Ensuring an Equitable Market Price and Risk Management Tool
When it comes to the use of commodity crops (e.g., corn or soybeans) in feed or pet food, price and availability are two important factors that drive animal food manufacturers’ purchasing decisions. Should a crop be in short supply, the demand will increase, and costs will be driven up – both for manufacturers and their customers – and manufacturers will find it difficult to fulfill their orders. Ensuring there’s a fair marketplace for the purchase of commodities is important to the animal food industry, and one reason why the American Feed Industry Association supports the work of the Commodity Futures Trading Commission (CFTC).
The CFTC performs the critical role of helping the United States safeguard its agricultural and energy derivative markets, which were created as risk mitigation tools for farmers during unforeseen circumstances, such as extreme crop loss during a bad weather event or a poor harvest. In essence, the CFTC helps the industry hedge commercial risks inherent to agricultural production, processing and marketing by limiting speculative investors outside of the agriculture community from dominating and influencing commodity markets to their investment advantage, which comes at the detriment to bona fide users of agriculture commodities, such as oil, corn, wheat and many others.
For example, in the early 2000s, several foreign entities purchased large quantities of wheat, which drove up the price of the crop as the availability decreased, sending the agricultural community into frenzy. Since then, the AFIA has worked as part of coalitions to urge the CFTC to more forcefully monitor and limit speculative activity to avoid future scenarios that can exacerbate price volatility and unhinge markets from real world supply and demand fundamentals. Industry positions maintain that the commodity derivatives markets were created as tools for risk mitigation and price discovery for bona fide commercial hedgers, that speculative investors are necessary for the proper function of these markets, and that regulations are important to maintain an appropriate balance of impact on both sides of the trade.
The AFIA works with other industry associations to advocate for federal funding to help the CFTC keep pace with its expanding regulatory oversight responsibilities.