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42–967 PDF 2008

HEARING TO REVIEW THE SOURCE OF 

DRAMATIC MOVEMENTS IN THE COMMODITY 

MARKETS (AGRICULTURE AND ENERGY): A 

CHANGE IN MARKET FUNDAMENTALS OR 

INFLUENCE OF INSTITUTIONAL INVESTORS?

HEARING

BEFORE THE

SUBCOMMITTEE ON 

GENERAL FARM COMMODITIES 

AND RISK MANAGEMENT

OF THE

COMMITTEE ON AGRICULTURE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

MAY 15, 2008

Serial No. 110–37

(

Printed for the use of the Committee on Agriculture 

agriculture.house.gov 

COMMITTEE ON AGRICULTURE 

COLLIN C. PETERSON, Minnesota, Chairman 

TIM HOLDEN, Pennsylvania, 

Vice Chairman 

MIKE MCINTYRE, North Carolina 

BOB ETHERIDGE, North Carolina 

LEONARD L. BOSWELL, Iowa 

JOE BACA, California 

DENNIS A. CARDOZA, California 

DAVID SCOTT, Georgia 

JIM MARSHALL, Georgia 

STEPHANIE HERSETH SANDLIN, South 

Dakota 

HENRY CUELLAR, Texas 

JIM COSTA, California 

JOHN T. SALAZAR, Colorado 

BRAD ELLSWORTH, Indiana 

NANCY E. BOYDA, Kansas 

ZACHARY T. SPACE, Ohio 

TIMOTHY J. WALZ, Minnesota 

KIRSTEN E. GILLIBRAND, New York 

STEVE KAGEN, Wisconsin 

EARL POMEROY, North Dakota 

LINCOLN DAVIS, Tennessee 

JOHN BARROW, Georgia 

NICK LAMPSON, Texas 

JOE DONNELLY, Indiana 

TIM MAHONEY, Florida 

BOB GOODLATTE, Virginia, Ranking 

Minority Member 

TERRY EVERETT, Alabama 

FRANK D. LUCAS, Oklahoma 

JERRY MORAN, Kansas 

ROBIN HAYES, North Carolina 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

MIKE ROGERS, Alabama 

STEVE KING, Iowa 

MARILYN N. MUSGRAVE, Colorado 

RANDY NEUGEBAUER, Texas 

CHARLES W. BOUSTANY, JR., Louisiana 

JOHN R. ‘‘RANDY’’ KUHL, JR., New York 

VIRGINIA FOXX, North Carolina 

K. MICHAEL CONAWAY, Texas 

JEFF FORTENBERRY, Nebraska 

JEAN SCHMIDT, Ohio 

ADRIAN SMITH, Nebraska 

TIM WALBERG, Michigan 

BOB LATTA, Ohio 

PROFESSIONAL STAFF

ROBERT L. LAREW, Chief of Staff 

ANDREW W. BAKER, Chief Counsel 

APRIL SLAYTON, Communications Director 

WILLIAM E. O’CONNER, JR., Minority Staff Director 

SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND RISK MANAGEMENT

BOB ETHERIDGE, North Carolina, Chairman 

DAVID SCOTT, Georgia 

JIM MARSHALL, Georgia 

JOHN T. SALAZAR, Colorado 

NANCY E. BOYDA, Kansas 

STEPHANIE HERSETH SANDLIN, South 

Dakota 

BRAD ELLSWORTH, Indiana 

ZACHARY T. SPACE, Ohio 

TIMOTHY J. WALZ, Minnesota 

EARL POMEROY, North Dakota 

JERRY MORAN, Kansas, Ranking Minority 

Member 

TIMOTHY V. JOHNSON, Illinois 

SAM GRAVES, Missouri 

CHARLES W. BOUSTANY, JR., Louisiana 

K. MICHAEL CONAWAY, Texas 

FRANK D. LUCAS, Oklahoma 

RANDY NEUGEBAUER, Texas 

BOB LATTA, Ohio 

CLARK OGILVIE, Subcommittee Staff Director

(II) 

(III)

C O N T E N T S 

Page 

Etheridge, Hon. Bob, a Representative in Congress from North Carolina, 

opening statement ................................................................................................ 1

Moran, Hon. Jerry, a Representative in Congress from Kansas, opening statement ...................................................................................................................... 2

Peterson, Hon. Collin C., a Representative in Congress from Minnesota, prepared statement ................................................................................................... 3

WITNESSES

Harris, Jeffrey, Chief Economist, Commodity Futures Trading Commission, 

Washington, D.C.; accompanied by John Fenton, Director of Market Surveillance, Commodity Futures Trading Commission ........................................ 4

Prepared statement .......................................................................................... 7

Stallman, Bob, President, American Farm Bureau Federation; Rice and Cattle 

Producer, Columbus, TX ...................................................................................... 42

Prepared statement .......................................................................................... 44

Duffy, Terrence A., Executive Chairman, Chicago Mercantile Exchange 

Group, Inc., Chicago, IL ....................................................................................... 49

Prepared statement .......................................................................................... 52

Ramm, Gerry, President, Inland Oil Company, Ephrata, WA; on behalf of 

Petroleum Marketers Association of America .................................................... 61

Prepared statement .......................................................................................... 63

Newsome, Ph.D., James E., President and CEO, New York Mercantile Exchange, Inc., New York, NY ................................................................................ 69

Prepared statement .......................................................................................... 72

Campbell, Laura, Assistant Manager of Energy Resources, Memphis Light, 

Gas & Water, Memphis, TN; on behalf of American Public Gas Association . 88

Prepared statement .......................................................................................... 90

Niemeyer, Garry, Corn and Soybean Producer, Auburn, IL; on behalf of 

National Corn Growers Association .................................................................... 113

Prepared statement .......................................................................................... 115

Carlson, Layne G., Corporate Secretary and Treasurer, Minneapolis Grain 

Exchange, Minneapolis, MN ............................................................................... 123

Prepared statement .......................................................................................... 125

Clark, Rodney, Vice President, CGB/Diversified Services; Chairman, Risk 

Management Committee, National Grain and Feed Association, Mt. Vernon, 

IN ........................................................................................................................... 129

Prepared statement .......................................................................................... 131

Farley, Thomas, President and COO, ICE Futures U.S., New York, NY ........... 138

Prepared statement .......................................................................................... 140

Weil III, Adolph ‘‘Andy,’’ President, American Cotton Shippers Association; 

Member, Executive Committee, National Cotton Council, Montgomery, AL .. 144

Prepared statement .......................................................................................... 147

SUBMITTED MATERIAL

Eastland, Woods, President and CEO, Staplcotn, Greenwood, MI; on behalf 

of Amcot, submitted statement ........................................................................... 169

Farley, Thomas, President and COO, ICE Futures U.S., New York, NY, 

response to submitted questions ......................................................................... 203

Lukken, Hon. Walter, Acting Chairman, Commodity Futures Trading Commission, Washington, D.C., response to submitted questions .......................... 190

National Cotton Council, submitted statement ..................................................... 167

Paul, Eugene, Policy Analyst, National Farmers Organization, Ames, IA, 

submitted statement ............................................................................................ 186

(1)

HEARING TO REVIEW THE SOURCE OF 

DRAMATIC MOVEMENTS IN COMMODITY 

MARKETS (AGRICULTURE AND ENERGY): A 

CHANGE IN MARKET FUNDAMENTALS OR 

INFLUENCE OF INSTITUTIONAL INVESTORS? 

THURSDAY, MAY 15, 2008

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON GENERAL FARM COMMODITIES AND

RISK MANAGEMENT, COMMITTEE ON AGRICULTURE, Washington, D.C. 

The Subcommittee met, pursuant to call, at 10:03 a.m., in Room 

1300 of the Longworth House Office Building, Hon. Bob Etheridge 

[Chairman of the Subcommittee] presiding. 

Members present: Representatives Etheridge, Scott, Marshall, 

Salazar, Boyda, Herseth Sandlin, Ellsworth, Pomeroy, Moran, 

Boustany, Conaway, Lucas, Neugebauer, and Latta. 

Staff present: Andy Baker, Adam Durand, Alejandra GonzalezArias, Scott Kuschmider, Merrick Munday, Clark Ogilvie, John 

Riley, Bryan Dierlam, Kevin Kramp, and Jamie Weyer. 

OPENING STATEMENT OF HON. BOB ETHERIDGE, A 

REPRESENTATIVE IN CONGRESS FROM NORTH CAROLINA 

The CHAIRMAN. This hearing of the Subcommittee on General 

Farm Commodities and Risk Management to review the source of 

dramatic movement in commodity markets (agriculture and energy): a change in market fundamentals or influence of institutional investors, will come to order. Let me thank all of you for 

being here. Let me thank the witnesses for coming today. We have 

a pretty full calendar, and we will try to accommodate everyone. 

You know the order in this Committee. Normally Members will be 

coming back and forth, but I can assure you the Chairman and 

Ranking Member are going to be here the whole time except when 

we have to go vote. We will put a chain on his legs, so both of us 

will be here. 

Let me thank each one of you for coming today. And as all of you 

know, the Agriculture Committee has been a little busy the last 

several months working on a small piece of legislation. It is normally called the farm bill. This year it is called the Nutrition and 

Energy Title, and the House passed it yesterday. Now that we have 

finished the work on this piece of legislation, I think it is appropriate that we turn our attention to other issues affecting American agriculture. Today’s hearing is on a subject for which I have 

2

been hearing a great deal of consternation, not only from farmers 

but from a lot of average people in my district, and really across 

the country. 

And here are a few facts over the past year on futures process 

of how they have increased: 47 percent for cotton, 66 percent for 

corn, 83 percent for soybeans, 95 percent for wheat, and 122 percent for rice. Normally you would find that farmers would be dancing in the fields, wherever they find a place to dance, to see price 

increases of this magnitude. But these higher prices have come 

with increased volatility in commodity trading and with consequences. The financial demands associated with using the futures market, particularly rising margin requirements, have made 

it difficult for market participants to continue using futures for 

price discovery and price hedging and forced some out of the market entirely. This in turn has led commodity buyers to refrain from 

offering contracts to producers, one of the key risk management 

practices that farmers have utilized for a long time. 

While agriculture commodity markets are not used to these levels of prices, or the largest swings in prices that we have been seeing recently, other commodity markets, particularly oil and natural 

gas, have been experiencing these conditions for some time. Gold 

futures are 37 percent higher from the past year, and crude oil futures have increased almost 82 percent in the last year. This Subcommittee has specifically looked at these energy markets last year 

and in previous Congresses. As you know, the farm bill includes 

additional authority for the Commodity Futures Trading Commission to police contracts of some of the more lightly regulated markets. 

Support for this additional authority came out of our hearing on 

energy trading. Last month, the CFTC held a hearing to look into 

whether futures markets are properly performing their risk management and price discovery roles for agriculture. With this hearing, we are building upon that work and expanding it to include 

energy because not only does energy trading affect industrial users 

of energy products and consumers, it affects agriculture producers 

as well. While everyone agrees on the facts, there is no consensus 

on the theory behind the recent run up in commodity prices or increased volatility. The CFTC hearing covered a wide range of viewpoints as to factors behind these market changes. 

Understandably, not all of those reports agree nor was a consensus reached, but I don’t think we will definitively answer that 

question today. It is important for Members to hear the arguments 

and the debate. Again, I want to thank the witnesses for participating. Now I will turn to my partner and the gentleman from 

Kansas, Mr. Moran, for his opening statement. 

OPENING STATEMENT OF HON. JERRY MORAN, A 

REPRESENTATIVE IN CONGRESS FROM KANSAS 

Mr. MORAN. Mr. Chairman, thank you very much. I am happy 

to be here with you and serve as your partner as we explore a very 

important topic that farmers across the country care about. Today’s 

agriculture is experiencing some of the most favorable market conditions in nearly a decade. In the last year, agriculture commodity 

markets, we have seen a tremendous appreciation price, and for 

3

the most part farmers welcome this news. With increased prices, 

however, as you say, come new challenges. As prices increase, the 

ability to utilize futures market as risk management tools become 

more challenging, as prices fluctuate and capital requirements increase to maintain market positions. 

While commodity prices have increased, the volume of trading 

and the number of participants in the commodity markets have 

also experienced record growth. The growth in the commodity markets is by no means a negative development. Increased market participation leads to additional equity and more opportunities for 

commercial market participants to utilize futures markets. The role 

of this Subcommittee is to insure that the Commodity Futures 

Trading Commission is doing its job to ensure that markets are 

functioning and that price discovery is occurring in an efficient 

manner. 

Today we will hear from a variety of witnesses that include the 

CFTC, futures exchanges, and market participants. I hope this 

Subcommittee can learn about the new challenges that market participants are experiencing. In addition, I look forward to seeing the 

data and market conditions that CFTC is monitoring, and if necessary determine whether there is something that can be done to 

better ensure that the markets are functioning properly. One thing 

I think we should not do is simply out of hand conclude that certain classes of market participants are to blame for the challenges 

we are experiencing in the prevailing market. Increased market 

participation can be a good thing, and additional participants can 

provide the equity necessary for more efficient conduct of price discovery. 

For every commercial market participant, there is another noncommercial participant that offsets the commercial traders position. The job of this Subcommittee today is to listen to the findings 

of the agency that we have tasked with market surveillance. I hope 

the CFTC experts will provide an explanation of market data that 

they are currently monitoring whether the data demonstrates the 

existence of issues that need to be addressed and whether additional data is needed to draw more sound conclusions. They will 

tell us if there are ways that regulatory structure can be adjusted 

to assure market access for willing participants without unnecessarily disrupting the function of the markets. I thank you for holding this hearing. I am glad to be back in 1300 and at work on behalf of farmers of America. I thank the Chairman. 

The CHAIRMAN. I thank the gentleman. The chair would request 

that other Members submit their opening statements for the record 

so that witnesses may begin their testimony and ensure that we 

have ample time for questioning. 

[The prepared statement of Mr. Peterson follows:]

PREPARED STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN

CONGRESS FROM MINNESOTA

Thank you, Mr. Etheridge, for holding this hearing this morning. We’ve all had 

a busy last few weeks, to say the very least, but I’m glad we are here today to discuss what has been happening in the agricultural and energy markets over the last 

several months. 

I think anyone who has any sort of historical perspective following these markets 

had a hard time believing the kind of prices we have seen in recent months. 

4

I don’t know too many people, for example, who ever envisioned $12 wheat fu- tures, much less $24 wheat futures, like we saw on the March 2008 Minneapolis 

contract. 

And prices are not just trending upward, they are moving rapidly in shorter periods of time. Daily trading limits on exchanges have been triggered on a regular 

basis, sometimes on consecutive days for the same contract. These wild swings call 

into question the role of futures markets as mechanisms for price discovery and risk 

management that work to benefit producers, processors and consumers. 

Furthermore, in many cases, farmers are not the ones seeing the benefits of these 

high prices. 

Farmers have been unable to enter into forward contracts with grain elevators because elevators have run up against their credit limits due to rapid price swings 

in a short amount of time. Some elevators have had to triple, quadruple, even go 

up to eight times their normal credit line just to finance margin calls on their positions. These are not speculators. These are people involved in production agriculture 

who depend on the markets for stability and solvency. 

Many of these issues were brought up last month when the Commodity Futures 

Trading Commission hosted an all-day hearing on commodity prices and the rise of 

large speculative positions. CFTC took testimony from more than 30 participants, 

some of whom are here before this Committee today. 

A lot of opinions were offered and a lot of ideas were exchanged at that hearing. 

Unfortunately, I heard a lot of disappointment expressed from many sectors of agriculture coming out of that hearing about CFTC’s apparent lack of interest in acting 

on the increasing lack of convergence in cash and futures prices. 

In my opinion, there are some real problems in the run-up we are seeing in these 

prices. I believe commodity contracts have become more popular as investment vehicles instead of the price discovery function for which the contracts were created. And 

this group of traders is growing larger and more influential given the size of some 

of their positions. 

A commodity futures market needs to have some semblance of stability to have 

any value to its participants. The issue of traders and hedgers getting caught up 

in the flood of speculators and hedge funds is of concern to this Committee and I 

think in time it will require some form of action. I look forward to hearing from 

today’s witnesses for their perspective and I welcome back my time.

The CHAIRMAN. We would like to welcome our first panel to the 

table, Mr. Jeff Harris, Chief Economist, Commodity Futures Trading Commission, Washington, D.C. He is accompanied by Mr. John 

Fenton, Deputy Director, Market Surveillance Section, Commodity 

Futures Trading Commission, Washington, D.C. Mr. Harris, please 

begin when you are ready, and I would ask that you summarize 

your statement in 5 minutes, and your full statement without objection will be entered into the record. 

STATEMENT OF JEFFREY HARRIS, CHIEF ECONOMIST,

COMMODITY FUTURES TRADING COMMISSION,

WASHINGTON, D.C.; ACCOMPANIED BY JOHN FENTON,

DIRECTOR OF MARKET SURVEILLANCE, COMMODITY

FUTURES TRADING COMMISSION 

Mr. HARRIS. Thank you, Mr. Chairman, and Members of the 

Committee. I am Jeffrey Harris, Chief Economist of the Commodity 

Futures Trading Commission, testifying along with my colleague, 

John Fenton, who is our Director of Market Surveillance. We appreciate the opportunity to discuss the CFTC’s role with respect to 

futures trading and our current view of market trends that the 

government is charged with overseeing. These are extraordinary 

times in our markets. Many commodity futures prices have hit unprecedented levels. In the last 3 months, the agricultural staples of 

wheat, corn, soybeans, rice and oats have hit all-time highs, as you 

can see from our Chart 1 here. 

We are also witnessing record prices in crude oil and natural gas, 

and other energy-related products. Adding to these trends, the 

5

emergence of the subprime crisis last summer and weak returns in 

equity and debt markets have led investors to increasingly seek 

portfolio exposure in commodities as an asset class. We are continually doing new analysis on our detailed market data, applying 

new research methods, building bridges to outside researchers and 

government agencies all to increase our view of futures markets. 

And separately our Division of Enforcement investigates any specific information of potentially manipulative conduct on a case-bycase basis. 

In line with these efforts, the agency convened an agriculture 

forum 3 weeks ago, in which we brought together a diverse group 

of market participants to air full views and opinions on the driving 

forces in these markets. The agency allowed a 2 week comment period following the hearing which just closed last Wednesday. Currently the Commission and staff are reviewing the comments received, and the Commission plans to have announcements of several initiatives in the very near future. The CFTC also recently announced the creation of the Energy Markets Advisory Committee 

and named the public members of the committee. That first meeting will be held on June 10 to look at issues related to energy markets and the CFTC’s role in those markets under the Commodity 

Exchange Act. 

Clearly, the commodity futures markets are experiencing robust 

growth across commodities particularly with the recent influx of institutional investors. There are two basic types of institutional activities that tend to be referred to as funds in our markets. Each 

is identified to some degree of accuracy within our large trader reporting system. The first group of funds represents monies that 

enter into futures markets through various form of managed money 

like hedge funds, commodity pools, and the like. Managed money 

funds can either be long or short in our markets depending on their 

speculative beliefs about future prices. The second type of fund, 

known as index funds, or commodity index traders, have become 

more important in recent years. These funds seek commodity exposure as an asset class like stocks, bonds, or real estate, and aggregated, index fund positions are relatively large. They are predominantly long and passively positioned, that is, they simply buy exposure to commodities in futures markets, maintain their exposure 

through pre-specified rolling strategies before the futures enter delivery months. 

