A pullback in investigations and enforcement by the Commodity Futures Trading Commission (CFTC) is leaving cotton farmers in a bind.
Last week, The New York Times reported that the CFTC reduced its regulatory enforcement in traditional commodity markets during the Trump administration. For years, U.S. cotton farmers believed that large international trading companies were giving false information about exports to China. And that kept prices low.
Toward the end of the Biden administration, the CFTC had settled with the trading firm Olam Group for $3.25 million over claims of misleading the cotton market. At the same time, a separate 20-month investigation into another global broker, the Louis Dreyfus Co., was stopped after the Trump administration took over the agency, even though CFTC staff were ready to recommend civil charges.
Earlier this year, the CFTC decided to scale back enforcement and shift to a more lenient voluntary self-reporting approach. This is directly reflected in agricultural products, especially in cotton. Cotton futures on ICE Futures U.S. (the regulated derivatives trading exchange) need transparency in pricing and solid regulation. Less enforcement means more risk for growers, local merchants and agricultural hedgers in the marketplace.
A Sharif News Market Analysis report on Oct. 3 said enforcement has paused on crypto while a “parallel retreat in ‘bread-and-butter’ agriculture cases signals a structural reprioritization.”
“Budget allocations shifted toward digital-asset litigation have left fewer investigators for complex physical-commodity cases that require on-site warehouse audits and supply-chain forensics,” the analysts said in the report. “For U.S. cotton exporters competing with Brazilian and Australian suppliers, any perception of weakened contract enforcement could accelerate the migration of benchmark pricing to ICE Futures Europe or Shanghai International Energy Exchange contracts.”
Amid the enforcement vacuum, the report’s authors said cotton merchants “face wider convergence uncertainty without active deterrence of delivery-point gaming” and noted that a prolonged pullback “risks ceding global price discovery to exchanges with stricter oversight regimes.”
The genesis of this current state of affairs goes back to May when the CFTC moved to self-reporting incentives and offering reduced penalties for corporate entities, which shifted enforcement away from proactive institutional audits.
“Absent aggravating circumstances, the advisory lays out a path for a potential declination when a respondent voluntarily self-reports, fully cooperates, effects timely and appropriate remediation, and provides full restitution and/or disgorgement,” the CFTC said in a statement, adding that the advisory also details what level of cooperation credit “may be awarded to respondents for self-reporting and cooperation when they are ineligible for a declination.”
But that doesn’t mean the CFTC is going soft on crime.
Michael S. Selig, CFTC chairman, said in a statement in May that policing “our markets for insider trading, fraud and other abuses remains a top priority. The division of enforcement’s new policy encourages prompt compliance and enhances our ability to police our markets in the most effective way possible.”
Selig said the division’s advisory “will provide clarity, promote consistency and reinforce the division’s commitment to transparency in its enforcement practices.”
David I. Miller, who heads the enforcement division, said the new cooperation policy “provides a clear path to declinations. It is also transparent and understandable to market participants and potential defendants, precisely stating what the division requires of parties to obtain credit for self-reporting and cooperation.”
Miller said the policy encourages good conduct from market participants “and gives us another tool in our efforts to fight fraud, manipulation and market abuse.”
On Sept. 11, the CFTC then approved a final rule amending its whistleblower regulations under 17 CFR Part 165, which implements Section 23 of the Commodity Exchange Act (7 U.S.C. § 1 et seq.). The amendments outline shifts in whistleblower award processing and regulatory reporting requirements. The updates are designed to streamline the information collection, evaluation and reward determination to match parallel tools that are in place at the Securities and Exchange Commission (SEC).
Kyle Peacock, principal at Peacock Tariff Consulting, told Sourcing Journal that the entire market runs on the assumption that export numbers are honest. “Cotton prices move on news about Chinese buying, and a handful of big trading houses are the source for a lot of that news,” he said. “The Olam settlement showed the CFTC was willing to go after them. Then a 20-month investigation into Louis Dreyfus gets shut down right when staff were ready to recommend charges, and it’s hard to see that as anything but a signal to the largest players that the pressure is off.”
“My worry is that once enforcement starts to look political, everyone in the market has to work in more uncertainty, and it’s usually the smaller players who pay for it,” Peacock added.
When asked about the impact of tis on U.S. cotton farmers, Peacock was straightforward in his response. “Farmers don’t set the price of cotton; they take it,” he explained. “They don’t have the data or the global reach the big merchants have, so they’re trusting the market to tell them what their crop is worth.”
Peacock said if that market is being fed bad export information, “farmers lose money on every sale and it throws off their planning for next season.”
“They’re already stuck dealing with tariffs and thin margins,” Peacock noted. “I think a lot of growers saw the Olam case as proof they’d been right, and seeing the next case dropped probably just confirms their feeling that nobody is looking out for them.”
