “We Saved the World,” a claim made by US Federal Reserve Chairman Ben Bernanke at the Jackson Hole, Wyoming banking symposium of global Central Bankers. Bernanke and his cartel of international bankers definitely did not save the world. All they did was take money from citizens and give it to big banks to help them reinflate their balance sheets. In turn, as the financial sector normally leads a general stock market index higher, they succeeded in inflating stock markets in the face of horrendous economic fundamentals.

However, let’s make it clear that this action was more comparable to “fooling the world” rather than “saving it.” When this inflated stock market bubble bursts as it surely will at some point in the future, whether China bursts first and drags down the world or the US markets burst first, then people will understand Bernanke’s and all Central Bankers’ duplicity. To buttress my point, I will merely post the below chart.

Furthermore, at least 3.5 billion people would beg to differ with Helicopter Ben that he has “saved” them as evidenced by the video below that relays the story of food riots in 30 countries and food emergencies in 40 countries.

Still, the problem in developed countries like the UK, Spain, and the United States is just a fraction of what it is in the developing world. Earlier this year, in Egypt, a woman relayed the story of hungry kids that beat her husband to death not to rob him of his money, but to steal only the loaves of bread he was carrying (to view more videos of the endemic global problem of soaring food prices, please follow this link). This is the problem that developed countries fear, and this is what is more than likely behind the CFTC and Chairman Gary Gensler’s decision to actively curb the prices of certain agricultural commodities, not a desire to return honesty and free market forces to commodity markets. Will it work? Sure in the short-term, this tactic may be successful in depressing food prices; however, long-term, the actions of Central Banks to devalue currencies will certainly greatly contribute to the continuation of rising food prices.

This tactic is consistent, however, with the short-sightedness and the desire to delay the inevitable growing crisis that has driven every single decision of the international banking cartel of which I still view Gensler as a member. If honesty were the mission of Gensler’s goals, then why should he act so swiftly with agricultural commodities but drag his feet on establishing and enforcing position limits in the gold and silver markets that are comparable to the position limits that exist for agricultural commodities (with no exemptions for HSBC, JP Morgan or any other bullion bank)? When it comes to actions of company men, I have learned that there is always an ulterior motive and an alternative explanation to the surface level explanations provided to the public through press releases.

And as a former Goldman Sachs man, Gensler’s actions to proactively curb the price of agricultural commodities was likely coordinated with Goldman Sachs. If one observes the component weightings of the GSCI (Goldman Sachs Commodity Index), the weightings the index had assigned to wheat, corn, and soybeans (the three components Gensler revoked position exemptions for) were respectively 5.08%, 4.83%, and 3.42% this past January. In May, the weightings for these three commodities were still relatively strong at 4.32%, 4.21%, and 3.30%. However from May to July, the weighting for wheat absolutely plummeted by 28% to 3.11%, the weighting for corn plunged by a whopping 33% to 2.93% and the weighting for soybeans plummeted by 26% to 2.43%, all huge decreases from their respective weightings in January of 5.08%, 4.83%, and 3.42%. On the other hand, the GSCI weighting for sugar increased from 2.11% to 2.49% from January to July 2009 so expect sugar prices to rise.

Soaring food prices were beginning to be a problem not only in poor countries (a problem the international banking cartel of Central Bankers can ignore as evidence by Ben Bernanke’s claim of saving the world) but also in the US this year (a problem the international banking cartel can NOT ignore). A hungry man is indeed an angry man as the late great Bob Marley sang in his seminal song “Them Belly Full”:

Cost of livin’ gets so high,
Rich and poor they start to cry:
Now the weak must get strong;
They say, “Oh, what a tribulation!”
Them belly full, but we hungry;
A hungry mob is a angry mob.
A rain is fall, but the dirt it tough;
A pot is cook, but the food no ‘nough.