It is equivalent to a ‘‘buy and hold’’ strategy in the stock market. 

In response to the growing activity by commodity index traders, in 

fact, the Commission has increased transparency in 12 agricultural 

markets by publishing weekly data on positions held by these index 

traders since January of 2007. Some observers have suggested that 

higher crude oil futures prices and agricultural commodity futures 

prices are being driven by speculators in the futures markets and 

have suggested steps to reduce or limit their actions in these markets. The CFTC has been actively engaged with the industry participants during this time of extraordinary price increases, and the 

data demonstrates the influence of fundamental factors in commodity prices. 

First, we note that prices have risen sharply for many commodities that have neither developed futures markets like durum 

6

wheat and steel, nor institutional fund investments like the Minneapolis wheat contract and Chicago rice. Second, in some markets 

where index trading is greatest as a percentage of open interest, 

such as the live cattle and hog futures markets, they have actually 

suffered from falling prices during the past year. Beyond these fundamentals, we have utilized our comprehensive data to rigorously 

analyze the role of hedgers and speculators to both energy and agricultural futures markets. All the data modeling and testing and 

analysis that we have done to date indicates there is little economic 

evidence to demonstrate that futures prices are systematically driven by speculators in these markets. 

The next chart highlights data on speculative positions. Here we 

highlight managed money trader positions in crude oil, for example. Generally, this chart shows that during the past year as crude 

oil futures prices have increased as denoted by the black line there 

the level of speculative positions have remained relatively constant 

in percentage terms. As the chart shows, managed money traders 

are both long, represented by the green bars, and short, represented by the orange bars, in these markets. Although not depicted directly in this picture, our studies in agriculture and crude 

oil markets have found that speculators tend to be trend followers 

in these markets, that is, speculators generally tend to buy the day 

after prices increase. 

Simply put, the economic data shows that the overall commodity 

price levels including agriculture commodities and energy futures 

prices are being driven by powerful economic forces and the laws 

of supply and demand. These fundamental economic factors include 

increased demand from emerging markets, decreased supply 

through weather or geopolitical events and the weakened dollar. 

Together these fundamental economic factors have formed the perfect storm that is causing significant upward price pressure on futures prices across the board. Given the widespread impact of the 

higher futures prices, the CFTC will continue to collect and analyze 

data closely. The agency prides itself on a robust surveillance and 

enforcement program complemented by rigorous economic analysis 

that we use to oversee U.S. futures and options markets. 

At the Commission, we are devoting and we will continue to devote an extraordinary amount of resources to ensure that futures 

markets are responding to fundamentals and are serving the role 

of hedging and price discovery. Thank you for the opportunity testify today, and we look forward to answering your questions. 

[The prepared statement of Mr. Harris follows:]

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The CHAIRMAN. Thank you, Mr. Harris. And the chair will now 

recognize himself for 5 minutes for questions. Mr. Harris, much of 

the CFTC’s analysis regarding index fund activity and commodity 

markets has led the Commission, as you said, to believe that index 

funds are not the cause of price increases we have seen in the commodity markets recently. I don’t have any evidence to challenge 

that assertion. However, I wonder if there is still not subtle but 

distinct influence the funds do have on the market, and this leads 

to this question. Given that these funds are generally taking long 

positions, big dollars, generally are passively managed and generally are putting a great deal of money into the markets, while 

they may not be directly causing commodity prices to increase, 

could they not be preventing prices from following their natural 

order of moving up and down or following the supply and demand 

curve? 

Mr. HARRIS. Actually that is one possibility that we are trying to 

assess here. What we have been doing in our analysis is looking 

at, from day to day, what the price changes are and what the position changes are by various groups of traders. Our public data 

groups traders broadly in terms of non-commercial and commercial 

traders. We can look at, and particularly in agricultural markets, 

the group of traders called index traders, and what we do as a simple analysis is this: we look at days the price goes up, and look who 

is buying on those days. And, in fact, that is one of the reasons we 

come to the conclusions we do. Usually when prices are going up, 

it is in response to trading by commercial dealers, whether it be 

manufacturers, producers, or dealers within the commercial space. 

The CHAIRMAN. Well, I raise this question because I think it 

raises a question whether or not these long positions by not moving, just staying there, are really establishing the floor that we traditionally think the speculators, people who are in the market for 

the right reasons, are moving in and out. If you aren’t going to 

move in, you have established, and you are assuming these two 

will keep moving, and obviously as long as the market keeps moving, you keep that floor up where it can’t go up and down. So, it 

is automatically a moving market, and that raises a question does 

it really put more money in the market when you are doing that. 

Mr. HARRIS. Well, that gets at the fundamental notion of what 

futures markets do, and one of the things I am not sure we have 

a great handle on is the psychological factor. The one thing that 

is true about futures markets, they are not like stock markets 

where we have a finite amount of stock outstanding, and so when 

people come and want to buy stock they have to bid it out of somebody else’s hand. The futures markets exist such that people can 

write new contracts on open interest. In fact, what we are seeing 

in our markets is if these commodity index traders come to the 

market to buy, it is not necessarily information driven trading that 

they are doing. In fact, they don’t necessarily have to go to the 

market and bid up prices. We could all write new contracts to those 

people and add liquidity into the market that way. 

The CHAIRMAN. Okay. Let me get one more question before my 

time runs out because we get a little concerned. We had the bubble 

of tech stocks in the 1990s and housing at the turn of this century, 

and the last thing we want to do is see the farmers back in the 

26

dust bowl. One piece of legislation introduced in the Senate is the 

Consumer-First Energy Act of 2008. One piece of this bill would require the CFTC to increase margin requirements for those trading 

in crude oil. And I believe you have been quoted as saying about 

such a proposal what it would do to impact—it would really force 

small market participants out leaving the market to only the very 

large hedgers or big speculators. I invite you to comment a little 

bit more on that before the Committee, if you would. 

Mr. HARRIS. Yes, I think my viewpoint there actually comes from 

in the agricultural markets where we saw problems with meeting 

margin calls this past year when wheat was going up and limit up 

on a number of days in a row. We saw a bunch of small grain elevators actually having issues with financing, establishing lines of 

credit, and that is sort of the parallel position. It wasn’t the big 

traders that had the issues with margins and margin costs because 

they were well capitalized. I think if we apply higher margins 

across the board to any market, it has the natural effect of adding 

a fixed cost of being in that market, and the fixed cost has to be 

borne obviously disproportionately by smaller participants. 

The CHAIRMAN. Then my question comes to this very quickly as 

we close, is there a way the big traders can push the little folks 

totally out no matter what the margin call is if they want to drive 

it up to a point? 

Mr. HARRIS. Well, in fact, yes, that is one of the things we do is 

to monitor these things, and, John, I think can speak to that in the 

market surveillance context. 

Mr. FENTON. Yes. If a trader or a group of traders were colluding 

to drive prices up, that is the job of Surveillance to detect it and 

prevent. It is the job of our Enforcement Division to take action 

afterwards if we find that somebody has done that, so we are looking for that all the time. With regard to the margin question, I 

think from our point of view you first have to establish that there 

is a reason to do something different than what has been done for 

100 years in margins; which is to set them to protect the financial 

integrity of the system; which they have worked brilliantly well to 

do, and there has been a great history of security in futures clearinghouses. So since we really don’t think that the case has been 

made that speculation is driving prices, you are running the risk 

of unintended consequences to increase margins to a level that is 

beyond—a super margin level—that is beyond what is needed to 

protect the financial integrity of the system. 

The CHAIRMAN. I would like to pursue that longer, but I have 

run out of time. I will yield to the gentleman from Kansas. 

Mr. MORAN. Well, Mr. Chairman, thank you very much. On that 

point, when you say, Mr. Fenton, that speculation is not driving 

the prices, you may want to rephrase what I just said, but just a 

moment ago that was something similar to your words. Would you 

repeat that? 

Mr. FENTON. I think that we haven’t found evidence that speculation is driving prices in the agricultural market and in the energy 

markets. 

Mr. MORAN. When you say that, what does that mean, that the 

price that is established in the market is based upon the laws of 

supply and demand, the so-called fundamentals that speculation 

27

is—when you say it is not driving the price, what is the consequence of that? What does that mean? 

Mr. FENTON. Well, I think it means that we think the market is 

reflecting fundamentals, that the——

Mr. MORAN. That is a desired outcome. That is what the market 

should—is that what the market should reflect in your mind, the 

fundamentals? 

Mr. FENTON. Absolutely. That is the purpose of the market to 

discover the price based on fundamentals, but I would add to that 

it is not just current fundamentals but all futures markets are anticipatory. It is basically looking down the road and putting a probability estimate on things that may happen, and it incorporates 

that into the price, and that is again a very important benefit of 

futures market that it does do that. 

Mr. MORAN. One of the oil company executives said within the 

last few weeks about oil prices based upon the laws of supply and 

demand oil should be priced at $55 a barrel, I think is what was 

said. What does that mean? 

Mr. FENTON. Well, frankly, in my opinion that is living in a 

dream world. The price of crude oil has been going up persistently 

for 5 years, and there have been people who said that the futures 

market was getting it wrong, that prices should be at $40 or at $60 

or at $80, and that each time it incorporated some level of speculative premium, $20 or something like that. And now looking back 

at price charts, you kind of think that the market really did get it 

right. You know, people would say, ‘‘Well, okay, back then when it 

was $60 maybe that was justified.’’ So I think the evidence over 

time is that the market has been more correct than the critics of 

the market. 

Mr. MORAN. Let me bring our conversation back to the agricultural commodities. I suppose there is a greater belief that wheat 

and corn reflect the so-called fundamentals in their price on the futures. But cotton, it seems to me, to be much more difficult to reach 

that conclusion, and we have had some what appears to be anomalies in the cotton market. Is there an explanation for what is going 

on there? 

Mr. FENTON. I agree. I think cotton is an exception to what I 

have said. I think we have not found—the fundamentals in cotton 

are very different from the grains, and there was an episode, I 

would say, dating to mid-February through March where cotton 

prices went up sharply and chaotically, and really there was no 

current change in demand and supply. The market may have decided to look at expectations about coming year plantings and that 

there would be changes in supply down the road. But, we are currently carrying a very high level of stocks in cotton, so that is 

something that we are looking into. The Commission is pursuing 

a regulatory inquiry into what happened in cotton and why it happened. 

Mr. MORAN. Do you have a list of what the possible explanations 

might be? 

Mr. FENTON. Well, I think that in mid-February there was buying by both managed money traders—that is a sub-group of the 

non-commercial traders—and the large professionally managed 

money traders. They did buying during the middle days in FebVerDate 0ct 09 2002 09:56 Jun 29, 2009 Jkt 041481 PO 00000 Frm 00031 Fmt 6633 Sfmt 6601 I:\DOCS\110-37\42967.TXT AGR1 PsN: BRIAN
28

ruary, and the index fund traders also were buying at around the 

same time. There was buying pressure from financial money, but 

prior to the real explosion of price which occurred on March 3, 

there had been no significant buying by those two groups for about 

a week prior to that. And, in fact, on March 3 and 4 and subsequent days when prices were high and volatile the two groups that 

I mentioned, the managed money traders and the index traders, 

were not only not buyers but they were sellers. 

Mr. MORAN. Mr. Harris or Mr. Fenton, if we didn’t have the futures market, if we didn’t have the speculators participating, would 

the price of commodities be less today than what we see in the 

market? Would the price of oil be something different, the price of 

corn be lower? 

Mr. HARRIS. Well, I guess from my testimony, I think that is one 

thing we point out. There are commodities out there that have no 

futures contracts, and they are going up as much or more than the 

current commodities that have listed futures. And in fact there are 

commodities that have very little institutional money that are 

going up. The rice contract, for instance, is the record increase for 

the past year, and there is very little institutional money in rice. 

Mr. MORAN. Thank you very much for answering me. Mr. Chairman, thank you. 

The CHAIRMAN. I thank the gentleman. And I yield 5 minutes to 

the lady from Kansas, Mrs. Boyda. 

Mrs. BOYDA. This is just fascinating. I have some questions, and 

I am not sure, they are not very well stated here. I am just trying 

to learn some stuff. On the sweet oil futures here that you had, do 

you have graphs? I know you were using this as an example. Do 

you have any graphs that are out there for the commodities? 

Mr. HARRIS. Well, yes, I guess John presented an entire set of 

graphs at our agriculture forum, and we, I believe, have that. 

Mrs. BOYDA. And we are talking about long and short contracts 

out here. Do you have the equivalent of this for sweet oil futures? 

Mr. FENTON. The data that we have used to create this for crude 

oil, we have for all commodity markets, so we could do a similar 

graph writing for other commodity markets. 

Mrs. BOYDA. And do they look similar? 

Mr. FENTON. There is, I think——

Mrs. BOYDA. My question is we are not the oil committee, we are 

the Agriculture Committee, so I am wondering why are we—it is 

interesting, but why are we looking at crude oil? 

Mr. FENTON. Well, I think because we have thought and think 

that crude oil is certainly on everybody’s mind, and it is also an 

important component of agriculture input costs. 

Mrs. BOYDA. In the interest of time, could you just get those to 

us? 

Mr. FENTON. Sure. 

Mrs. BOYDA. Okay. This is fascinating. I would like to learn. 

Mr. FENTON. You asked if the similar chart for some of the agriculture markets would look similar. There is more spread trading 

in the crude oil markets. Spread trading is trading by a trader that 

takes a long position in 1 month and a short position in another. 

It is trading in differential. And that is the predominant trading 

activity of non-commercial traders in crude oil markets. There is 

29

that in the other markets as well, but I think it is less in terms 

of the real world trading. 

Mrs. BOYDA. Most are going still long, is that what you were saying earlier? It is all right because I only have 5 minutes. Do you 

have any way of knowing—I did 58 Congress On Your Corner 

events, it is fascinating, and you get to talk to everyone, and I have 

asked, ‘‘Has anybody seen $12 a bushel wheat, anybody paid $12 

in my neck of the woods.’’ Nobody that I have talked to in Kansas 

is getting these prices. So where are the differences going? I guess 

my question is do you have any sense of what percentage of the actual prices or what percentage of the money, the whole money, that 

is being invested spent, everything? What percentage of it is going 

to hedge fund managers as opposed to the farmer, any sense of 

that? 

Mr. FENTON. Well, the amount of money going to hedge funds is 

obviously a function of the position they take and whether they are 

right about prices. The differential between a futures price and 

some cash prices, it depends where the cash price is, the location 

of the cash price. There is going to be a basis relationship between 

a cash market and a futures market that reflects both the time element and also the locational element. That is, it costs money to get 

a commodity from one place to another so——

Mrs. BOYDA. I don’t have a lot of time. I apologize. But the perception is in my neck of the woods that our farmers aren’t making 

the money. The hedge fund managers are making the money. 

Mr. HARRIS. If I could make a comment on that. 

Mrs. BOYDA. Yes. 

Mr. HARRIS. One of the issues I think is the consternation among 

the farm community is that they looked at the futures prices going 

say from $6 to $8 and thought this is a good—‘‘I can go out and 

hedge my crop and lock in a nice little profit here,’’ and then prices 

continue to go up to $9, $10. We are then facing actually these 

margin costs so it costs them a little bit more in financing costs 

than they thought it would be. There is a common belief that there 

are methods of hedging and selling not your entire crop. These are 

extraordinary times, and I think that is true probably that the 

farmer didn’t have perfect foresight for the most part and couldn’t 

predict it. They probably wouldn’t have hedged their commodity if 

they knew it was going to $10 and $12. 

Mrs. BOYDA. And I guess that is what we are going back to, is 

there any manipulation there of saying it is our small farmers and 

ranchers, and clearly I have small farmers and ranchers. I have 

large farmers and ranchers in my district that are the ones that 

are being caught in the middle here. How much time do I have? 

Do you know, there are these rumors out there that these hedge 

fund managers sit at their computers and they basically bet and 

gamble on what is going on in Kansas. That there are basically formulae that are written that support these decisions. There are not 

people making decisions, that there are all these formulae, is 

there? 

Mr. HARRIS. Well, it is certainly true that hedge funds both go 

long and short so they do take——

Mrs. BOYDA. Are there formulae out there? 

30

Mr. HARRIS. Generally, yes, most hedge funds have some sort of 

program or they determine what the price should be. So if they say 

the price is too high or too low, they try to take a position both long 

and short in the market. One thing we do know is that they don’t 

change positions all that often, so they tend to hold positions more 

than maybe the street lore would have it. Their trading activity is 

actually lower than the average in the markets. 

Mrs. BOYDA. Thank you. 

The CHAIRMAN. Thank you. The gentleman from Texas, Mr. 

Conaway, for 5 minutes. 

Mr. CONAWAY. Thank you, Mr. Chairman. Getting back to the 

differential between cash market and futures market, do you guys 

watch that in terms of trying to analyze? I mean if it is just transportation cost or location, that is pretty easily done but is there—

to expand on what Mrs. Boyda was saying, those differences in the 

cash market versus the future market, is that a trigger or a red 

flag for you in any way? 

Mr. FENTON. Yes. It is a very important price relationship that 

we look at. 

Mr. HARRIS. In fact, we have been monitoring that. In fact, being 

in touch with some of the University of Illinois researchers, we did 

a report on the Chicago Board of Trade 2 years ago on that particular issue, so we invited them to our ag forum. And we monitor 

these things and have been monitoring every contract and expiration for the last few years. 

Mr. CONAWAY. What was your finding? Anything untoward involved or just the normal——

Mr. HARRIS. Well, one regularity actually in the basis risk is that 

the basis is actually—the futures prices—are lagging above the 

spot price during the expiration month up the Illinois River into 

Mississippi. At the Gulf Coast it is actually the opposite way so to 

us at the first glance or the first explanation would be that is a 

transportation cost issue. We have also collected information on 

barge rates and fuel, and we know that those costs have tripled or 

doubled in the last year alone. There does seem to be some fundamental explanation for some of that basis problem. 

Mr. CONAWAY. Looking at this chart on the Minneapolis Exchange of wheat in over a relatively short period of time, what 

were you guys doing during that time frame from a regulatory 

standpoint to say, ‘‘It is okay to be happening like that, it is wrong, 

somebody is manipulating the system.’’ Mr. Fenton, what were you 

doing on that wheat? 

Mr. FENTON. We were intensively monitoring the trading. We 

were watching who was doing the buying and selling, and it is in 

a way illustrative of the fact that we have had high price movements and volatility—having in this case, very little to do with 

speculative trading. Speculators were not buying in this market 

during this period in a significant way, and index funds or index 

traders don’t trade in the Minneapolis wheat market at all so——

Mr. CONAWAY. But who was buying at those prices? 

Mr. FENTON. It was commercial firms. 

Mr. CONAWAY. Firms that were trying to lock in the price for deliveries at that level? 

