By Jeremy Bowden

The Chicago Mercantile Exchange (CME) has extended its range of offerings to include biofuel and fertiliser futures’ contracts over recent months, against a background of growing concern over the bullish implications of speculation on food prices. In an attempt to curb food price inflation and volatility, more attention is being paid to the idea of greater transparency in agricommodity derivatives markets.

Four new CME Group fertilizer swap futures will be listed on CME ClearPort and the NYMEX trading floor: Urea (Granular), UAN, and two DAP (Diammonium phosphate) contracts (FOB Tampa and FOB NOLA). CME has also launched four new European biofuel swap future contracts, including RME biodiesel, FAME 0 biodiesel, and two types of Ethanol.

CME’s move to list additional standardised contracts brings more deals on to exchanges (many are currently bilateral, unregulated over-the-counter deals), and is geared to moving trade away from unmonitored markets. But it also makes trading, and associated speculative investing, easier. According to CME, clearing services allow market participants to “substantially mitigate counterparty risk and provide neutral settlement prices”, making trading simpler and more attractive.

Increasingly, there are calls to make derivative trading on exchanges easier to monitor so as to prevent a build-up of systemic risk. One proposal, by French President Nicolas Sarkozy, calls for a minimum amount of collateral to be posted by counterparties when making a derivative transaction. This would insure traders against adverse market movements, and contribute to limiting purely speculative positions.

Whether further regulation is ever actually imposed remains to be seen. But the listing of these new contracts is a good thing. It allows more of the agricultural commodity complex to be hedged more easily. Fertiliser prices, for example, are some of the most volatile cost inputs in crop production. Fixing this cost by buying ahead allows the farmer to focus more on his prime concern – managing his margins through maximising efficiency and yields.

However, as commodities solidify as a distinct investment category, the influx of the associated additional funds will increase demand for futures’ contracts, and so will lift prices overall. Volatility is also likely to increase, as investors exhibit crowd behaviour and cumulatively pull money in and out of this asset class.

But those attempting to regulate the market should bear in mind that speculators do provide important functions. In food markets, speculators not only improve liquidity generally, they also help to smooth over the period of a year when hedging demand swings either side of crop sowing and harvest. Crushing this hedge cushion entirely will be a short-term win.

Source: http://www.worldcrops.com/6259-cme-%E2%80%93-fertiliser-and-biodiesel-futures-launched/