In the end, the fear of food riots spreading from developing countries to developed countries is truly what I believe spurred Gensler’s decision to revoke exemption limits in corn, wheat and soybeans. The international banker’s greatest fear is the angry educated who ask hard-hitting questions. This situation was undoubtedly brewing in developed countries, and while this problem is already full blown in many poor nations and can conveniently be ignored by Central Bankers with inflated egos that believe they saved the world even as billions go hungry due to the effects of their monetary policies, it cannot be ignored in developed countries. If angry mobs formed in developing countries due to the people’s inability to afford food, the true roots of this economic crisis may come to light. And this is a scenario that Central Banks and their regulators do not want.

Comments

[socrateazz:]

I believe current attempts to lower food prices will probably have the opposite result because too many farmers are already in such a marginal position that they may go out of business. Corporate farms may save the day. New farmers are not as likely to because new farmers tend to make some mistakes and there is not much forgiveness for such. Also, the capital investment in farming is great, Where does it come from? Fertility of the land will need to be replaced. Where will it come from? At what cost? Food will not get cheaper long term because needed nutrients will need to be replaced or production will reduce. The choice has been made. And I expect the government may act even stupider long term to make things better for the next few days. Will the folley subside? Only after trying to force changes which really just makes things worse. I believe a little hunger will become widespread starvation before realization that an economy needs to really be balanced and not controled by the ignorant short term policies. Especially ones that cause less incentive to produce. The future is what will be. Hope is an expectation things willl change without making the changes needed to accomplish such. Will they?

Aug 25 08:50 AM

[Moto:]

Pulling a news clip from April 2008. Where's the integrity in that? Also that 1 out of 7 hungry people sounds like the same number the UN has been using for decades. We shouldn't trust our financial institutions and end the Fed. How about ending the UN.

Aug 25 09:16 AM

[je:]

Socrateazz is on the right track.

I have said for so,me time now that farms are next. Our leaders have methodically taken over housing, banking, autos, and airlines are there for the taking. So farms are next. When the price is low enough, directly or indirectly Goldman, JP Morgan or other vermin will take over the newly equipped farms.
Price and wage controls are not far off making plenty of room for the government to profit on export tax from grains.

This is a crisis of design.

Aug 25 09:25 AM

[Leftfield:]

You nailed it. Thanks for looking into GS positions vs. agricultural commodities and how that, surprise, ties in with Gensler's selective policies. They're "fooling the world" which they and their lapdog media characterize as "saving" the world.
Increasing food riots would be inconvenient. They need a continued docile public. There's much to be done.

Aug 25 09:32 AM

[Davinci:]

Thanks, I could not figure out what Gary was up to. I knew he was not trying to create honest markets I just could not figure out his angle. Ted Butler is a good silver and gold analyst and knows why they are manipulated however, Ted only sees best intentions in everyone until those intentions are clear.

This ability to see the good in all government actions until they turn bad will help him if he transitions to mainstream media, however his positive attitude brings irrational enthusiasm to the silver market in a world where the central bankers manage markets.

Personally I rather see the truth than believe in a hopeful lie.

I would like your take on the bank holiday non-sense going around the internet.

Aug 25 10:11 AM

[dieuwer:]

Perhaps one should look at GSC, the commodity ETN of Goldman-Sachs himself. You can bet that this ETN will be last one standing when all other commoditiy ETNs/ETFs are destroyed by Gary G.

Aug 25 12:56 PM

[Genesis:]

I agree with the other commenter that you should have provided the date of the news clip. It is difficult to find the date otherwise. It forces us to go to YouTube. What's so difficult about saying they may still have in mind what happened one and a half years ago? Give us the context.

Aug 25 02:40 PM

[PVizzle:]

I liked the article but I found the clip misleading because of the date.

Aug 25 03:12 PM

[Ben Banana:]

What is the use of those position limits anyway? As the oversized ETF will trade above net asset value, investors should sell and put their money in smaller, probably newly introduced, ETFs that do the same thing.
Also, by althering investment strategy in case of rolls and potentially including foreign exchanges a lot of the pain should be removed.
Also, it is clear that bigger investors should switch to the futures market anyway. Okay, they have to roll themselves, but it is an illusion to think that the roll problem does not exists in the ETFs.