31

Mr. FENTON. Or buying back short positions, and it is interesting 

that——

Mr. CONAWAY. You can tell that. You can tell if they are just trying to cover short positions. 

Mr. FENTON. Absolutely. 

Mr. CONAWAY. Okay. 

Mr. FENTON. The cash price during this time period was at or 

above the futures price, and one of the features here was for a long 

period of time this market was locked. It reached the daily permissible price move and it was locked, and it was locked 15 out of 16 

consecutive days, and so a lot of the pricing signals were coming 

out of the cash market. 

Mr. CONAWAY. Any sense that the actual supply of wheat was 

driving this? In other words, was there a fundamental that said, 

‘‘We are going to be short this particular type of wheat?’’

Mr. FENTON. I think it is primarily being driven by demand, demand for—and maybe even panic demand to cover——

Mr. CONAWAY. You said panic demand? 

Mr. FENTON. Covered needs. We know that millers and exporters 

or export buyers were bidding high prices to get wheat during this 

period. 

Mr. CONAWAY. Why were they short wheat this year versus last 

year? There were people living this year but not doable. 

Mr. FENTON. Well, I think in the case of—there is strong world 

demand for wheat and so it may well have been as people saw 

prices going higher, and they thought, ‘‘Well, it is high but I better 

buy it now, it may be higher later.’’

Mr. HARRIS. The difference, I think, between this wheat, this is 

the high protein hard red wheat so this is a unique commodity that 

is in high demand. There has been some evidence in Australia, for 

instance, that their wheat was probably short the last 2 years in 

a row. 

Mr. CONAWAY. And you said in the rice market that is just insiders who—there are not other speculators in that market, you said? 

Mr. HARRIS. It is not quite as clean as the wheat market where 

there is no index trading in wheat in the Minneapolis wheat but 

there is very little index trading in the rice market. 

Mr. CONAWAY. And again rice market, you mean rice production 

around the world is down, up, sideways? 

Mr. HARRIS. Yes. 

Mr. CONAWAY. I gave you three choices. I said down, up, sideways. 

Mr. HARRIS. Oh, it is down. 

Mr. CONAWAY. Okay. I yield back. Thank you. 

The CHAIRMAN. I thank the gentleman. The gentleman from 

Georgia, Mr. Scott, for 5 minutes. 

Mr. SCOTT. Thank you very much, Mr. Chairman, for holding 

this important hearing, and the fact that we are holding this hearing just less than 24 hours after completing the farm bill, which 

indeed was an arduous journey, is testimony to the importance of 

this issue and also the dedication of you, Chairman Etheridge, to 

this work. With the rapid increases and volatility in commodity 

prices, I think we have to take a careful look not only at the causes 

but as well as the consequences. I would like for each of you to very 

32

quickly, if you could, in order of priority give me your opinion for 

the causes of this volatility, and then also in order of priority the 

consequences of these rapid increases in price. 

Mr. HARRIS. Well, I think from an economic standpoint one of the 

things we see in all commodity markets is tremendous uncertainty 

about the future. We have two political events now of countries cutting off exports of food commodities in particular. We have seen a 

tremendous growth in the open interest from the hedging crowd so 

commercial traders who are on the buying end of these commodities in grains have bought more than ever. There is more shorting 

and locking in of futures prices by the farm community. We have 

record volumes in all of our markets. I should note that one of the 

exercises of margin calls in Kansas City, we did have a Kansas 

City Board of Trade member sell their seat to finance one of their 

positions, so that is an indication that the markets are booming as 

far as volume goes. 

What is driving that demand, I think is just tremendous uncertainty about what is coming up. We see oil markets developing out 

now into 8 year contracts. We didn’t have oil market contracts beyond 5 years just 5 years ago, and so there is some inherent hedging of demand or hedging of uncertainty in the future of trying to 

lock in prices using the futures markets. 

Mr. FENTON. If I can add, there is of course more than one thing 

causing volatility, and it varies by market, but if I had to pick one 

thing that sort of spans many commodity markets, it is tremendous 

world demand for commodities especially coming out of emerging 

countries. China principally, in copper, in oil, in cotton although 

cotton is not a market that has strong fundamentals. If it wasn’t 

for cotton and Chinese buying, cotton prices would be lower. So it 

is tremendously demand driven, and the consequence of these high 

prices, I would say, is it has made trading very difficult and short 

hedging very difficult. To have a short hedge on and to have done 

the right thing to hedge your risk and then face margin calls day 

after day is a very difficult position to be in. 

Mr. SCOTT. Let me ask you both, what about the role of the institutional investors in the market? There seems to be quite a bit of 

blame that is geared their way. I would like for you to give your 

opinions on that, and also to comment on what I think are probably 

other more profound factors; which are the increased demand as 

you mentioned in developing countries, the weakening of the dollar, 

crop shortfalls, and this recent downward pressure on corn in 

terms of the production of ethanol. If we look at those, what would 

be your fair opinion, is it accurate as many in the community are 

doing to use the institutional investors as a scapegoat in light of 

these other causes? 

Mr. FENTON. Well, I think there has been a growth of institutional money in the market. It has been, I think, mostly coincidental with the bull market and commodities. I think the things 

that you cited are powerful fundamental factors driving prices that 

demand for commodities around the world, the dollar weakness, 

and many crops of wheat in particular with the Australian 

drought, so many commodities are in short supply. And ethanol has 

really fundamentally changed the picture. Thirty million acres of 

American farmland now is devoted to producing energy really rathVerDate 0ct 09 2002 09:56 Jun 29, 2009 Jkt 041481 PO 00000 Frm 00036 Fmt 6633 Sfmt 6601 I:\DOCS\110-37\42967.TXT AGR1 PsN: BRIAN
33

er than food, and so it has direct effects and indirect ripple effects 

throughout the ag economy. 

Mr. SCOTT. Did you say 30 million acres? 

Mr. FENTON. I am just basing it approximately a third of the 

corn crop is going to ethanol, and we use around 90 million acres 

to grow corn. 

Mr. SCOTT. Is that new acres? 

Mr. FENTON. No. Well, there has been some new acreage moved 

into corn from other crops, but it is acreage mostly that has been 

growing other things. 

Mr. SCOTT. My time has expired. Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. The gentleman from 

Texas, Mr. Neugebauer, for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. I have a number 

of questions. I think the first question is that when you look at 

these graphs and the markets were edging upward, but then we 

had some very erratic behavior during a period of time there. If you 

look at these now some of these processes have come back down 

and seem to be a little bit more stable in their nature. And so I 

guess the question I have beginning with is was this some kind of 

a perfect storm that was going on where we were having some 

issues in other financial markets, people looking at moving liquidity around, looking for places to go, seeing the trend in the commodity process and say, ‘‘Hey, maybe that is the place for us to 

take money out of one place and go put it into another,’’ and so all 

of that pressure kind of hitting the marketplace at one time. Mr. 

Harris, Mr. Fenton. 

Mr. FENTON. They don’t with some of that, and it does—many 

markets, certainly the wheat and soybean markets have come 

down quite a bit from their high of February and March. There 

probably was some of that money moving into commodity markets, 

but again we did not see, and looking at the data, do not see a massive in-flow of financial money into the commodity markets during 

this period that would explain these price rises. 

Mr. NEUGEBAUER. The other question is I wish we could have 

seen here also over the same period of time what has happened to 

the dollar. American agriculture is a bargain when you look at 

other currencies around the world. In fact, everything is a bargain 

if you are buying American products because people are paying 

about $75 a barrel for oil in other countries. We are paying $110 

a barrel just because of the differentiation of the dollar and the fact 

that oil is traded in dollars and some of these commodities. What 

would that chart look like as the dollar is going down, would it 

have been pretty much an inverse relationship in many cases? 

Mr. FENTON. Yes. A while ago we looked at what oil prices would 

be if denominated in Euros compared to what it is denominated in 

dollars. It was about 25 percent less so we are judging using that 

back of envelope type analysis. That dollar weakness explains 

about a quarter of the increase in oil prices and probably similarly 

it would explain some of the increases in the ag markets. 

Mr. NEUGEBAUER. Maybe we should send that message over to 

Chairman Bernanke and let him know that maybe he could help 

us with some of these oil prices and help strengthen our dollar. I 

think the other question I have is when I view these markets, parVerDate 0ct 09 2002 09:56 Jun 29, 2009 Jkt 041481 PO 00000 Frm 00037 Fmt 6633 Sfmt 6601 I:\DOCS\110-37\42967.TXT AGR1 PsN: BRIAN
34

ticularly the commodity markets, I find them an extremely important tool for our producers around the country. When I think about 

what is their primary purpose, I have to think it is the commercial 

movement of commodities and the ability to do that in this country. 

Obviously, we need a certain amount of speculative activity in 

those markets to provide some liquidity. So if things are changing 

and we have this perfect storm, I think the question that all of us 

want to know today is, is this some kind of systemic change in 

these markets? Is it a time for reflection to make sure that these 

markets continue to provide that as an effective tool as we move 

forward? 

Do we need to look at these structures and make sure that it is 

in place to be a tool? What I hear today from a lot of folks is that 

it is difficult to forward contracts for the little guy out there that 

is actually growing these commodities. I think sometimes we forget 

those folks. Those are the folks who are the most important. Are 

the tools in place for them? And I think some people are saying 

today that, ‘‘No, those tools are not in place because some of the 

things that have happened in the market have caused huge swings, 

volatility, margin calls that almost freeze up lines of credits for 

some of these folks.’’ Do we need to stop and pause and reflect here 

and see if we are doing it right, or do you think we are doing it 

right? 

Mr. FENTON. Well, first, I absolutely agree that the primary purpose of the futures markets is for price discovery and hedging. It 

is for people who are producing, consuming, or marketing commodities. And it has traditionally served that role very well. There is 

new trading in the market, index trading in particular is trading, 

that didn’t occur in any significant way 10 years ago or even 5 

years ago, so it is a new part of the market. And we are, and have 

been studying it, and we encourage others to—we do publish data 

on index trading. We started doing it last year in January. There 

are 3 years almost of data now available. 

We encourage people to use it, to study it, to see if they see some 

impact of index trading on our markets. And unfortunately we 

don’t get to stop the market. The market has to go on. But you are 

absolutely right that it calls for continued study to better understand these new types of trading in the market. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. Let me follow up as a 

prerogative of the chair for just a minute because I remember we 

had in the financial markets some of these things we didn’t understand that we were trading in. Are you telling this Committee that 

some of this index stuff that we are trading in, you are trying to 

figure out what it is, and what we ought to be paying attention to? 

Are we not in a position to be able to have some regulatory authority over that, that is, trading that may be influencing some of the 

other stuff? 

Mr. FENTON. I think this trading is not really complex. It is not 

an exotic engineered product. It is pretty straightforward. It is new 

though, and it is relatively new. It is in the past 4 or 5 years that 

it has been a significant factor in the market. And we think we 

have a pretty good handle on it, but have we completely answered 

does it have any impact in the market? Probably not. But our best 

35

sense now is that we don’t think that it explains the high level 

commodity prices. 

The CHAIRMAN. We might want to come back to it. The gentleman from Georgia, Mr. Marshall. 

Mr. MARSHALL. Thank you, Mr. Chairman. Thank you for holding this hearing. We, Members of Congress, find ourselves sort of 

in between all of you all and the folks that we represent. In a district like mine what people see is increased gas prices, diesel 

prices, food prices general commodity prices. For an awful lot of the 

folks that I represent an increase of 10, 20, 30 percent in 30, 40, 

50 percent, 60 percent, of a family budget is devastating, just devastating. And so naturally we are being assailed with all kinds of 

questions about what is going on. None of the answers seem particularly convincing to anybody because this has happened so suddenly. 

I see on page two, your summary of the macro, micro economic 

forces at work here, that is basically the letter that I send out 

when people ask me about this. It doesn’t satisfy folks. That is not 

surprising that it doesn’t satisfy folks. I also see right after that, 

again on page two, your caution that you don’t necessarily have the 

answers. That certainly doesn’t comfort people. It doesn’t comfort 

somebody like me. It is understandable. I accept that. But it is very 

difficult to send a letter back in response to somebody who is really 

hurting and not understanding this, saying, ‘‘Here are the forces 

generally, but we don’t really understand what is going on.’’ That 

is a very difficult position to take, and we are just looking for help 

up here. 

And I got to tell you, it would be very helpful if I sensed a little 

bit more alarm than I sense. You know, for the families that are 

affected by this, this is a huge alarming phenomena that if the experts are saying we don’t know, and it could go on for quite some 

time with sort of calm measured voices, that is not comforting at 

all. If you could flip to Chart 9, a quick question here. A lot of people have worried that the movement of money out of different asset 

classes and into other asset classes away from subprime mortgages, 

whatever it is, into this area is somehow causing all prices to move 

up. This is just a lot of capital in the world and capital looking 

around for security for investment opportunities, that sort of thing, 

perceived by ordinary folks not to be real, just rich people making 

money off a bad situation. That is how it is perceived. 

And if you take a look at this, if I understood your testimony correctly, the idea here is that this chart suggests that people are taking short positions, long positions about equally, and so you 

shouldn’t be too concerned. Yet I see the green is a lot more than 

the brown, and then on top of that, and we have seen this in the 

cotton business for sure, people taking short hedges worrying about 

having to make margin calls. I am going to have to sell my seat 

in the exchange to stay in the game. It seems to me that market 

would generally under these circumstances be saying, ‘‘Oh, my 

God, all this money is going to flow in here, prices are generally 

going to be driven high whether you call it,’’ as somebody just said, 

‘‘panic demand or not.’’ Prices are going to go up so we better not 

be taking short positions here. There are a lot of investors out 

36

there that are just going to park their money. It is going to be long. 

And that is a large part of the phenomena. 

You know, there are just general consumption trends worldwide. 

You described that as well. That is something that we probably 

have to live with and adjust to. But to what extent can you safely 

say—well, what percentage? You estimated maybe 25 percent is a 

weak dollar. What percentage of this is just a whole bunch of 

money flooding into these different commodities? 

Mr. FENTON. Well, before I answer that, could I just say that if 

my voice sounded calm or if our voices sound calm, it is not from 

a lack of concern. We are really busting our butts to be following 

these markets, and we take it very seriously. We completely understand the importance of this too. 

Mr. MARSHALL. If I could just briefly interrupt. I think you guys 

do a great job of watching for market manipulation, conscious efforts, that are improper under our rules, criminal in some instances to manipulate the market for financial advantage. That is 

not what we are talking about here. I think we are talking about 

general trends that are very problematic for a huge hunk of our 

population, so, what percent? 

Mr. FENTON. Well, I would say in my opinion the safe assumption in crude oil, which is the graph we are looking at, is that it 

is zero, that the market is reflecting—now obviously from day to 

day there may be days when particular trading, not by any means 

manipulative, but speculative trading may create a liquidity effect 

that moves prices but that would quickly abate over time. So I 

think the safe assumption is that the futures market is reflecting 

the fundamental reality of demand and supply for crude oil. 

Mr. MARSHALL. And, Mr. Harris, you agree. My time is up so——

Mr. HARRIS. I think I would reiterate that we have the most detailed data in these markets than almost any market in the world. 

And I would agree. I think we see that the market seems to be 

functioning appropriately in reacting to demand and supply. 

Mr. MARSHALL. Yes, we are all ears if you got some good ideas 

how we address this for these ordinary Americans who are really 

struggling as a result of this. And it is happening too soon to say 

that this is just sort of normal stuff. It is not. Thank you. Thank 

you, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. The gentleman from Louisiana, Mr. Boustany, for 5 minutes. 

Mr. BOUSTANY. Thank you, Mr. Chairman. This is a very important hearing. I agree, a lot of American families are feeling tremendous anxiety, business owners are feeling anxiety, farmers, and so 

forth. And I think the importance of this hearing and the information we are getting is very valuable because we are getting some 

facts out there that we can all kind of get our arms around. And 

just to kind of review some of the things that came out in testimony and from further questioning, Mr. Harris, you said earlier little evidence that futures prices are driven by speculation, and then 

we kind of repeatedly heard that in other committees. And I think 

that should give some sense of comfort that we don’t have this wizardry going on out there, that the markets are really being driven 

by fundamentals of tight supply and demand. 

37

We know there is a linkage between energy and the other commodities. Clearly, the ethanol bridge and other things, the cost of 

inputs which largely related to petroleum products is also driving 

commodity prices. As well as problems such as what we have seen 

with rice in Thailand and other countries that have cut off exports. 

So basically the message that I am getting is that we have tight 

supply and demand. The fundamentals are driving the prices in 

this market. We know that the nature of the futures market is anticipatory. We know that hedging is a very important tool and that 

without arbitrage you can’t really effectively hedge, so I think that 

the alarm that my colleague, Mr. Marshall, raises should not be 

something that Mr. Scott talked about, which would be 

‘‘scapegoating’’, but really good policy that is going to address the 

tight supply and demand, and that is sort of where we are at an 

impasse here. 

I can’t help but think about the oil industry which I know a little 

bit about since I come from southwest Louisiana, and you mentioned the oil markets are looking at futures 8 years out. I know 

planning is a multi-year process with a lot of geopolitical risk, geologic risk, and so forth. I can’t help but think that when the House 

voted four or five times in this past year or so to possibly impose 

$18 billion in new taxes on U.S. oil and gas companies, that can’t 

be a good thing. It certainly has to have a detrimental impact on 

the planning process. And in a sense that is a type of speculation 

as well or a ‘‘speculatory’’ issue that could potentially create price 

increases down the line. Windfall profits tax, we have heard that 

kind of discussion as well with the oil and gas industry. We know 

what that did. We know what it did to us in the 1970s, and I would 

submit that if that sort of tax were imposed today the impact 

would be even worse because of the tight supply and demand situation that we are faced with. 

So I guess I am pleased to hear the two of you today once again 

reiterate that fundamentals are driving this tight supply and demand, and that what we really need to do is look at ourselves, 

Democrats and Republicans, and face the fact that these are the 

facts here. We need to come up with good policies that, particularly 

in the energy industry, are going to help us increase supply as we 

transition to alternative fuels, which we know is going to be a 

lengthy process. I would submit we need to strategically manage 

our interdependence on fossil fuels today with good policy that emphasizes supply as well as future investment as we transition to 

hopefully alternative forms of energy. 

So more of a speech than a question, but again I appreciate you 

again reiterating the facts about tight supply and demand. I don’t 

know if you want to comment on that. 

Mr. HARRIS. Well, if I could comment actually. One of the things 

that I want to make a point of is that we do have detailed trading 

data every day on who is buying and who is selling in these markets. We are rigorously analyzing these things, and on a weekly 

basis updating. In fact, we have most of this up through last Monday now sort of fully engaged in determining when does a psychological factor take over, does a psychological factor take over, what 

are we seeing on a day-to-day basis. The pattern that we saw actually in Minneapolis Grain isn’t all that unusual for a market that 

38

goes limit up. There is quite a bit of market behavior research that 

shows that when you stop trading in a market, you get more volatility when you start trading again. I think that is part of what 

might have happened in Minneapolis back in early March. But I 

do want to emphasize that we have information on who is buying 

and who is selling every day in these markets. 

