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Commodities Margins Rising to Cool Markets

The biggest commodity exchange in the world is clamping down once again on overheated commodity markets.

At the Chicago Mercantile Exchange traders are facing increased margins on a number of agricultural products. From butter to lumber, speculators and hedgers will need to post more money to initiate a position and also, to maintain a position.

Increases were announcedfor butter, milk, lumber, soybeans, cotton, oats and rice futures. (Track commodity prices here.)

For example, speculators in butter futures will need to post initial margins of $2,700 per contract versus $2,430 prior. Maintenance margins are rising from $1,800 to $2,000. Changes are expected to go into effect close of business Friday, November 19, 2010.

Along with some foreign exchange futures, margins are also being raised on Nymex cotton futures. While off its one year high, the price of cotton has soared about 70 percent over the past year. Nymex is part of the CME Group.

Starting with increased margins on silver last week, the action may appear to be part of a broader plan to cut the froth in the commodity markets. But, insiders say margin adjustments are part of normal procedures by the CME to address increased volatility and trading and to ensure a smooth delivery process for end users.

According to Jim Steel, HSBC Chief Commodities Analyst, more money flowing into—or out of—agricultural products also helps to feed the demand cycle for precious metals. “The energies and the agricultural products make up the bulk of the commodity indices such as the CRB, GSCI and Dow-Jones UBS Commodity Index.”

As the weighting price of agricultural products change, the other components of the indexes need to be adjusted accordingly in order to maintain the respective component weightings.