Of Corn and Silver: Evaluating Margin Raises

As corn surges higher and higher on the back of last week’s USDA report which showed low inventory levels, the CME has raised margins 16% to ensure that participants in this rally are able to handle the rapid movements.

Some people see margin raises as an attempt to curb speculation and lower prices, but that isn’t why the CME raises margins in our view. The CME has to do a balancing act with margins, keeping them low enough to attract investors who don’t want to tie up all their capital in betting on commodity moves, but high enough that the CME has a buffer against a large move wiping customers who bought/sold their contracts  (the CME guarantees all trades in its contracts, after all). Theoretically, this should slow the ascent of corn’s prices, as it requires more capital upfront from investors, but that may not be the case. In fact, that hasn’t been the case lately for margin raises in commodities.

Take for example November 2010, when the CME raised margins in Silver. While it slowed silver’s surge momentarily, the ascent continued within a week and silver closed today up over 53% higher than its post-margin raise slump.

Now take a look at corn since the margin hike. Despite this increase, corn surged even higher today, up 3.13% at the bell, setting new highs for 2011.  What is going on here? Are commodities just in such demand that nothing can slow them down?

Likely not… what is really happening is that despite the big headline number (16% increase in margin), Corn margins really only went from $2,025 to $2,363 – for the ability to control $38,000 worth of Corn. [$7.60 per bushel * 5000 bushels per contract = $38,000] When looked at in that light,  the leverage factor built into the commodity merely went from 18.7 to one, to 16 to one, which is hardly crippling for those looking to speculate on prices moving higher.

Viewed another way, you can see the ‘leverage factor’ in the current May Corn contract barely budging at the far right of the chart after the supposedly large 16% margin increase.


Speak Your Mind


Interested in distributing or reprinting this content? Check out our reprint policy here.


Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author.

*The mention of specific asset class performance (i.e. +3.2%, -4.6%) is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.), and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship and self reporting biases, and instant history.

The mention of general asset class performance (i.e. managed futures did well, stocks were down, bonds were up) is based on Attain’s direct experience in those asset classes, estimates of performance of dozens of CTAs followed by Attain, and averaging of various indices designed to track said asset classes.

It should be noted that past market performance is not indicative of future market movement.No market data or other information is warranted by Attain Capital Management as to completeness or accuracy, express or implied, and is subject to change without notice.

Managed Futures Disclaimer:

Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.