Mr. BOUSTANY. And I suppose it is safe to say that in a very 

tight supply and demand situation, you certainly are going to see 

more hedging going on, and so that creates the opportunity for 

more arbitrage. Is that an accurate statement? 

Mr. HARRIS. Well, it is true that if prices were artificially driven 

high typically what you would see is a build up in inventory because nobody would want to buy those artificially high prices. In 

the grains that we highlighted in the written testimony here, we 

have historically low storage grain so there is a real reason that 

there is just not product out there to be able to buy so that seems 

to be driving the prices up. 

Mr. BOUSTANY. Thank you. 

The CHAIRMAN. I thank the gentleman. His time has expired. 

The gentleman from North Dakota, Mr. Pomeroy, for 5 minutes. 

Mr. POMEROY. Thank you, Mr. Chairman. I commend you——

The CHAIRMAN. Excuse me, just a minute before you start. It 

looks like we are going to have a vote somewhere between 11:30 

and quarter of, so we are going to try to stick to our time so we 

can try to get through with this panel and hopefully get the next 

group, get their testimony. The gentleman is recognized for 5 minutes. 

Mr. POMEROY. Well, Mr. Chairman, it is a very important matter 

before us, but I am still a bit in afterglow on this farm bill vote. 

I commend you and especially the staff for the tremendous work 

we did on that. I agree with the comment made, I think it was by 

Congressman Scott, that the fact that we are moving directly immediately right into business shows the level of Committee concern 

about this whole range of issues. One of the things that I am worried about is the activity occurring in unregulated markets and 

whether or not CFTC has a handle on things the way they used 

to. The farm bill closed up the Enron loophole but still points to 

things we know and there are things we don’t know. How do you 

try to get a handle on market activity at large, understanding that 

a lot of movement now is in the OTC unregulated area? 

Mr. FENTON. Well, I think there it is by commodity. In the agricultural commodities, the OTC market is still pretty undeveloped, 

and in fact that was one of the reasons why we felt like we could 

put out accurate data for index trading in commodity markets. The 

swap dealers who do trading in the ag markets are predominantly 

almost overwhelmingly index trading, and we get to see that in the 

form of the swap dealer taking the position in the futures market. 

So I don’t think that there is a significant chunk of activity in the 

ag space that is happening in OTC. 

Mr. POMEROY. What about other areas under your regulatory 

control? 

Mr. FENTON. I think in energy obviously the OTC market is a 

much bigger developed market, and there are OTC products traded 

on exempt commercial markets like ICE, and in the——

39

Mr. POMEROY. This whole thing has grown up since we addressed 

the Commodity Futures Modernization Act or whatever the name 

of it was, the Reauthorization Act. Go a year or 2 and have another 

hearing, and the whole marketplace will be different than the one 

I just studied about the last time we enacted, so this has been really—I am an old insurance regulator. You don’t have anything moving like this in insurance regulation. I mean this is pretty phenomenal what has occurred in terms of the new activity occurring 

on these unregulated exchanges, correct? 

Mr. FENTON. There is a big growth in the OTC. 

Mr. POMEROY. Have you ever seen anything like that happen in 

your regulatory career? 

Mr. FENTON. I would say there has been more growth in the last 

few years in the OTC market than have been in any previous——

Mr. POMEROY. The President’s regulatory working group seemed 

to point to that we need to do something. We don’t have a comprehensive handle on all this. I am just wondering, for example, it 

is not just within the country either. It is global. The global marketplace really is undifferentiated whether the trading is occurring 

in England or Georgia or wherever. 

Mr. HARRIS. Well, if I could comment on that. I think one of the 

reasons I think the Enron loophole that we just hopefully will be 

closing soon is that development of a market. I can’t speak specifically to the intent because I wasn’t involved in the drafting of the 

legislation, but one of the issues in that legislation was to provide 

competition from electronic trading that we were seeing growing in 

the stock markets and other places in the United States. And ICE 

Futures in particular grew——

Mr. POMEROY. But my issue, do we have a handle——

Mr. HARRIS. I will get there. This is related because what happened then in ICE Futures was not reporting any of their trading 

to anybody, and the fix that we have in front of Congress right now 

is to have them report directly to us. That is not a directly parallel 

comparison to what we had——

Mr. POMEROY. That is good. What about England? 

Mr. HARRIS. Exactly. So in the oil and crude markets right now 

ICE Futures UK trades a commodity related to our commodities 

traded here. We get weekly reports from ICE Futures from the 

FSA every week so that John’s staff——

Mr. POMEROY. Is the report sufficient? They have kind of a different philosophy about regulation over there, it seems to me. Are 

you getting what you need to do to basically look at whether there 

is activity occurring in these other areas that might be of concern? 

Mr. FENTON. I think the reports are sufficient to monitor for manipulation of the expiring futures. That was the purpose when we 

negotiated with the FSA and developed a pretty comprehensive information sharing and cooperative agreement with them. 

Mr. POMEROY. I urge you—my time is rapidly expiring. I have 

one more question to get in the next 15 seconds. So I urge you to 

do more on that. I am interested in learning that, and I hope we 

will have a chance to further inquire on that. The last question, 

sovereign wealth funds. You look at speculator activity. Are you 

looking at a significant market presence coming in by another deVerDate 0ct 09 2002 09:56 Jun 29, 2009 Jkt 041481 PO 00000 Frm 00043 Fmt 6633 Sfmt 6601 I:\DOCS\110-37\42967.TXT AGR1 PsN: BRIAN
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velopment sovereign wealth funds and whether or not that is affecting market function? 

Mr. FENTON. There is a very limited amount of trading activity 

by sovereign wealth funds directly. There is a likelihood that some 

trading going through managed money traders, commodity trading 

advisors, may be sovereign wealth funds money. But direct trading 

by sovereign wealth funds is pretty limited. 

Mr. POMEROY. I would like to pursue that but another time. I 

yield back. 

The CHAIRMAN. I thank the gentleman. The gentlelady from 

South Dakota, Ms. Herseth Sandlin, for 5 minutes. 

Ms. HERSETH SANDLIN. Thank you, Mr. Chairman. Thank you for 

the hearing today. Thank you, gentlemen, for your testimony, and 

I would just like to build on the line of questioning that Mr. Pomeroy and Mr. Marshall were pursuing. If I am a cattle seller and 

I am going to the cattle auction, I am going to be a lot happier if 

there are about 15 bidders at the auction that day than if there are 

three. Prices for me if I am selling cattle that day are probably 

going to be significantly higher if there are far more bidders at the 

auction that day. It would seem to me that the same would hold 

if you are talking about expanding that to the oil futures market 

or the futures market for agricultural commodities. 

So my question for you is how certain are you that the aggregate 

number of speculators in the market isn’t driving up the price of 

oil which in turn drives up the price for the producers we represent? 

Mr. HARRIS. Well, we are very confident. In fact, we can break 

out different types of speculators as well. We can break out the 

managed money traders from the index traders. We can aggregate 

as a whole, and that is exactly the analysis we are doing. I think 

an important point there is exactly that, that in the futures market 

there is an ability to write a new contract—so it is not like there 

is a single cow that we are all bidding on. 

If you come to the market, and I come to the market at the same 

time, someone could write two contracts and give them to both of 

us so you can sort of split—you can get double the number of available supply in that case, so it is a little bit different than actual 

physical market in that sense. 

Ms. HERSETH SANDLIN. I understand, and generally look for the 

marketplace to work effectively for our producers, we would rather 

have more bidders. This is sort of getting at what Mr. Pomeroy and 

Mr. Marshall are trying to get at in terms of: while the index trading may not be that complex; it is relatively new; and how we are 

breaking out the information. How the trading data in the futures 

market is being analyzed is raising a lot of questions. Particularly, 

when I think even your own examination has shown that there has 

been no visible evidence that any hedging operations are declining 

as a result of the rising financial obligations associated with hedging. Yet, we have had an increase in the aggregate number of speculators. I think it has tripled in the last number of years, and so 

I guess you are saying that you feel that the sophistication of your 

analysis suggests that there is absolutely no impact at all of that 

aggregate number of speculators in the market on prices. 

41

Mr. HARRIS. I think the last graph in my written testimony, we 

have natural gas broken out in looking at, and that is exactly what 

we are looking at, the mix of traders. Even though speculative activity has tripled perhaps in some different markets, it is almost 

entirely mirrored by people on the other side hedging. So I think 

the speculator allows some liquidity in the market to afford that 

hedging activity to be executed on the market. I do think one good 

thing about the oil markets in general and sort of the explosion of 

volume in our markets suggests that a lot more of the over-thecounter market that used to exist that we never saw is actually 

being executed on exchange now. I think this credit crunch that we 

hit last summer is actually driving more of that trading onto the 

exchange. I am actually fairly confident that we are seeing more 

of the market now than we actually were in the past because of the 

fundamental soundness of the markets that we regulate. 

Ms. HERSETH SANDLIN. Mr. Fenton, did you want to elaborate at 

all? 

Mr. FENTON. Well, I think that in your analogy if you were at 

a cattle auction and you were a seller, you would like there to be 

multiple bidders. I think that certainly it is the case. It has always 

been true that one of the advantages of the speculator is that they 

provide liquidity so when you are offering to sell there is a bid 

there to buy. But as Jeff said, it is different in that there is a limited number of cattle to sell at an auction and there is an unlimited 

number of contracts that can be sold if something seems that the 

buying activity of an index fund is pushing prices to what seems 

like too high a level. 

Ms. HERSETH SANDLIN. I appreciate your responses. Thank you, 

Mr. Chairman. I yield back. 

The CHAIRMAN. I thank the gentlelady. Let me thank both of you 

for being here. One question I would ask, and then each Member 

may have some questions they want to submit in writing. I do, but 

I would ask you to respond back to that within a week if at all possible. But I would like to know in following up what Mr. Pomeroy 

said with sovereign wealth funds and other things coming in the 

market, do you have the tools you need to do the job you need to 

do? 

Mr. FENTON. Well, we are——

The CHAIRMAN. Yes or no. If you want to give me a written explanation, that is fine, but we want to get to the next one. 

Mr. FENTON. We can do the job. We could use more tools. 

The CHAIRMAN. You could use more tools? 

Mr. FENTON. We need—I think it is a well-known fact that we 

are under severe budget constraints. 

The CHAIRMAN. Okay. If you would share that with us in writing, 

I would appreciate that. Let me thank you for coming and we appreciate very much your testimony this morning. 

Mr. BOUSTANY. Mr. Chairman, I am glad you asked that question. I would hope you get details as to what you would need to 

accomplish those goals. 

The CHAIRMAN. He said he would within a week. 

Mr. BOUSTANY. Thank you. 

The CHAIRMAN. Thank you, gentlemen. And I will ask the second 

panel if they would join us. First will be Mr. Bob Stallman, PresiVerDate 0ct 09 2002 09:56 Jun 29, 2009 Jkt 041481 PO 00000 Frm 00045 Fmt 6633 Sfmt 6601 I:\DOCS\110-37\42967.TXT AGR1 PsN: BRIAN
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dent, American Farm Bureau Federation; Mr. Terrence Duffy, Executive Chairman, Chicago Mercantile Exchange Group; Mr. Gerry 

Ramm, President, Inland Oil Company, on behalf of Petroleum 

Marketers Association of America; Dr. James Newsome, President 

and CEO, New York Mercantile Exchange; and Ms. Laura Campbell, Assistant Manager of Energy Resources, Memphis Light, Gas 

& Water, on behalf of the American Public Gas Association. 

And I am going to ask each one of you, if you will, we are going 

to try to get your testimony in before we have a vote that is upcoming. And if you would be kind enough, I know you have tried to get 

your statement to 5 minutes, we would ask you, if you can, to try 

to condense it to 4 if that is possible. We will be a little bit flexible 

on you, but if we can do that, I think we can get all of your testimony in, opening testimony, before we have to go vote. When we 

come back, we are going to have five votes so it will take a good 

while to get those votes in. You have been kind enough to sit 

through all this morning. I appreciate it. We have another panel 

following you in an attempt to get all of this in today, so thank you. 

We appreciate that. And with that, Mr. Stallman, you are welcome 

to start when you are ready. 

STATEMENT OF BOB STALLMAN, PRESIDENT, AMERICAN 

FARM BUREAU FEDERATION; RICE AND CATTLE PRODUCER, 

COLUMBUS, TX 

Mr. STALLMAN. Thank you, Mr. Chairman, and Members of the 

Subcommittee. I am Bob Stallman, a rice and cattle producer from 

Texas, and President of the American Farm Bureau Federation, 

and we are pleased to be here today to present some producer perspectives on what we are facing in the market. We are seriously 

concerned about the effective performance of the futures exchanges 

as mechanisms for price discovery and risk management. Over the 

past month, as has already been referenced, we have witnessed extreme price volatility, expanding and volatile cash/futures basis relationships, and hedgers difficulties in meeting margin calls. 

The basic purpose of the Commodity Futures Trading Commission is to ensure that these markets under its jurisdiction operate 

in a way that allows us to manage price risk and discover cash 

prices. However, we believe that the market mechanism at this 

point is bent, if not broken, and the fact that several major grain 

and oil seed marketers are only offering firm crop price bids 60 

days into the future is a rather ominous sign for the future. We 

have three main areas of concern. First, is lack of convergence between futures and cash prices. Convergence is the idea that futures 

prices by the close of the contract eventually equate to what is occurring in the cash market, also known as the law of one price. 

Today, neither the convergence of futures to cash nor reasonable 

expectations of basis levels applies for a number of contracts. These 

developments challenge producers abilities to develop and implement risk management programs for marketing their products. The 

problem is compounded by the fact that many producers are being 

asked to make firm commitments for inputs far in advance of them 

using them and not being able to establish the price for the crop 

for which those inputs are applying. One reason we believe futures 

prices may not be making an orderly convergence is part of the 

43

process established in 2000 when the river system delivery process 

was instituted by the Chicago Board of Trade. This system introduced the concept of a certificate of delivery that does not have to 

be redeemed by any certain date. Therefore, it provides little incentive for the actual physical commodity to move into the market. 

Some possible solutions to the convergence may be: one, encourage the CFTC to require additional delivery points to prevent potential market manipulation and assure an adequate delivery system. Some of that is being done. Two, end the certificate of delivery 

and return to the notice process originally used for delivery. Three, 

examine the merits of cash settlement. Moving to a cash settlement 

contract should not be undertaken lightly, but we believe it merits 

further study. The second area of concern, the impact of higher 

margin requirements and expansion of daily trading limits. Volatility is at a record high and with already high trading limits and 

high margin requirements the average farmer has a very difficult 

time using the futures and options for price protection. 

Last month we requested that CFTC analyze the possible effects 

on market participants of lowering the daily trading limits. We are 

not necessarily seeking to lower the price limits, but we believe a 

study would benefit participants by understanding: what the potential effects of margin requirements are; what the risk factors are; 

volatility; and what financing charges are coming in to play. Our 

third and last area of concern is the role of speculators and commodity index traders. As hedgers, we understand the importance of 

having speculative interest in the commodities markets. Market 

analysts report a continued though massive inflow of capital. It far 

exceeds what we have experienced in the past primarily by the 

long-only, passively managed index. 

Trading activity by funds is certainly one of the contributing factors we believe to higher futures prices, and this ordinarily would 

appear to be positive, but if you don’t get convergence with cash 

markets at the end of the contract there is little real information 

as to what the price level should be either for producers or consumers. Our AFBF policy opposes restricting speculative funds 

from the commodity markets because we do believe that they provide pricing opportunities and liquidity that might not otherwise be 

there. 

We do have some concerns though that the volume may overwhelm the system at least to some extent with extreme levels of 

speculation. It is critical for hedgers to manage the price risk if 

they are going to do that to fully understand who is in the market, 

and perhaps more importantly, why. We are asking that additional 

transparency about the funds involved in the futures market 

should be required so that the markets can fulfill their primary 

functions of price discovery and risk management. In conclusion, 

let me just say we continue to support the CFTC’s regulation of the 

commodity futures business. We vigorously oppose efforts to weaken the CFTC by transferring or reducing its authority or by combining it with the SEC as some have called for. Thank you for arranging this hearing, and we look forward to questions. 

[The prepared statement of Mr. Stallman follows:]

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The CHAIRMAN. Thank you, sir. Mr. Duffy. 

STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, 

CHICAGO MERCANTILE EXCHANGE GROUP, INC., CHICAGO, IL 

Mr. DUFFY. Thank you, Chairman Etheridge, Ranking Member 

Moran, and Members of the Subcommittee for holding this hearing 

and inviting me to appear before you today. CME Group is the 

world’s largest and most diverse commodities market. Our products 

have served as leading global benchmarks for commodity prices for 

more than 150 years. We provide an important public service precisely because we operate a free market that permits risk transfer 

from hedgers to speculators in an open, transparent, and well-regulated marketplace. CME Group is a neutral facilitator of transactions, and does not profit from higher food or energy prices, increased volatility or speculation. Our core philosophy is to operate 

free markets that foster price discovery and the hedging of economic risks in a transparent and regulated environment. 

Let me be clear that our markets are working. The Commodity 

Futures Trading Commission and most economists that have been 

surveyed agree that our markets are working and current price levels in energy and commodity markets are related to fundamental, 

macro-economic factors, not excessive speculation. One, biofuels are 

increasing commodity prices. As a result of U.S. legislation requiring 36 billion gallons of renewable fuels by 2022 approximately 1⁄4

of the U.S. corn crop will be used to produce ethanol. Two, increased acreage for biofuels is limiting acreage for food crops. 

Farmers are economically rational. Last year they dedicated the 

most land to corn since 1944 as the demand for the ethanol sector 

boosted prices. 

This diminished acreage devoted to wheat contributed to higher 

wheat prices. Three, the weak U.S. dollar has increased energy and 

commodity prices. The dollar’s weakness against major foreign currencies has increased U.S. grain exports reducing domestic stocks 

and increasing prices. Additionally, our weaker dollar purchases 

less foreign oil than it did 1 year ago. Four, future projected demand exceeds future projected supply. The average annual growth 

rate and the production of grain and oil seeds has slowed from 2.2 

percent per year in the 1970s and 1980s to only 1.3 percent since 

1990. USDA projects further declines in the next 10 years. Five, 

greater affluence and changing dietary habits is driving higher 

meat consumption and further straining grain feedstocks. 

As the demand for meat rises in China, India, and other developing countries, the demand for grain grows at an even faster rate. 

Six, droughts are limiting supplies. Multi and single year droughts 

in Australia, the Black Sea states, Canada and Russia have resulted in lower crop yields. Seven, export curbs and tariffs are limiting global supplies. Argentina, China, India, Pakistan, Russia, 

the Ukraine, and Vietnam have all suspended or cancelled wheat 

or other commodity exports or implemented prohibitive export tariffs in order to combat inflation or stabilize prices in their own 

home countries. Eight, inventories are low. U.S. wheat supply 

stocks are forecast by the USDA to be the lowest in 60 years and 

global wheat stocks are forecast to be the lowest in 30 years. 

50

In summary, there is strong evidence that commodity prices are 

being impacted by fundamental factors. In contrast, there is absolutely no objective evidence that futures market speculators are 

driving higher prices. In fact, CFTC data demonstrates that index 

fund participation has remained relatively constant since 2006. Despite these facts and despite considered opinion of most economists, 

some have suggested limiting speculative activity in futures markets by artificially raising margin requirements for speculators. 

