Market Matters Blog

Daily Price Limits to Shrink Over Weekend

We haven't seen many limit up or limit down moves in the grain markets lately, even after USDA reports. The record corn and soybean harvests are a supply factor that's hard to outweigh. And as prices have fallen, so shall the daily futures price limit.

Last May, CME group put a new policy into place governing the daily price limits on grain and oilseed futures contracts. The new methodology allows the price limits -- how much a futures contract can move up or down during a trading day -- to shrink when market prices fall and rise when prices climb.

The new price limits declined across the board in the second adjustment under the new system, no surprise there. The changes are effective when markets open on Sunday evening for the Monday, Nov. 3, trading day.

P[L1] D[0x0] M[300x250] OOP[F] ADUNIT[] T[]

Here are the new limits are on per-bushel basis.

Commodity Current Initial Price Limit New Initial Price Limit New Expanded Price Limit
Corn $0.35 $0.25 $0.40
Soybeans $1.00 $0.70 $1.05
CBOT Wheat $0.45 $0.35 $0.55
KC Wheat $0.50 $0.40 $0.60

(Also, please remember that since the Minneapolis Grain Exchange is independently owned, its limits don't follow this scheme. The daily price limit on Minneapolis wheat remains at $0.60 per bushel.)

CME updates the daily price limits on the first trading day on or following May 1 and November 1. To arrive at the daily limit, CME group takes the average price of the July or December futures contract over 45 days, multiplies it by 7% and rounds the answer to the nearest 5 cents.

This new mechanism replaces CME Group's ad-hoc style of adjusting fixed daily price limits. In the past, they made relatively few changes to daily price limits and they caught some flak for it in 2011 when traders argued they were too slow to make the change. Prices had already risen, and traders felt the 30-cent limit restricted the market on its upswing.

On the other side of the coin, there were traders concerned that once the limit grew larger, it'd be tough for CME to reduce it if prices swung lower. As the new adjustment shows, CME's found an answer to their concerns. Now we'll just have to wait and see if anyone remembers the daily price limits and expanded limits next time the market makes a limit move.

(CZ/SK)

P[] D[728x170] M[320x75] OOP[F] ADUNIT[] T[]
P[L2] D[728x90] M[320x50] OOP[F] ADUNIT[] T[]

Comments

To comment, please Log In or Join our Community .