Then a word on the underlying demand. It is fully legitimate that I, as the average John Doe want to safeguard my lifetime commodity consumption at today's prices. It is prudent and probably a smart thing to consider. Preventing this exposes people to future shortages and could cost them dearly.

In the end it is another excellent exemple of the stupidity of politicians who without understanding markets come up with counterproductive rules.

Aug 25 04:29 PM

[J. S. Kim:]

for those that stated the video is misleading because it is from April, 2008, I only selected that video because of its explanation of soaring food prices as a global problem whereas most news clips of food riots in 2009 focus on one country. thus, that was the best video I could find that explained it as a global problem. I don't think it is misleading because it explains the problems that still exist today quite adequately, and despite TEMPORARY easing of food prices, food prices will undoubtedly soar again in the future once today's Central Bank's monetary policies of easy money start leaking into the world economies. So it is very likely that the video's problems as explained will actually become much worse in future years. As former Fed Chairman Greenspan once said, inflation is nothing more than debasement of currency and food inflation in significant terms is very very probably in future years.

Also the below story is from July, 2009:

The World Food Program warns hunger and malnutrition will continue to rise as financial and food crises bite into the ever-shrinking income of the world's poor. The World Food Program says new creative ways must be found to feed the hungry as government resources dry up.

The World Food Program reports the number of hungry people in the world has topped one billion for the first time in history. The agency's Deputy Executive Director, Staffan de Mistura says this shocking figure set alarm bells off during this year's G 8 summit in Africa.

So the above video does not misrepresent either the current grave food crisis that still exists (despite recently improving food prices around the world) and the likely worsening food crisis that is likely to occur in future years in my estimation.

Aug 25 09:33 PM

[gva1203:]

Grains were hit after the CFTC announcements but they were somehow stale already following the bearish USDA reports, so banks/funds shouldn't be bothered that much right on.

On the other hand Sugar has a very compelling global deficit going on, so who dares preventing Wall Street from profiting from this bull run??? The DB Agricultural fund is 36.5% in Sugar, based on a net asset value of $2.5 billion and Jul-10 Sugar at 21.40cts/lb, so they are long about 39,500 lots, that's staggering 2 million tons of Sugar with a potential 50%* upside over the next 6 months !!! (* the weak moonson in India/Pakistan/Bangladesh will force them to keep on buying Sugar in the world market, hence prices could surpass 30cts by Jan-10)

Here is the link to the DBA ETF: www.dbfunds.db.com/dba...

Ps: I am a believer that Gensler’s actions are coordinated with Goldman (just as Mr. Paulson's whilst at the Treasury)

Aug 26 11:01 AM

[jortex:]

I find it interesting that since these funds are now limited in the amount of futures they can trade they are now forced to do swaps in order to track their indexes. I would bet that Goldman is on the other side of those swap arrangements. Hmmmmmm, nice move Gensler.

Aug 26 06:49 PM

[Alan von Al...:]

J.S. Kim's articles are always thought-provoking and timely. Got me to open my view much wider.

Aug 27 01:08 AM

[maryanne:]

The poor needs to stop making babies when they can't already afford to feed the ones they already have (or will have) Reform of US Welfare/Food stamps system is needed. Also those developing countries need to control their population growth as well

Aug 31 08:57 PM

[Wiskey:]

I wholeheartedly agree with the author. He is spot on, right on on the criminals in government agencies and at financial terrorists firms. US has become the country of open criminal conduct by financial and government. The real actions are masked as a good and fair policies. But they are not. The populist president has no courage to face the issues straight and do what it takes to restore the faith and order. He is a puppet. The best way to end up this game is to move money out of the country and invest in commodities there: Asia/China, Russia, Middle East. While I do my research here, I wish if one could share some links for brokerage firms which offer trading stocks and futures in these locations and in local currencies.

Sep 16 10:53 AM