Government-mandated artificial margin requirements in futures 

markets will not limit speculative participation and will significantly disrupt the value of hedging and risk transfer services we 

provide. 

We strongly believe that any proposal to artificially raise margin 

requirements will increase costs for speculators on both sides of the 

market, including the sellers; driving liquidity providers from regulated and transparent U.S. futures markets to unregulated dark 

pools in the OTC market or less regulated foreign markets. This is 

a net loss to the objective of fair, efficient, and well functioning 

commodity and energy markets. Interfere with the prudent risk 

management practices of central counterparty clearinghouses, performance bonds are designed to ensure the safeness and soundness 

of our clearing and settlement systems, not to create incentives or 

disincentives for trading decisions. 

Rather than pursuing a flawed and harmful strategy of imposing 

artificial margin requirements on speculators and commodity or futures markets, we propose two useful steps for you to consider. 

First, we again recommend that the CFTC exercise its existing authority to eliminate exempt commercial markets originally authorized as part of the so-called Enron loophole. Under this trading 

loophole futures contracts based on energy, metals, and other nonenumerated commodities are traded in so-called dark pools without 

regulation. That means that speculators and commercial players 

can trade economically identical products in energy and commodities without position limits, position reporting, large trader reporting or transparency. CME Group strongly agrees with the recommendation of the President’s working group which expressly 

found that unregulated trading in commodity and energy markets 

that are susceptible to manipulation is not appropriate. 

Eliminating the Enron loophole would produce more effective 

regulation oversight without any adverse implications for innovation, competition, or market flexibility. More important, it would 

provide a better means of understanding, detecting, and deterring 

manipulative activity in exempt commodity and energy markets. 

Second, CME Group recommends the establishment of a joint task 

force by the CFTC and both U.S. Department of Agriculture and 

Energy. The task force should evaluate current cash market practices involving storage, delivery of commodities, as well as crude oil 

and gasoline and the impact of such practices on both cash and futures markets. Doing so will ensure that improper or undesirable 

activity is not falling in between the cracks of cash and futures 

market jurisdiction of these different Federal agencies. Thank you 

for your time today, and we look forward to working with you and 

your colleagues in Congress to insure our markets remain the envy 

of the world. 

51

[The prepared statement of Mr. Duffy follows:]

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The CHAIRMAN. Thank you. Mr. Ramm. 

STATEMENT OF GERRY RAMM, PRESIDENT, INLAND OIL

COMPANY, EPHRATA, WA; ON BEHALF OF PETROLEUM

MARKETERS ASSOCIATION OF AMERICA 

Mr. RAMM. Honorable Chairman Etheridge, Ranking Member 

Moran, and distinguished Members of the Committee, thank you 

for the invitation to testify today. I really appreciate the opportunity to provide some insight on the extreme volatility and record 

setting prices seen in recent months on the energy commodity markets. I am an officer of the Petroleum Marketers Association of 

America. We represent over 8,000 independent fuel oil dealers and 

almost all of the heating oil dealers in the United States. Excessive 

speculation on energy trading facilities is the fuel that is driving 

this runaway train in crude oil prices. Last month Stephen Simon 

of ExxonMobil Corporation who testified before the House Select 

Committee for Energy Independence and Global Warming agreed 

that speculation is part of the problem stating, ‘‘When you look at 

the fundamentals, the price should be $50–$55 a barrel.’’

If you are a large party like a hedge fund or a sovereign wealth 

fund because of your balance sheet you can purchase high leveraged, unregulated bilateral energy trades. If this entity speculates 

with $1 million, they could get a 100 to 1 margin account for energy trades. If on May 13, 2008, where there was a 13¢ increase 

in heating oil, they could have netted a return of $3.6 million or 

364 percent on that day of trading. The rise in crude oil prices in 

recent weeks have reached $127 on Tuesday, has dragged with it 

every single petroleum refined product, especially heating oil. In 

May, heating oil has gone up over 60¢ per gallon. This price spike 

occurred while heating oil inventories remained at or near a 5 year 

average. 

While energy commodities continue to skyrocket petroleum marketers and consumers are forced to pay excessively high energy 

prices. We have come to the conclusion that excessive speculation 

on energy commodity markets has driven up the price of crude oil 

and consequently all refined petroleum products without supply 

and demand fundamentals to justify the recent run up. Large purchases of crude oil contracts by speculators have in consequence 

created additional demand for oil for which drives up the price of 

future delivery of oil. We have now moved beyond the previous inflation adjusted high of $104 in 1979, but without an equivalent 

disruption to oil availability that was experienced in those decades. 

U.S.-destined crude oil and heating oil contracts are trading daily 

at the rate for multiple times the annual consumption of crude oil 

in the United States. We must have full market transparency. 

Speculators who have no direct contact with physical commodities 

are trading in the over-the-counter markets and the foreign boards 

of trade, which due to a series of legal and administrative loopholes, are virtually opaque. We want to thank you for passing the 

farm bill. That will help bring transparency to some of these energy markets. However, the farm bill is just the first step. The 

CFTC provided a No Action letter to a London-based International 

Petroleum Exchange, IPE, because it was regulated by the United 

Kingdom Financial Services Authority. Subsequently, IPE was 

62

bought by the IntercontinentalExchange, ICE, located in Atlanta, 

Georgia. 

ICE is the exchange most often utilized by those who exploit the 

Enron loophole. ICE is a publicly traded exchange whose shareholders are primarily investment funds. In recent years, ICE’s 

trading volume has exploded at the expense of the regulated 

NYMEX. ICE purchased IPE and will continue to claim exemptions 

on various contracts whether or not the farm bill becomes law since 

they effectively get a ‘‘get out of jail free card.’’ Closing the Administrative Foreign Boards-of-Trade Loophole via review or elimination of the CFTC No Action letters to overseas trading would be 

something that you may consider. Raising margins or necessary 

collateral for non-commercial entities or so-called non-physical 

players, requiring non-commercial traders to have the ability to 

take physical delivery of at least some of the products, imposing 

new transaction fees for non-commercial or non-physical traders 

are others. 

PME strongly supports the free exchange of commodity futures 

in the open market, that we want well-regulated and transparent 

exchanges that are subject to the rules of law and accountability. 

Reliable futures markets are crucial to the entire petroleum industry. Let us make sure that these markets are competitively driven 

by supply and demand fundamentals. We and our customers need 

our public officials, including those in Congress and the CFTC to 

take the stand against the loopholes that are artificially inflating 

our energy prices. One other point I would like to raise is the pass 

through of the ethanol credit where now with oil companies at terminals doing injection blending they are not passing through the 

ethanol credit to their marketers or to their end-users. 

So what we would like to see, we used to be able to splash blend 

but now we are not able to do that anymore, so we would like to 

see something on that too. Thank you very much for your time. I 

will answer any questions. 

[The prepared statement of Mr. Ramm follows:]

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Mr. MARSHALL. Mr. Chairman, why don’t you suggest that Dr. 

Newsome vary from his prepared testimony and just respond to 

Mr. Ramm. 

The CHAIRMAN. Dr. Newsome for 5 minutes, and then we may 

have to stop after that because we are running short of time that 

we got to vote on. 

STATEMENT OF JAMES E. NEWSOME, PH.D., PRESIDENT AND 

CEO, NEW YORK MERCANTILE EXCHANGE, INC., NEW YORK, 

NY 

Dr. NEWSOME. Thank you, Mr. Chairman. It is a honor to speak 

in front of this Subcommittee again. In a highly transparent, regulated, and competitive market, prices are affected primarily by fundamental market forces. The demand and supply fundamentals in 

the oil markets continue to be the driving factors in oil prices. The 

latest EIA Short-Term Energy Outlook summarized the demand 

and supply situation as follows, ‘‘The oil supply system continues 

to operate at near capacity and remains vulnerable to both actual 

and perceived supply disruptions. The combination of rising global 

demand, fairly normal seasonal inventory patterns, slow gains in 

non-OPEC supply, and low levels of available surplus production 

capacity is providing firm support for prices.’’

I wish to highlight this finding; growth in consumption has outstripped growth in non-OPEC production by over one million barrels per day. With projected demand exceeding one million barrels 

per day, the only way a market with highly inelastic demand will 

equilibrate is through a substantive rise in price. The upward price 

pressure has been there, and according to projections will continue 

to be there. It is key to realize that the market tightness and the 

market struggle to discern actual demand in growing and developing economies are both fundamental influences in the world oil 

market. The most visible signs of these conditions are the transparent market mechanisms that reside in the world today such as 

NYMEX’s futures and options markets, where prices are discovered 

and risk is managed. 

On the supply side, global production of crude oil was relatively 

flat in 2007 despite rising demand and rising prices which did not 

provoke a significant supply response. Further, the geopolitical risk 

provided added uncertainty to supply outlook. Moreover, various 

state-owned oil companies have not been investing adequately in 

oil production. Venezuela nationalized assets owned by U.S. oil 

companies and has generally proved to be an unreliable partner. 

Mexico’s major oil field has been depleted and will not allow U.S. 

companies to engage in deep water drilling. Colombian rebels have 

been blowing up pipelines with frequency, and are being financially 

backed by the Venezuelan Government. Nigerian rebel forces routinely shut down oil fields, either through strikes, terrorism or sabotage. 

Russia has suffered a decline in production. And, finally, U.S. 

production has declined dramatically in the past 20 years, and 

promising new drilling areas are generally not being opened up due 

to environmental considerations. The role of speculators in NYMEX 

markets is widely exaggerated and misunderstood. Our data shows 

that the percentage of open interest in NYMEX crude oil futures 

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held by non-commercial participants actually decreased over the 

last year even at the same time that prices were increasing. The 

chart that you have on the screen overhead displays the percentage 

of open interest in the NYMEX crude oil futures contract held by 

non-commercial longs and shorts relative to that held by commercial longs and shorts. 

As you can see, during the last year commercial longs and shorts 

consistently have comprised between 60 and 70 percent of all open 

interest. On the other hand, non-commercial longs and shorts consistently have been in the range of 25 to 30 percent of open interest. Therefore, non-commercials holding long or buy positions have 

not been participating in the market to the extent that they could 

have a significant impact on market price. Moreover, the extent of 

non-commercial participation in the crude oil energy futures contract has actually declined since last summer. Additionally, noncommercial participants are not providing disproportionate pressure on the long or buy side of the crude oil futures market. Instead, non-commercials are relatively balanced between buy and 

sell open positions for NYMEX crude. 

It has been widely, yet inaccurately, theorized that speculators 

can drive up prices. With hundreds of commercial participants and 

instantaneous price dissemination, any spike in price would be met 

with an equally strong commercial reaction. If markets move in a 

direction inconsistent with actual market factors a vast number of 

participants, including energy producers, wholesalers, and retailers 

have comparable access to information. These participants will respond to ensure that prices rapidly return to where the industry 

consensus believes they should be. Speculators do exist, and they 

play an important role in the market. They add liquidity to the 

market and enable commercial traders to get in and out of the 

market when necessary. Speculation traders seek to participate in 

price trends that are already underway, but because they lack the 

capacity to make or take delivery, they will never be in a position 

to hold a market position through delivery. Therefore, they create 

virtually no impact on daily settlement prices which is the primary 

benchmark used by the marketplace. 

In futures markets, margins function as financial performance 

bonds and are employed to manage financial risk and to ensure financial integrity. Some have suggested that the answer to high 

crude oil prices is to impose substantially greater margins on energy futures markets regulated by the CFTC. We believe that this 

approach is very misguided. Furthermore, given the reality of global competition and energy to revenues, increasing crude oil margins 

on futures markets regulated by the CFTC invariably will force 

trading volume away from regulated and transparent U.S. exchanges. Prices in the NYMEX markets are determined by fundamental market forces. However, uncertainty about the availability 

of supply due to political and security factors, uncertainty about 

the actual levels of continuing growth and demand in developing 

parts of the world, and uncertainty about currency fluctuations materially weigh in to the fundamental analysis. 

There is no evidence to date that the trading by non-commercials 

has impaired the price discovery function of the markets nor the 

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raising margins would have an impact on lowering prices. Thank 

you, Mr. Chairman. 

[The prepared statement of Dr. Newsome follows:]

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The CHAIRMAN. I thank the gentleman. We are going to have to 

recess until we get through voting. I thought we would get everybody in, but the clock has run out on us. It will be about 30 minutes. If you want to just stretch a little bit, we will be back. 

[Recess.] 

The CHAIRMAN. Begin your testimony, please, ma’am, 5 minutes. 

Four minutes would be better. 

STATEMENT OF LAURA CAMPBELL, ASSISTANT MANAGER OF 

ENERGY RESOURCES, MEMPHIS LIGHT, GAS & WATER,

MEMPHIS, TN; ON BEHALF OF AMERICAN PUBLIC GAS

ASSOCIATION 

Ms. CAMPBELL. Fair enough. Chairman Etheridge, Members of 

the Subcommittee, I appreciate this opportunity to testify before 

you today, and I thank the Subcommittee for calling this hearing 

on the important subject of trading activities. My name is Laura 

Campbell, and I am the Assistant Manager of Energy Resources 

from Memphis Light, Gas & Water. MLGW is the nation’s largest 

three service municipal utility. I testify today on behalf of the 

American Public Gas Association or APGA. APGA is the national 

association for publicly-owned natural gas distribution systems. 

There are approximately 1,000 public gas systems in 36 states, and 

almost 700 of these systems are APGA members. 

Publicly-owned gas systems are not-for-profit retail distribution 

entities owned by and accountable to the citizens they serve. 

APGA’s number one priority is the safe and reliable delivery of affordable natural gas. To bring natural gas prices back to long-term 

affordable level, we ultimately need to increase the supply of natural gas. However, equally critical is to restore public confidence in 

the pricing of natural gas. This requires a level of transparency in 

natural gas markets which assures consumers that market prices 

are a result of fundamental supply and demand forces and not the 

result of manipulation or other abusive market conduct. APGA believes that the increased regulatory reporting and self-regulatory 

provisions relating to the unregulated energy trading platforms 

contained in legislation that reauthorizes the Commodity Futures 

Trading Commission is a critically important step in addressing 

our concerns. Those provisions are contained in Title XIII of the 

farm bill, which was passed yesterday by the House of Representatives. 

We commend this Committee for its work on the CFTC reauthorization bill. We also believe that under Acting Chairman Lukken’s 

leadership the CFTC has taken important first steps in addressing 

our concerns by forming an Energy Markets Advisory Committee. 

We, along with other consumer groups, have watched with alarm 

certain pricing anomalies in the markets for natural gas. More recently, we have noted a run-up in the price of energy and other 

physical commodities. One of the topics of today’s hearing is whether the price behavior reflects market fundamentals or results from 

other factors in the market, such as a change in the level or nature 

of speculative trading in the market. We simply do not know the 

answer to that question. 

As hedgers, we depend on liquid and deep markets in which to 

lay off our risks. Speculators are the grease that provides the liVerDate 0ct 09 2002 09:56 Jun 29, 2009 Jkt 041481 PO 00000 Frm 00092 Fmt 6633 Sfmt 6601 I:\DOCS\110-37\42967.TXT AGR1 PsN: BRIAN
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quidity and depth to the markets, and we value the role that they 

play in the markets. However, some trading strategies such as 

those pursued by Amaranth Advisors have had an adverse effect on 

the price of natural gas. We believe that in order to restore confidence in the pricing of these energy markets and in order to answer the questions raised by this Committee with respect to the effect of speculative trading interests in the current environment a 

greater level of market transparency is needed. In response to the 

failures that Amaranth’s market abuse has brought to light, APGA 

over the last several years has pushed for a level of market transparency in financial contracts in natural gas that would routinely 

and perspectively permit the CFTC to assemble a complete picture 

of the overall size and potential impact of a trader’s positions, irrespective of whether the positions are entered into on the NYMEX, 

on an OTC multi-lateral electronic trading facility, which is exempt 

from regulation, or through bilateral OTC contracts. 

APGA is optimistic that the enhanced authorities provided to the 

CFTC and the provisions of the CFTC reauthorization bill will help 

address the concerns that we have raised. Nonetheless, APGA also 

supports proposals to further increase and enhance transparency in 

the energy markets. APGA urges the CFTC to take additional steps 

to increase transparency within its existing authorities. For example, the CFTC in 2007 made certain enhancements to the commitment of traders reports by reporting separately the aggregate positions held by long-only, passively managed investment funds. To 

the extent that such funds hold positions in energy commodities, 

APGA encourages the CFTC to reconsider expanding those enhancements to the commitment of traders reports to include energy 

commodities. 

The CFTC plays a critical role in protecting consumers and the 

market as a whole from fraud and manipulation. APGA encourages 

Congress to provide sufficient funding for the CFTC to effectively 

carry out its oversight responsibilities. Natural gas is the life blood 

of our economy and millions of consumers depend on natural gas 

every day to meet their daily needs. It is critical that the price 

those consumers are paying for natural gas comes about through 

the operation of fair and orderly markets. It is too soon to determine whether the provisions of the farm bill will fully achieve the 

goals of increasing transparency with respect to pricing and natural gas markets. 

In light of the critical importance of this issue to consumers, we 

believe that the Committee should maintain active and vigilant 

oversight of the CFTC’s market surveillance and enforcement activities, and APGA and its approximately 700 public gas system 

members applaud your efforts to do so. We look forward to working 

with the Committee to determine whether further enhancements 

are necessary to restore consumer confidence and the integrity of 

price discovery mechanisms. 

[The prepared statement of Ms. Campbell follows:]

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The CHAIRMAN. Thank you, Ms. Campbell. I will now recognize 

each Member for 5 minutes for questions in the order in which 

they appeared. I will now recognize myself for 5 minutes. Mr. 

Ramm, you indicated that you wanted to raise the margin requirements for non-commercial entities. Legislation introduced in the 

Senate, called the Consumer-First Energy Act of 2008, could raise 

margin requirements for everyone. What do you think of their proposal, and how would this impact your company’s ability to use 

these markets for hedge purposes? 

Mr. RAMM. Well, I think in my testimony I stated that there 

would be a non-commercial raising so it would be only in the nonphysical speculator, and I don’t think——

The CHAIRMAN. But my point is the Senate bill would raise it for 

everyone. 

Mr. RAMM. Yes, and we don’t support that. 

The CHAIRMAN. Okay. That was my question. Dr. Newsome, your 

testimony states that the crude oil market has been declining in 

non-commercial participation over the last year. I believe that is 

what I read. The GAO study on energy derivatives cited by Mr. 

Ramm also makes that point that non-commercial participation in 

crude oil has declined. How do we square these facts with the facts 

that crude oil prices have increased and claims that speculators are 

behind it all? 

Dr. NEWSOME. Mr. Chairman, to me it is a clear indication that 

speculators are not behind the rise in crude oil prices or potentially 

the other commodities. I think devaluation of the dollar, the supply-demand fundamentals that we talked about earlier are the 

clear drivers behind the increase in these commodity prices. 

