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NMPF Backs CFTC Decision Not to Limit Dairy Futures Contracts

March 9, 2017

NMPF has endorsed a recent decision by the Commodity Futures Trading Commission not to propose position limits on Class III milk futures, options and equivalent swaps contracts. The CFTC rule is a victory for dairy farmers and cooperatives using risk management tools, and the latest development in a multi-year process through which the Commission is attempting to further regulate speculative activity in futures markets by limiting the positions any individual party could take in such contracts.

In a response to provisions of the Dodd-Frank Act to regulate speculative activity in futures markets, the CFTC proposed limits in 2013 for Class III milk and 27 other physical commodity contracts. At that time, NMPF, several of its member cooperatives and others in the dairy industry argued that such limits would reduce the effectiveness of Class III contracts for dairy farmers.  National Milk said the proposal would diminish the liquidity needed in dairy futures contracts and make it more difficult for NMPF’s cooperatives to offer risk management programs for their members.  In such programs, cooperatives take offsetting, non-speculative Class III milk futures positions on often sizeable volumes of member milk production.

NMPF also argued that, in contrast to delivery-settled futures contracts, position limits were less appropriate for dairy futures contracts, which are cash-settled to a USDA announced price, and in which open interest positions remain high through contract expiration, thus making the risk of distorting speculative activity very minor.

The Commission cited this earlier push-back from NMPF and dairy groups as a key reason for its recent decision to defer imposing limits on Class III milk and two cash-settled contracts for other animal agriculture commodities. However, CFTC declined to exempt cash-settled contracts altogether, and indicated it would revisit the issue of position limits on such contracts at some future time.

In its recent comments to the CFTC, NMPF again argued that there is little reason to impose limits on dairy futures contracts, and it will continue to argue to this effect in response to any future Commission proposals on the issue. The CME exchange has rules that are adequate to guard against any distorting speculative activity in dairy futures contracts, NMPF said.