The CHAIRMAN. Mr. Ramm, you mentioned in your testimony the 

issue regarding the five percent tax credit on ethanol that is used 

in blending gasoline and that with some companies it is a splash 

blend, others it is injection. And without naming the companies, 

which I may eventually, we have at least one, now two, talking 

about already moving to injection so, number one, they can use a 

lower grade to raise the level of the octane with the ethanol, which 

means you as the distributor do not get that portion of the credit, 

so they retain it. Is that what you were saying? 

Mr. RAMM. That is correct, sir. 

The CHAIRMAN. So does that mean if the major company is retaining it and they have stores or stations of their own, you are at 

a five percent competitive disadvantage to begin with? 

Mr. RAMM. That would be correct. 

The CHAIRMAN. I am not sure that was the intent of the legislation. 

Mr. RAMM. I would agree. 

The CHAIRMAN. This is not the Committee of jurisdiction, but it 

certainly seems to me that somebody is—I reckon the oil companies 

probably are figuring they aren’t making enough money. 

Mr. RAMM. The practice that we are seeing is that as terminals 

put in the injection equipment, the major companies are not allowing us as marketers to splash blend anymore. We are not seeing 

a corresponding price of the credit on the product that we are now 

having to buy after it has been injected. 

105

The CHAIRMAN. So that means that you are at a five percent disadvantage starting off? 

Mr. RAMM. Yes, sir. 

The CHAIRMAN. Would you share with the Committee what 

‘‘splash blending’’ is for people that don’t know what ‘‘splash blending’’ is? 

Mr. RAMM. ‘‘Splash blending’ would be where a marketer purchases his own ethanol, buys his product, and then puts the ethanol, the 10 percent blend of ethanol, into the fuel before delivery. 

The CHAIRMAN. So what advantage—why would you want to do 

that? 

Mr. RAMM. Based on that type of action then the marketer can 

apply for the credit. 

The CHAIRMAN. And it flows to the marketer? 

Mr. RAMM. Then it would flow to the marketer, then in turn 

would flow to the end-user. 

The CHAIRMAN. But if I as the major oil company do the blending, I do not pass that on to you? 

Mr. RAMM. It is not being passed on. 

The CHAIRMAN. But they could? 

Mr. RAMM. They could. 

The CHAIRMAN. But they are not? 

Mr. RAMM. They are not. Some are, but not all. I wouldn’t know 

exactly which terminals and which companies are. I do know that 

there are some companies that have stated that they are not. 

The CHAIRMAN. Okay. Thank you, sir. I will stop at this point 

and yield to Mr. Moran. I may have a follow-up question later. I 

yield. 

Mr. MORAN. Mr. Chairman, thank you very much. Mr. Duffy and 

others, apparently the Senate has now passed the so-called farm 

bill by a vote of 81–15, which means we may have less reason. This 

includes the reauthorization of the Commodity Futures Trading 

Commission which means we may see less of you, unless we have 

more hearings on the price of commodities and the fluctuations of 

the market. So, maybe we will find another reason to have you and 

other participants back to talk about this topic. But, Mr. Etheridge, 

the farm bill is now on its way to the President. Let me see, what 

caught my attention in the testimony of this panel is Mr. 

Stallman’s topic of convergence. Maybe this is a question Mr. Duffy 

or Dr. Newsome can answer. Is convergence based upon an economic theory? Is that what is supposed to happen despite some 

fluctuations? It is not perfect, but convergence should occur, and, 

if so, is Mr. Stallman, President Stallman, correct in his concern 

that it is not happening in today’s market? What is the significance 

of that being the case? Is this a legitimate concern? 

Mr. STALLMAN. Theoretically, law of one price says that at a 

given point in time, at a given location, assuming costless delivery, 

which is not the real world, the price, cash price, and the futures 

price contract should be equivalent. Now in the real world there 

are variations. There are differentials, but what has occurred, and 

we go back to look at what Dr. Kunda from the University of Illinois actually presented to the CFTC forum here, if you do the analysis, it looks like for some contracts that to hedge effectively, you 

106

need to be able to depend on that convergence occurring at the end 

of the contract basically. 

Mr. MORAN. So farmers in making their decision about hedging 

are relying upon a theory that says these prices will converge? 

Mr. STALLMAN. Yes. 

Mr. MORAN. And then is that, Mr. Duffy or Dr. Newsome, is that 

based in economic theory that is the reality of the way the market 

should work? 

Dr. NEWSOME. Yes, sir, that is the way that the market should 

work. If the market is operating efficiently, the two prices should 

converge, and then you would therefore have very few actual deliveries of the underlying commodity. If the market is not operating 

efficiently and you don’t have convergence, then you enter a different form of risk into the hedger’s equation which is the basis 

risk. So you end up, again, having more risk to deal with than just 

the risk that you are trying to hedge to begin with. 

Mr. MORAN. And when you were at the CFTC, Dr. Newsome, this 

would be something that the CFTC would be monitoring is whether 

convergence occurs? 

Dr. NEWSOME. Absolutely they would monitor that. 

Mr. MORAN. And is the trend, as Mr. Stallman outlines, that 

there is something different about todays market when it comes to 

convergence than we have seen historically? 

Dr. NEWSOME. I don’t spend time looking at the agriculture markets that he was discussing, so I don’t have any specifics on that. 

Mr. MORAN. What is true in the petroleum, the oil market? 

Dr. NEWSOME. The crude oil market is operating very efficiently. 

We are having price convergence. We have had fewer than 1,300 

contracts over the last year and a half go to delivery which is the 

prime example that the market is operating very efficiently. 

Mr. MORAN. Mr. Duffy. 

Mr. DUFFY. Congressman Moran, we have studied the convergence issue quite a bit, especially recently with the increase in the 

prices of agricultural products. We work closely with the commodity markets and bring in all different groups into the exchange 

to work with them. There are a number of factors that go into the 

convergence issues. We are actually asking some of the same questions of why the non-commercials are not arbitrating the price between the cash and the futures so we can have convergence. There 

are also factors of freight cost and storage cost that are variances 

and that convergence equation, and we also as you know, we have 

just applied with the CFTC for a swaps contract on convergence between cash and futures, which we think will help mitigate this 

problem. But, the convergence issue has actually taken care of 

itself. The market has worked quite effectively over the last several 

expirations, and we have had convergence in our agricultural products. 

Mr. MORAN. But, Mr. Stallman, you are saying something is different today than it has been historically? 

Mr. STALLMAN. Well, the numbers we were looking at were comparing the 2001 to 2005 period with 2006 to 2008 period. So, it was 

a historical comparison. I think recent activity has indicated that 

the convergence is better than what it was. 

107

Mr. MORAN. I am about to lose my time, but in fact maybe it is 

gone. Anybody have anything they want to tell me about this topic 

that I haven’t asked? Thank you very much, Mr. Chairman. 

The CHAIRMAN. Thank you. The gentleman from Georgia, Mr. 

Marshall, for 5 minutes. 

Mr. MARSHALL. Thank you, Mr. Chairman. I got my rant off my 

chest with Mr. Harris and Mr. Fenton, and at this point would like 

to hear, Dr. Newsome, your comments about Mr. Ramm’s testimony. In fact, it turned out that your opening statement written, 

I assume, without having looked at Mr. Ramm’s opening statement 

or heard it, kind of addressed what he was asserting. But, it would 

be helpful for us to hear specifically what you thought was off the 

mark in his assertions. And then, Mr. Ramm, if you are in a position to do so, if you could respond, that would be pretty good. 

Dr. NEWSOME. Well, we certainly didn’t have access to Mr. 

Ramm——

Mr. MARSHALL. I understand. 

Dr. NEWSOME. And the first we heard it was when he gave it sitting next to me. I guess a couple of comments, Mr. Marshall. One, 

the margin issue in my opinion is only an issue if you believe that 

speculators are in fact artificially moving prices. We do not believe 

that is the case, and we think we have the data to show that is 

the case. So given that fact, the margin issue becomes a moot issue 

as far as we are concerned. 

Mr. MARSHALL. That is number one. I think from the speculative 

standpoint, and we show the actual numbers in the chart, I would 

go beyond that to say even if you bought into the theory that speculative long positions were driving the market higher, I think you 

have to look at the flip side of that. Because they are speculators, 

they do not have the ability to make or take delivery so they have 

to trade out of that contract prior to expiration. So then where is 

the down side that should also be put on the marketplace when the 

speculators are trading out of their positions? It doesn’t occur. It 

doesn’t exist. And, therefore, that is part of our philosophy as to 

why speculators are not driving these higher prices. 

And just one too, that is it, Mr. Ramm. Do you——

Mr. RAMM. I guess we get our position from a couple of things. 

One is that in looking at the testimony that Stephen Simon from 

ExxonMobil gave who is Vice President of the largest oil company 

in the United States that their fundamentals say that oil is at $50 

to $55 and then $127 means that it still looks like there is something other than maybe the weak dollar that might be involved in 

this. The other thing is that in the NYMEX and also in CME those 

are regulated markets, and there is full transparency there. I think 

that all of the data that we see is showing that there is not excessive speculation on those trading platforms. 

What we would say is that there is activity outside of those and 

I think was referred to as a dark market or an opaque market, that 

those types of trades are not being seen, and it is increasing. 

Mr. MARSHALL. Something like the tulip craze is going on here, 

and prices are being bid unrealistically high by investors that are 

not very sophisticated and don’t understand fundamentals. Is that 

why they are way up over twice what the barrel of oil should actually bring? 

108

Mr. RAMM. Well, I think that what we have seen is also some 

correlation to just the amount of cash that has moved into those 

markets from other areas. Like when the subprime hit there was 

a lot of cash that moved into commodity market trading, and then 

in turn there was quite a bit of increase in price. 

Mr. MARSHALL. Dr. Newsome, your response on $50, $55 fundamentals? 

Dr. NEWSOME. Well, I think it is interesting to step back and 

look at the amount of information that is available, and there are 

basically two entities that have the information about speculative 

positions, the CFTC and NYMEX. Both have taken the position 

that given the data, given the numbers, speculators are not responsible for the upturn. People have talked about it so much, I think 

a lot of people have just come to believe that it is a fact. 

Mr. MARSHALL. You are basically saying this guy is wrong when 

he thinks the fundamentals are at $50 to $55? 

Dr. NEWSOME. I absolutely think that he is wrong. 

Mr. MARSHALL. And what about the assertion that this dark pool 

of money that is out there that we can’t see as Mr. Duffy pretty 

aptly described it, that all kinds of money has flowed there. You 

have said that the commercial side is dominating right now, trading where oil is concerned at least on-exchange. And could it be 

that off-exchange there is something going on that we just don’t 

understand and don’t know about that is causing this? 

Dr. NEWSOME. Well, two things. One, about the $50–$55. If oil 

companies really believe that was the case, they would be selling 

everything that they could currently get their hands on in today’s 

market. That is not the case, so what they are saying and what 

they are doing are two very different things. All I can do is present 

the information that we have in NYMEX, and that is what I have 

done today. There is no doubt that in the less transparent markets 

things can go on. We don’t have access to that. CFTC doesn’t have 

access to that. I do know at the end of the day transparency is a 

key component for a competitive marketplace, and the more we can 

make these markets transparent the better. 

Mr. MARSHALL. May I just ask one more? How do you compare 

the size of the market, those two markets, your market? Don’t you 

have the lion’s share of the trading activity that goes on? Isn’t the 

OTC market fairly small or can you not even tell? 

Dr. NEWSOME. No, the OTC market in crude oil is huge, and we 

would estimate that exchange traded market with regard to crude 

is 20 to 30 percent of the overall OTC market. 

Mr. MARSHALL. And do you understand the OTC market to be 

paying attention to the values that are set on your exchange and 

doing their deals? 

Dr. NEWSOME. Typically the settlement price that is determined 

at NYMEX is at least a component of the pricing mechanism of the 

OTC. 

Mr. MARSHALL. Thank you for your indulgence, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. Since there are only 

three of us with your indulgence, you have been kind enough to 

come and wait, we are going to do a second round very quickly, and 

then move to our next group. Mr. Duffy, the National Corn Growers Association in their testimony state they have forwarded to the 

109

Chicago Board of Trade several recommendations, including investigating methods to allow farmers that have taken short positions 

to actually deliver against future contracts. Second, implement a 

forced loan out plan whereby some set percentage of contracts have 

to go to delivery, third, increase storage rates. And, finally, investigate the establishment of base contracts. What are your thoughts 

on this proposal if you had time to study it? 

Mr. DUFFY. Mr. Chairman, I apologize. I do not have a copy of 

that economic study from the Corn Growers Association on what 

they are proposing, and I think I will go one at a time, you said 

on the first one that limit the ability or increase the ability of having the participation of making delivery but a small——

The CHAIRMAN. Small. 

Mr. DUFFY. They have that ability today to make delivery on the 

contract. The contract does not discriminate from making or taking 

delivery. 

The CHAIRMAN. Okay. I am sorry. I thought maybe you had this. 

It was something that was submitted in testimony. I will share it 

with you, and if you could just sort of share it back with us to the 

Committee, it would be fine. Ms. Campbell, you have been named 

as a member of the CFTC’s new energy market advisory committee. Congratulations. I guess my question is what are your expectations for this committee, and what will you be pushing for the 

CFTC to accomplish when you meet with them in your first meeting next month? 

Ms. CAMPBELL. Well, the very first thing is that we are really 

hopeful that the Title XIII of the 2008 Farm Bill is going to go a 

long way to address the transparency issues that the other folks on 

the panel have raised. So, the very first thing will be to start to 

look at the materials that are coming back, the information that is 

coming back and assess whether we have further action that needs 

to be taken by the committee. 

The CHAIRMAN. Thank you very much, and I would yield to the 

gentleman from Kansas for 5 minutes. 

Mr. MORAN. I would yield to Mr. Marshall. 

Mr. MARSHALL. Thank you, Mr. Moran. Mr. Duffy, I would like 

to follow along the same line of questioning that I was addressing 

to Dr. Newsome. The public counter market, and this isn’t necessarily limited to oil, but to all of these commodities that seem to 

be rising very rapidly in price, can you think of ways in which the 

over-the-counter market—well, first, if you would, describe the size 

of the over-the-counter market compared to the——

Mr. DUFFY. Regulated exchange derivatives are listed products 

on exchanges today has a notional value of $77 trillion. Over the 

counter look alike derivatives have an estimated notional value of 

$415 trillion, so roughly six times larger than that of a regulated 

platform. An agricultural commodity at the CBOT, the grain products have roughly a notional value of $80 billion. On an over-thecounter grains look alike contracts the notional value is about $270 

billion. 

Mr. MARSHALL. Though you are with the exchange, you are in 

the business, you generally know how the over-the-counter market 

works, the different kinds of instruments that are out there, transactions that occur, can you go ahead and share with us ways in 

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which the over-the-counter market could be causing artificially 

high prices where commodities are concerned? 

Mr. DUFFY. Mr. Marshall, in my testimony we are not accusing 

the over-the-counter markets of manipulating price at all. All we 

are saying is these exempt commercial markets, no one knows the 

activity of their participation or the level of their participation. I 

congratulate the Congress on passing the farm bill, and in that 

farm bill, Congressman Moran mentioned that the reauthorization 

was done in that there was some provisions as it relates to energy. 

Mr. MARSHALL. Yes, just energy though. 

Mr. DUFFY. There were some provisions but there was one lacking and that is position limits. It was not required. And that is 

probably the most important component that you could have in the 

transparency of the market to have position limits accountability. 

Mr. MARSHALL. Well, and position limit is intended to do what? 

To limit the risks associated with failure to sort of protect? So 

when you mention position limits as a problem in the OTC market, 

it is principally one that could cause a systemic failure if we don’t 

know——

Mr. DUFFY. Again, sir, we are not accusing or——

Mr. MARSHALL. Well, I understand you are not accusing. I am 

just asking for speculation. 

Mr. DUFFY. One of the things I learned a long time ago when I 

became the Chairman is not to speculate. I speculated for 23 years 

as a trader so I decided speculation should be out of the equation. 

And again we can only go by the facts. We are just saying that 

these exempt commercial markets should look the same since they 

are look alike products as a regulated exchange and——

Mr. MARSHALL. You are making that suggestion because you are 

at a competitive disadvantage. There are lots of folks out there——

Mr. DUFFY. No, sir. No, sir. I think that the CME Group has expanded its business dramatically, and we have made the notions 

that we are going to enter into the over-the-counter markets. We 

have the capabilities and facilities to do so except the products that 

we are listing for trade that we are going to do over-the-counter. 

We are also going to go by the same requirements that we have 

in our regulated products. 

Mr. MARSHALL. Can any of the witnesses offer just some 

thoughts about how if it is possible the over-the-counter market 

could be causing prices to surge inappropriately? I take it from 

your silence that none of you despite your——

Mr. RAMM. I think I would just make one comment that the fact 

is they don’t know because those numbers aren’t being seen. No 

one sees that today, so I think that if the numbers were seen then 

they could see if there was, but I am sure there are ways of doing 

it. Whether it is happening or not, nobody knows. 

Mr. MARSHALL. Dr. Newsome, from your response to the suggestion that market fundamentals have price per barrel at $50 to $55, 

if that is the case people would be selling like crazy—let us capture 

the profit now. Don’t you think the over-the-counter market works 

the same way? I mean different types of instruments, transactions, 

et cetera, but are parties also rational? 

Dr. NEWSOME. Well, I think because of the very nature of that 

market is two sophisticated participants striking a deal with each 

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other so that level of sophistication I think probably keeps the contract relatively fair. I think the point of concern is the financial integrity of the overall marketplace and the fact that you could have 

an Amaranth type scenario that creates damage for legitimate market participants. 

The CHAIRMAN. I think we all agree. 

Dr. NEWSOME. But I think since I was the Chair of the CFTC 

back when the CFMA was passed obviously we had no crystal ball 

at that time, and markets have changed dramatically over the last 

7 or 8 year period. What we have seen in the OTC markets is really a move away from the very individually negotiated contracts to 

trading more of exchange look alike contracts that serve the exact 

same function as an exchange contract. At the end of the day if it 

looks like a duck, acts like a duck, walks like a duck, it probably 

is a duck. 

The CHAIRMAN. I thank the gentleman. Thank you. The gentleman from Kansas, 5 minutes. 

Mr. MORAN. Thank you, Mr. Chairman. Mr. Ramm, one of the 

things that is pleasing to me about your testimony is that it provides some relatively specific recommendations, and I don’t—I am 

happy to have you explain any of those things. I was particularly 

looking at what you suggest the Congress and the Administration 

might consider. I am happy to have you expand upon what you 

have in your testimony, but I would be interested in also hearing 

what other participants on the panel have to say about the consequences of those recommendations. Mr. Ramm, do you have anything to add to your recommendations to your testimony? 

Mr. RAMM. Well, as we made those recommendations, we are cognizant of liquidity and making sure that there is liquidity. We 

agree that the regulated markets are working well. Again, it comes 

to this opaque market, and no one knows what is going on. So 

when we looked at raising margins—this is a crisis that we are 

under. Petroleum marketers throughout the nation are going to be 

out of business because they can’t afford to carry the farmer anymore because their credit lines are getting too high. The banks 

have quit lending us money. The risk is too high. Our margins are 

low. The risk reward for a tanker load of diesel today at $40,000, 

we net maybe less than $100. Our gross is about $600, but that is 

before freight. 

And our farmers can’t even establish a credit line with us anymore for the fuel that they need to be able to go out to the farms 

with, so this is a crisis. We are looking at some type of solution to 

try to get some control over this what we feel is an out of control 

market. It seems to be dysfunctional. 

Mr. MORAN. Thank you, Mr. Ramm. Dr. Newsome, do you have 

any responses to the seven items? You have seen Mr. Ramm’s testimony or heard his testimony. 

Dr. NEWSOME. Well, just from what I heard, Mr. Moran, what I 

would prefer to do is really to look at them and respond back to 

the Committee with more thoughtful comments. 

Mr. MORAN. That would be fine, Dr. Newsome. Raising margin 

requirements, just a general reaction, whether that is a good idea 

or bad idea? 

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Dr. NEWSOME. I think that is a bad idea for a couple of reasons. 

One, because you would only address that if you believed that it 

was speculative money that you are trying to control. We don’t believe that is the case. 

Mr. MORAN. So if you start with the premise that it is not speculation that is causing the problems then the solutions suggested by 

Mr. Ramm would not be appropriate? 

Dr. NEWSOME. Absolutely. 

Mr. MORAN. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman from Georgia, Mr. Scott, for 5 

minutes. 

Mr. SCOTT. Let me ask this question, going back to the institutional investors. Would you interpret the fact that because they are 

bringing needed liquidity into the market that the investors could 

very well be bringing some needed stability to the markets? 

Mr. DUFFY. I will be happy to respond to you, Congressman, and 

if the Committee will allow me, I will tell you a quick story about 

how investors can help the producer on markets that go down as 

much as what happens when they go up. In 1998, we had postWorld War II lows in the price of the hogs in the United States 

here, and the nearby contracts were severely depressed in pricing. 

But the back end of the market, the futures market, was at a premium because the speculator or the investor felt that the market 

was entirely too low, and it kept the market higher. It kept buying 

the market which in turn gave the producer hedger an opportunity 

to sell into that in order to protect their crops or their hog production, which they did, and a lot of them survived in business. 

When the markets go up or the markets go down investors, their 

appetite for risk is great, and it is a good thing they are there on 

both sides of the market. I think they are essential to the efficiency 

of any marketplace, whether it is going up or whether it is going 

down. And the fundamental factors, and that is what this hearing 

seems to be more about whether the pricing is obvious that it is 

fundamentally driven. 

Mr. SCOTT. Do you all believe that in the new farm bill there was 

some new substantial powers were given to the CFTC. Dr. 

Newsome, do you believe those are adequate, and what are your 

thoughts on the new powers that were contained in the new farm 

bill for the CFTC? 

Dr. NEWSOME. Congressman Scott, I think the powers given to 

the CFTC were adequate as it relates to natural gas markets, but 

it only addresses natural gas at this point. I think that same kind 

of authority can be very useful in some of these other larger OTC 

markets, and I think that is what some of the colleagues at the 

table are expressing this morning. 

Mr. SCOTT. Okay. Thank you, Mr. Chairman. 

The CHAIRMAN. I thank the gentleman. Let me thank each of 

you, each one of our panelists, for your patience this morning for 

staying through the hearing with the votes we had. Each Member 

may have an opportunity to submit to you written questions. We 

would encourage you to get it back to the Committee within 10 

days should they do so. Thank you very much. We will now move 

to our third panel. Mr. Gary Niemeyer, who is a corn and soybean 

producer, on behalf of National Corn Growers Association; Mr. 

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Layne Carlson, Corporate Secretary and Treasurer, Minneapolis 

Grain Exchange; Mr. Rodney Clark, Vice President, CGB/Diversified Services, on behalf of National Grain and Feed Association; 

Mr. Thomas Farley, President and Chief Operating Officer of ICE 

Futures U.S., New York; Mr. Andy Weil III, President, American 

Cotton Shippers Association, Montgomery, Alabama. Mr. Niemeyer, 

please begin when you are ready, 5 minutes. And I would only just 

remind all of you that your total statements have been entered into 

the record, and if you will try to summarize it in about 5 minutes. 

Thank you. 

STATEMENT OF GARRY NIEMEYER, CORN AND SOYBEAN

PRODUCER, AUBURN, IL; ON BEHALF OF NATIONAL CORN 

GROWERS ASSOCIATION 

Mr. NIEMEYER. Good morning. I am Garry Niemeyer, and I am 

a corn and soybean farmer in central Illinois. I am here today representing the National Corn Growers Association. NCGA represents the interests of over 32,000 corn farmers throughout the 

United States. For over 100 years, commodity exchanges have 

played two valuable roles critically important to farmers, price discovery and risk management. Over the last several months, 

though, we have witnessed a lack of convergence between cash and 

futures markets as the futures contract expires. Without market 

convergence the futures markets are not fulfilling the role of price 

discovery, leading us to question whether market fundamentals 

still underpin current grain prices. 

Corn growers are not upset about higher corn prices. Our concern is that the current prices may not be fundamentally supported. This is leading people to speculate that we may be witnessing the development of a commodity bubble. As this bubble inflates, it has harmed the elevator industry and has been devastating to our livestock customers. I should point out the corn that 

I grow, I produce, is railed to the Texas Panhandle to feed cattle, 

so I am very sensitive to the price impact to livestock feeders. In 

early March we saw the bubble’s first impact when the grain elevators were hit with tremendous margin calls. In response, many 

elevators suspended or severely restricted forward contracting. One 

of my local elevators will not even contract for grain this fall. 

As a farmer, how am I supposed to manage my price risk if my 

elevator will not contract grain? Farmers have always had the ability to do their own risk management on exchanges, but it is estimated that less than 10 percent of the farmers use this tool themselves. Lacking other hedging opportunities, growers will have to 

absorb the cost and risk of the futures market. In today’s market 

conditions, these costs and risks are not insignificant. In the end, 

the unwillingness of commercial players in the market to offer forward cash prices has effectively transferred the market risk onto 

producers and producers still do not have a means to offset this 

basis risk. 

NCGA is not blaming the elevator industry for their recent phenomenon. The elevators are businesses that must be able to recoup 

losses and manage price risk. During the last several years, we 

have witnessed a tremendous increase in input cost, especially fertilizer and diesel fuel. In March, my fertilizer dealer asked me to 

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lock in my fertilizer for the crop that I will plant next spring. The 

prices for anhydrous, DAP, and potash have risen 52, 100, and 118 

percent, respectively, since last fall, and the trend is pointing to 

even higher prices by this fall. Since no elevators are offering this 

on the 2009 production, my options are simple and unpleasant. I 

can borrow more money to buy the fertilizer and borrow more 

money to finance risk management on the exchange or I can stay 

completely exposed. 

As I had mentioned, NCGA’s concern is the development of a 

commodity bubble and now the hope is that the bubble doesn’t 

burst. This bubble was not caused by ethanol. Instead, it has been 

caused by dramatic increase in non-traditional investors in all commodities. It is the general investment pattern of the index funds 

that has inflated this bubble. These funds take huge net long positions—buy futures—which given the volume of purchases naturally 

drives prices higher. Our challenge is to restore the efficiency in 

price discovery and risk management without jeopardizing the 

market openness and liquidity. In light of that goal, NCGA would 

like to submit the following possible solutions for the consideration. 

First, to address the lack of convergence in between cash and futures markets, we must simply fix the delivery system. Second, and 

more importantly, we must find a way to head off the development 

of the commodity bubble or if it has already occurred stop it from 

bursting. Several possible solutions include: since large funds are 

having a disproportionate influence and are non-commercial traders, they should be treated as speculators counter to several CFTC 

decisions, we believe, to truly be classified as a hedger an entity 

must have a cash commodity position. This would still allow the 

large funds to take their net long positions, but they will have 

higher margin requirements just the same as any other speculator. 

Number two, short of redefining all players without cash positions as speculators, the CFTC and exchanges should implement a 

moratorium on providing a hedger status to any of the non-cash 

traders. I have several other positions that I would like to talk 

about, but I will answer the questions when asked. 

[The prepared statement of Mr. Niemeyer follows:]

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The CHAIRMAN. Thank you, sir. Mr. Carlson, 5 minutes. 

STATEMENT OF LAYNE G. CARLSON, CORPORATE SECRETARY 

AND TREASURER, MINNEAPOLIS GRAIN EXCHANGE,

MINNEAPOLIS, MN 

Mr. CARLSON. Thank you. Good morning. My name is Layne 

Carlson, and I am an officer of the Minneapolis Grain Exchange. 

It is a great pleasure to be here before the Subcommittee on General Farm Commodities and Risk Management, and speak on matters important to us and participants on our market. The Minneapolis Grain Exchange is both a Designated Contract Market 

and a Derivatives Clearing Organization, which means we clear all 

our trades executed on our market and assume the counterparty 

risk. We are also subject to CFTC oversight. 

The Grain Exchange was first established in 1881, and is the 

only futures and options market for hard red spring wheat. Additionally, we have five financially settled index contracts based on 

interior cash prices of corn, wheat and soybeans. What happens to 

the price of those cash commodities is of significant importance to 

us. Participants from around the world now trade our contracts 

and that trend is expected to continue to grow. Trade volume and 

open interest records are routine events at the Grain Exchange. 

What happens on our markets has regional, national and now global importance. Conversely, what happens regionally, nationally and 

globally can have material effect upon our markets. For example, 

a drought in Australia will affect our spring wheat futures prices. 

The general objects and purposes of the Grain Exchange are 

spelled out in our Articles of Incorporation. To facilitate the buying 

and selling of all products, to inculcate principles of justice and equity and trade, to facilitate speedy adjustments of business disputes, to acquire and disseminate valuable commercial information, 

and so forth. These stated purposes indeed hold a lot of weight and 

responsibility which the Grain Exchange takes seriously. Our futures and options contracts are available to all who wish to trade, 

both speculators and hedgers. From a regulatory perspective, we 

monitor trade activity for evidence of fraud and manipulation. The 

MGEX believes our new contract, our market participants, including some funds, have greater liquidity and have added that to the 

marketplace. These are benefits to all market participants. While 

institutional investors do participate in very small amounts in our 

marketplace, it appears that many environmental factors have 

been building for some time in the wheat market, and culminated 

early this year with dramatic effect. 

The result was a rise in prices, both in the cash market and on 

our futures market. Over the past several years, wheat plantings 

and production have continued a downward trend. Meanwhile, demand remains high. Additional factors have exacerbated the existing and shrinking supplies of spring wheat such as has been mentioned before in other panels, wheat failures in Australia, weather 

factors around the world. Wheat stocks hit 30 year lows while U.S. 

wheat stocks dropped to 60 year lows. Meanwhile, the value of the 

U.S. dollar continues to decline, enticing others to buy wheat on 

our markets. This past winter the cash price of wheat increased 

dramatically. As a result, there are many instances when the 

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spring wheat futures market locked the limit price up. This hindered the price discovery and risk mitigation purposes for our futures contract. 

Additionally, energy costs, fuel and fertilizer prices have continued to increase, and wheat is having to compete with other commodities for space for acres. Despite the volatility of futures prices 

that has occurred on our market, there was almost perfect price 

convergence between the futures and cash price on the first notice 

day for delivery on our March futures contract, but there are still 

other factors that may interfere in the price convergence process. 

Therefore, the Grain Exchange has introduced financially settled 

index contracts that force convergence between the futures and 

cash price. These contracts can be used as a compliment to the current delivery contracts or provide an alternative to those who want 

the benefits of a financial settlement. These contracts could also 

offer relief to those expressing concerns about the influence of 

funds and other institutional investors. 

All parties will be able to rely upon the fact that there will be 

price convergence. As the settlement day approaches, those holding 

positions in MGEX contracts need not be concerned with who the 

position holders are or what the open interest is. The Grain Exchange has been involved in the cash and futures business for over 

126 years offering valuable services to a varied and growing group 

of market participants. We do not have any control over the fundamental factors affecting the wheat market. However, we do want 

to make our futures contracts available to all participants for the 

purpose of price discovery and risk mitigation. To do that effectively and efficiently, the MGEX believe it is necessary to allow the 

widest possible range of market users to participate. 

After all these years, the Grain Exchange stands by its statements in its Articles to promote the furtherance of legitimate business pursuits and to advance the general prosperity and business 

interests of the region and the nation. The Grain Exchange expresses its appreciation to the Subcommittee for this opportunity 

to express our views. 

[The prepared statement of Mr. Carlson follows:]

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The CHAIRMAN. Thank you. Mr. Clark, for 5 minutes. 

STATEMENT OF RODNEY CLARK, VICE PRESIDENT, CGB/

DIVERSIFIED SERVICES; CHAIRMAN, RISK MANAGEMENT 

COMMITTEE, NATIONAL GRAIN AND FEED ASSOCIATION, MT. 

VERNON, IN 

Mr. CLARK. Thank you, Mr. Chairman and Mr. Moran, for calling 

today’s hearing. My name is Rodney Clark. I am Vice President for 

CGB Enterprises, and I am Chairperson of the NGFA’s Risk Management Committee. CGB/Diversified Services Division, which I am 

responsible for, provides risk management solutions to farmers and 

ranchers, including grain marketing strategies and crop insurance. 

We are one of the 16 companies that helped deliver and service the 

Federal Crop Insurance Program. I am here today representing the 

National Grain and Feed Association. NGFA members are intimately aware of the challenges currently inherent in the futures 

markets since we use them every day to hedge our risk. Without 

them, we cannot effectively run our businesses. 

In my brief comments, I would like to share what we believe are 

the two most important issues involving the futures market today, 

and end my comments by suggesting two important solutions that 

we have already proposed to the CFTC. I will begin with the issue 

of convergence and basis, of which we have already heard a lot 

here today. NGFA member firms have relied on U.S. agricultural 

futures markets to hedge their price and inventory risk. In addition, part of our daily business is to advise and counsel producers 

and ranchers to do the same. We count on well-functioning futures 

markets for price discovery and risk management. 

One of the bed rock fundamentals upon which hedging strategies 

are predicated is consistent and reliable convergence of cash in futures markets. Allow me to explain. Cash values are what the 

grain is really worth. It is what a buyer and a seller agree to in 

exchange for the actual commodity. It is what the commodity is 

really worth. The difference between this real cash price and the 

price which is reflected in the futures markets is called the basis. 

In properly functioning markets, the difference between the cash 

price and the futures price theoretically become the same as the futures contract enters its delivery period. Theoretically, the basis 

goes to zero. While there are many reasons why this seldom happens perfectly, the markets have historically functioned properly 

when the two markets converge in a predictable level. 

Today, convergence is occurring less often and only for very short 

periods of time. There are many factors that have contributed to 

this, transportation costs, storage rates, higher prices in and of 

themselves have had an influence on the lack of convergence. Ultimately, given time the futures markets may adjust and rediscover 

balance on their own, but we do not want to run investment out 

of U.S. agriculture. However, in today’s environment we believe agricultural futures markets need to take a break from additional 

large infusions of investment capital. The second issue I would like 

to make the panel aware of is the tremendous financial pressure 

that our industry faces. As we purchase grain from our farmer customers, we hedge those purchases in the futures markets. The financial stress to finance inventory purchases from farmers and to 

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meet the demands of margin calls from our hedges in the futures 

markets has been overwhelming. 

Because they are unable to adequately manage the risk or unable to obtain financing, some firms in our industry have been 

forced to restrict or eliminate deferred purchases from farmers. If 

the situation worsens in the months ahead, and this is a very real 

possibility, meaning if we have price gains and volatility due to 

weather or other reasons this financial stress will increase. A continued influx of long-only, passively managed investment capital 

will only make that worse. If that happens, our farmer customers 

may find continued lack of access to cash forward contracts that 

they have come to rely upon in managing their price risk simply 

because our industry does not have the wherewithal to continue to 

finance our margin calls and hedges. 

These problems are important and they are complex. The NGFA 

has worked diligently with futures exchanges and the CFTC to 

proactively deal with these issues. First, we have called upon the 

CFTC to put a moratorium on hedge exemptions for long-only, passively managed investment capital. Second, early last year the 

CFTC began publication of a supplemental report to its commitment of traders report that attempts to identify investment capital 

into a new index category. We believe that today’s complex environment calls for re-examination of the report in a manner that provides more transparency. We have requested the CFTC to analyze 

in detail the reporting it receives from market participants to determine if long-only investment capital is reflected in the proper 

categories. 

I thank you for the opportunity to share my thoughts and those 

of the National Grain and Feed Association with the Subcommittee 

on these important topics. We want to be a proactive partner with 

the exchanges, the CFTC, and with Congress to find solutions to 

the problems that we face. I will be happy to respond to any questions. Thank you. 

[The prepared statement of Mr. Clark follows:]

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The CHAIRMAN. Thank you, Mr. Clark. Mr. Farley, 5 minutes. 

STATEMENT OF THOMAS FARLEY, PRESIDENT AND COO, ICE 

FUTURES U.S., NEW YORK, NY 

Mr. FARLEY. Thank you, Mr. Chairman. I am Thomas Farley, 

President and COO of ICE Futures U.S., and I appreciate the opportunity to testify before the Subcommittee today on recent trends 

in the futures markets. ICE Futures U.S., formerly known as the 

New York Board of Trade, or NYBOT, was founded in 1870 and is 

a wholly-owned subsidiary of IntercontinentalExchange known as 

ICE, an Atlanta based public company that operates regulated futures exchanges and clearinghouses in the United States, United 

Kingdom, and Canada, as well as an over-the-counter marketplace. 

ICE Futures U.S. is the leading futures exchange for sugar, coffee, 

cocoa, cotton, and orange juice, and also lists currency and equity 

index futures contracts. 

Many of the products traded on our exchange and other exchanges have experienced dramatic price movements over the last 

several months and quarters. During periods of high prices and volatility, it may be a natural reaction to focus on exchanges. It is important to bear in mind that while we are the messengers of price 

information the prices that are discovered on our exchanges are the 

result of market-based activity. As such, we encourage a broader 

objective review of today’s unusual environment. Recent dramatic 

movements are not isolated to our markets but have been seen 

across agricultural, metals, equity, energy, and interest rate markets. 

Comparing the historic volatility for a dozen equity, interest rate, 

energy, and agricultural markets traded on our exchange and elsewhere, we found that volatility in all of these markets for the 

month of March 2008 was between 1.4 to 3.1 times higher than 

March of 2007. Further, we did not find the increase in agricultural 

markets to be any more pronounced than the increase in the these 

other markets. Nearly all global markets are experiencing increased volatility. Therefore, prescriptive measures intended to reduce volatility in a given market or across multiple markets will 

likely be negated by the existence of broader market turbulence 

and have unintended negative consequences. Worldwide commodity 

prices are moving in ways that defy conventional models constructed to produce price movements. With respect to agricultural 

commodities, I would like to share three factors that are impacting 

price levels. 

First, China, India, and other emerging economies are increasing 

consumption of raw commodities at an unprecedented rate taking 

global demand to new levels. Second, the dollar is at all time lows 

compared to many foreign currencies making it less expensive for 

global citizens to consume these goods. And, third, corn-based ethanol incentives and sugar-based ethanol tariffs here in the United 

States mean that over 1⁄3 of our corn crop is now consumed in the 

production of corn-based ethanol. This demand has triggered a 

domino effect where the competition for acreage has contributed to 

record price levels of many agricultural products. One factor that 

some have suggested may be affecting volatility on futures exchanges is the role of so-called long-only commodity index funds. 

139

The complete analysis of the potential impact of such funds is 

still in process but our findings indicate that commodity index 

funds have had a positive impact on our agricultural markets as 

they enable producers, their cooperatives, and merchants to manage risk on a greater portion of their production. As a general rule, 

in the cotton market as well as our other agricultural markets the 

producers and merchants are sellers that use futures to protect or 

hedge against decreases in prices. Long-only index funds, whether 

you label them investors or speculators, fulfill an important role as 

they are buyers that take the other side of the producers and merchants futures transactions. 

While the involvement of long-only funds in the cotton market 

has been under particular scrutiny in the past several weeks. It is 

interesting to note that using a common measure of market participation the proportion of cotton futures and options long open interest attributable to such funds, their participation has actually decreased over the last 2 years. Looking at March of each year, the 

figure has gone from 37 percent to 34 percent to 23 percent in 

March of 2008. I would like to briefly address the role of clearinghouses as well as the importance of futures style margining in 

managing systemic risks. Our clearinghouse, ICE Clear U.S., has 

its own governing board and rules subject to the regulation of the 

CFTC, much like our exchange. 

Each day, the clearinghouse marks the positions carried by each 

clearing member to the market based upon the closing or settlement price for each individual futures contract. The clearinghouse 

collects cash from the clearing firms who had a net loss on the 

prior day, and it pays that cash to the clearing firms who generated a net profit. These amounts are referred to as variation 

margins. To guarantee its obligation to make variation margin payments when due each clearing member makes a security deposit 

called initial margin. Initial margin and variation margin are designed to ensure that the clearinghouse has sufficient funds to 

cover its obligations even in highly volatile markets. Margin is not 

intended to control price volatility or the amount of trading at a 

particular market. Rather, it is the key element that protects the 

financial integrity of our markets. 

Attempting to employ margin payments for purposes other than 

risk management would be unprecedented and undermine a business model that has been a shining star in the financial markets 

for 150 years. Mr. Chairman, thank you again for inviting me to 

testify on behalf of the exchange. 

[The prepared statement of Mr. Farley follows:]

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The CHAIRMAN. Thank you, Mr. Farley. Mr. Weil, for 5 minutes. 

STATEMENT OF ADOLPH ‘‘ANDY’’ WEIL III, PRESIDENT,

AMERICAN COTTON SHIPPERS ASSOCIATION; MEMBER,

EXECUTIVE COMMITTEE, NATIONAL COTTON COUNCIL, 

MONTGOMERY, AL 

Mr. WEIL. Thank you, Mr. Chairman. I am Andy Weil of Montgomery, Alabama, President of the American Cotton Shippers Association. I am also a Member of the Executive Committee of the National Cotton Council. With me today are other ACSA officials, 

Gerry Marshall, John Dunavant, and Neal Gillen. First of all, we 

thank you for holding and conducting this hearing today. Today I 

speak for the entire cotton industry, which was devastated by the 

disruptive and excessive speculative activity of March 3 and 4, and 

has yet to fully recover from its adverse effects. My written statement fully details what occurred in the cotton market in mid-February to early March. Now I will tell you in brief what occurred 

and why the U.S. cotton industry and its supporting financial institutions lack confidence in the ICE No. 2 Futures Contract as a vehicle to manage our price risks through hedging and to seek price 

discovery. 

By early March the open interest had reached record levels of 

just over 300,000 contracts for 30 million bales of cotton. About 2⁄3

of this open interest was in the May and July contract periods, 

while the other third was in the December contract month. Since 

the U.S. provided only 19 million bales in 2007 the commercial 

trade represented a much smaller portion of this volume. The commercials who held the physical cotton had sold futures to lock in 

their basis and carry the cotton until sold and shipped. Speculative 

trading drove up cotton futures prices by over 50 percent in a 2 

week trading period in late February and early March. On March 

3, while futures prices was up the limit of 3¢ per pound the price 

rose to 93.9¢, up 12¢ that day. 

It was at this level of 93.9¢ where daily variation margins were 

set for collection. This resulted in a collective margin call on the 

industry that day well in excess of $1 billion. As a result of this 

unprecedented financial stress, the following morning many traders 

were forced to liquidate their hedges by their lenders. This buying 

pushed prices to $1.09, only the second time since the Civil War 

that cotton has traded over $1.00. At the same time, the physical 

price was in the low 60¢ range. In the short time frame that day, 

the commercial trade did not have sufficient time to adjust to this 

irrational event, which was unrelated to the physical or cash market. The commercial market was subject to a severe financial strain 

never realized before in the history of the U.S. cotton industry. 

To meet margin calls, banks would have had to evaluate clients’ 

physical stocks well beyond what the market could bear. The value 

of the cash commodity bore no relationship to the futures or options prices. The current futures market situation precludes any 

form of price discovery because of the potentially high margin 

risks. The result is that merchants and cooperatives cannot offer 

farmers forward prices. This situation also precludes individual 

farmers from using the futures market. Therefore, the producer 

cannot take a forward contract to his banker to secure financing. 

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This is not only true for cotton but for other agricultural commodities. As a result, the banks financing producers, merchants, and 

cooperatives no longer have confidence in the futures market. Now 

they are either reluctant to or lack the capacity to provide the necessary margin funding. 

Lacking price discovery, the U.S. cotton farmer cannot adequately make production plans. The same goes for a U.S. textile 

mill who cannot determine what his raw fiber costs will be in future months. The entry of large speculative funds and index funds 

into the agricultural futures contracts has clearly distorted both 

the futures and the physical or cash markets and agricultural commodities. There is such an abundance of cash in the hands of these 

funds that their impact on the agricultural markets is overwhelming and negates the primary purpose for the existence of 

such contract markets. We no longer have a rational market for 

price discovery and hedging as used to the commercial trade has 

been minimized. 

It is not an investment vehicle for huge speculative funds and 

swaps dealers and other OTC entities that have created havoc in 

the market unimpeded by fundamentals or regulation. More importantly, there is no limit to or transparency in the trading activity. 

Therefore, I suggest that these unregulated entities be subject to 

the same reporting requirements that I as a legitimate hedger am 

subjected to by requiring that they report their full position to the 

CFTC each week. In conclusion, what we have learned from this 

bitter experience is that the CFTC does not know what is going on 

in the markets; who is doing the trading; how much they are trading; and in what markets. In point of fact, neither does the Federal 

Reserve, the Treasury Department, the SEC, or any other U.S. 

Government agency know what is going on. 

In sum and substance, Mr. Chairman, let us find out who they 

are and what they are doing. Accordingly, we believe that our recommendations if implemented by the CFTC will help to restore 

confidence in the agricultural futures markets. In the interest of 

time, Mr. Chairman, I can go ahead and read our recommendations, if that is okay. 

The CHAIRMAN. That would be fine. 

Mr. WEIL. Okay. Thank you. Require that an index fund with a 

hedge exemption restrict its position in a commodity to the dollar 

allocation or the percentage of funds allocated to that commodity 

as defined in the funds prospectus and recorded with the CFTC. 

Further, any variation should be subject to the speculative position 

limits, and that such funds should report their cash positions on 

a weekly basis. Recommend that the CFTC monitor and oversee all 

swaps and OTC activity by requiring the reporting of all swap and 

OTC contracts by market participants, and that the CFTC determine the aggregation of positions from all sources, including the 

exchanges, ETFs, swaps, OTC, and all other trading entities. 

Require that all non-traditional hedge accounts, those not involved in the commercial enterprise of physically trading bales of 

cotton, be reported as a separate individual category. Require that 

the ICE and its clearing members adhere to the practice of margining futures to futures settlements and option to option settlements, that only those involved in the commercial enterprise of 

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physically trading bales of cotton shall be eligible for hedge margin 

levels. And, finally, urge the CFTC to study the impact on price 

discovery and volatility, prior to any additional increases above 

current levels in speculative position limits in the single months or 

all months. Thank you, Mr. Chairman. 

[The prepared statement of Mr. Weil follows:]

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The CHAIRMAN. I thank the gentleman. I thank each of you. I 

will now recognize Members, each for 5 minutes of questioning. I 

yield the first 5 minutes to myself. Mr. Niemeyer, in your testimony you say you don’t want the commodity bubble to burst, and 

that you believe the bubble is not caused by ethanol but by nontraditional investors, as you say, playing in the commodity markets. However, wouldn’t many of the proposals that you recommend 

force those investors out of the market, and wouldn’t that have the 

effect of bursting the bubble if we force them out of the market? 

Mr. NIEMEYER. First of all, Mr. Chairman, we are not interested 

in eliminating anybody from trading. We just think they ought to 

trade by the rules. I grow corn, the elevator stores corn and——

The CHAIRMAN. I understand that, but how can you move—if you 

assume the speculators are in, and I will assume that is the assumption, how do you move them out? 

Mr. NIEMEYER. I am not trying to move them out. 

The CHAIRMAN. A corresponding drop in prices, I guess. 

Mr. NIEMEYER. I am not trying to move them out. What I am suggesting is as a hedger, if I go to hedge grain, it costs me $1,500 

to contract currently to maintain a position. I grow all those—handle the grain, but as speculators come in, their margin money 

should be 20, 25 for the same position, so in a sense they have a 

24 percent advantage because they don’t grow the corn, they don’t 

store the corn, and they don’t transport it. All we want is fairness 

in the market. If they are a speculator, they should be considered 

a speculator. If they are a hedger and they handle the grain, they 

handle the physical commodity, then they should be a hedger and 

get that advantage. 

The CHAIRMAN. Okay. Thank you. Mr. Weil, if the markets are 

not true indicators of cotton prices, do you know what cotton farmers are using to base their decisions on whether to or how much 

cotton to plant this year? Do you think the problems being experienced in the cotton market will have—what will that have or how 

will that impact their planning decision this year? 

Mr. WEIL. Mr. Chairman, growers, first of all, I think they look 

to the farm bill for some support going into the next crop. In terms 

of finding a contract from a merchant such as myself or a cooperative, it is very difficult for them. So, yes, they may think about how 

much cotton they will plant, and in certain areas of the country 

they can plant other crops such as corn and soybeans down our 

way. But, yes, this could have an impact on their decision. 

The CHAIRMAN. Okay. Thank you. Mr. Farley, you heard the 

comments a few minutes ago from Mr. Weil as it related to the 

March situation, and I know you were taking notes. So my question 

to you is how do you explain in March a pricing range from about 

84¢ to $1.00, and it seems incredibly large when those holding cotton it was pretty clear, 63¢, 64¢. Furthermore, I understand that 

a senior USDA official has raised that issue with the CFTC in a 

forum about that very event stating basically that all fundamentals 

in the marketplace at the time appeared to have been bearish, suggesting there is no reason cotton prices should have made such 

large movement upwards at that point. So since the traditional 

basis for forward purchasing of U.S. cotton from growers is typically 350 points off the—plus or minus off the highest futures price, 

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they were off 250 points at one point during that day. What happened? And I guess what could have caused such an enormous deviation or divergence between cash price and future option prices 

for essentially an identical bale of cotton? 

Mr. FARLEY. Thank you, Mr. Chairman. I would be pleased to answer that question. If I can go back a few months, the price move 

in cotton, even going back to February 2008, the price of cotton was 

54¢ and then moving forward in time to—excuse me, February 

2007, 54¢, and then the last trading day of February 2008, the 

price was 82¢. And so that is kind of setting the stage for what occurred on the trading days of March 3 and March 4. Looking at 

that move, which is a very significant 28¢ move leading up to that 

time. There are a lot of supply and demand factors which have 

been discussed at this hearing several times by other panelists I 

won’t go into in detail, and mentioned in my testimony, suffice it 

to say that despite the near term bearish fundamentals that you 

described, there are many long-term, bullish fundamentals. 

So now on March 3 and March 4 what you saw trading in the 

market was not traditional supply and demand. It was liquidity, 

and there was a perfect storm, if you will, in the cotton market. 

There was really three waves crashing together tossing the cotton 

market around. One was that rising price from 54¢ to 82¢. The second was on March 3, March 4 the cash market, as I understand 

it, all but shut down. So, while as you described the price was 250, 

the basis was 250 points off, it actually was—it was difficult to get 

even that price. It shut down. And the third wave was that we are 

in the middle of a global liquidity squeeze, so when the price got 

to 82¢, it became very difficult for these producers, farmers, producers, the co-ops, to finance their short margin positions with the 

exchange. And on March 3 the price jumped 12¢. 

And as Mr. Weil described in detail, their lenders on that 

evening required that they close out their hedge positions on March 

4, which yielded another volatile day. We as an exchange, we don’t 

operate a spot market. We operate a futures market, and our job 

is to provide a venue for price discovery, and we look at trading activity to determine if there is a price being discovered. On March 

3 and 4 there clearly was. On March 4, we did 155,000 options. To 

put that in perspective, that is the most options we have ever traded on our exchange. There clearly was price discovery going on. 

Thank you. 

The CHAIRMAN. Thank you. I would like to follow it up but my 

time is expired. I will yield to the gentleman from Kansas. 

Mr. MORAN. Mr. Chairman, thank you very much. Mr. Clark, 

thank you for your continued conversation about convergence. I appreciate that. Is there something, I still want to go back to what 

I asked an earlier panel, historically is something different today 

than there has been in the past; that we see a greater inability 

over time for the cash and futures price to come together at time 

of delivery? 

Mr. CLARK. I answer that question by saying, ‘‘Yes, there clearly 

is something fundamentally different about these markets today 

than there have been in the past.’’ I mention it in my testimony, 

and it has been mentioned already today. Transportation costs are 

two to three times higher than what they used to be. Storage costs 

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are higher than what they used to be. The cost of carrying the commodity from 1 month to the other is higher because interest rates—

because the price of the commodity itself is higher. It costs more 

to finance those inventories. There are a lot of fundamental reasons 

why convergence is not happening the same way that it always 

has. 

But I would suggest that there are—that is what makes this so 

difficult is because there are real reasons but it is not that—if it 

wasn’t happening the same way that it always has, that is fine as 

long as it is happening consistently. In other words, if they used 

to converge within five percent of each other and the price is twice 

as high or three times as high, you factor all those things in, then 

it should be converging within 15 percent of each other. 

Mr. MORAN. None of those things seem to be nefarious. They are 

circumstances we face with changing prices, particularly as it relates to energy and transportation costs. What it suggests to me is 

that economically those two points have to come together or we are 

dealing with a system in which there is inadequate information to 

make the predicted estimate as to what the futures price should be, 

is that right? 

Mr. CLARK. I think that is correct. 

Mr. MORAN. And so as the world has changed, the markets have 

changed, we are not capable at this point of having sufficient 

knowledge to make the price of our futures contract the appropriate price. Maybe I am focusing too much on the futures price. 

Maybe we don’t know enough about the—the cash market is set. 

There is a buyer and seller on that particular day, and so what we 

are lacking is knowledge about what the price is going to be in the 

future which is what the market is designed to——

Mr. CLARK. That is correct, and that is why the contract has lost 

its utility as a hedging tool. Because it is not happening, and it is 

inconsistent, and there is something fundamentally wrong about 

the futures contract if that convergence is not happening. I think 

we can point to a lot of the reasons. We can look at a lot of the 

reasons, but that fact of the matter it is not happening, and producers are losing their ability to use it as a hedge and we certainly 

are too. 

Mr. MORAN. Well, do futures markets increase or decrease price 

volatility? Do we have more price volatility because there is speculation in futures markets or do they reduce price volatility? 

Mr. CLARK. Well, I think there is something important here that 

as I have sat here all day and in some of the exchanges have made 

the comment, Mr. Scott asked the question, ‘‘Isn’t it fundamentally 

correct that their investment funds provide stability to the market?’’ I think it is important to understand that just because they 

bring volume to the market doesn’t mean they are bringing liquidity to the market. Just because they are bringing volume to the 

market doesn’t mean they are bringing liquidity because they are 

passive, they are long only. They never change. They come in. They 

stay long, and they stay long forever. Therefore, they are not trading the fundamentals of the market like the cash market does, and 

therefore they are having an influence on convergence. 

Mr. MORAN. I think it goes back to Mr. Etheridge’s earlier point 

about setting a base or a floor, as he said, in price. And you menVerDate 0ct 09 2002 09:56 Jun 29, 2009 Jkt 041481 PO 00000 Frm 00162 Fmt 6633 Sfmt 6601 I:\DOCS\110-37\42967.TXT AGR1 PsN: BRIAN
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tioned, Mr. Clark, about perhaps restricting the market participants or perhaps the products that they invest in. Is that a fair 

statement of what——

Mr. CLARK. We have said that right now this market is in an unprecedented time. We are all struggling to figure out why these 

markets are acting the way they are. We believe very firmly that 

right now is not the time for the CFTC to continue to grant hedge 

exemptions to these kinds of passively traded funds. We think they 

need to put a moratorium on it. We are not against these monies 

coming in to our marketplaces. We just think we are in an unprecedented time. There has been so much change that the market 

needs time to adjust to that. 

Mr. MORAN. Your testimony I think focuses on the problems that 

my grain elevators and co-ops have in this current market, and you 

focus upon the participants in the market. I assume that there is 

another side to this problem, which I don’t know, which one is the 

one that deserves the most attention, but there has also got to be 

a credit problem. Your inability, I don’t mean this in a pejorative 

way, but you blame the futures markets and the circumstances 

that your grain elevators face, but on the other hand the problem 

you face derives from the fact that you have the inability to access 

credit. 

Mr. CLARK. There are two issues which we struggle with the 

most, one of which is convergence, which we have already addressed, which means the utility of us to be able to hedge our position is more difficult than it has been in the past. That needs to 

be fixed. That is one issue. The other issue is an issue that has 

more to do with high prices and volatility than anything. It is because prices are going up. Traditionally we are short, as most of 

our members, although we have members who are long hedgers, 

but if I am a country elevator and I buy grain from a farmer, I am 

going to sell it or hedge myself on the Chicago Board of Trade. When the price of corn goes up $2.50, I have to keep margining 

those positions. Somebody from the CFTC said earlier this morning 

that, ‘‘It is no big deal for the big companies because they have the 

capital to withstand it,’’ I beg to differ. If you have a nationwide 

operation where you are buying grain all over the nation and the 

price of corn goes up $2.50, and you are margining that position 

all the way up, you have a catastrophic problem. It is a catastrophic problem that we cannot continue to finance these positions. If we have a situation this summer where we have a 

drought, and the market, we have a runaway market like we had 

in wheat in Minneapolis, I think everybody needs to understand 

this problem is going to be huge. I think you will see we have problems already that grain companies are not buying deferred positions. That is going to be more prevalent and it is going to be a 

real problem. 

Mr. SCOTT [presiding.] Mr. Neugebauer. 

Mr. NEUGEBAUER. I thank the chair for allowing me to go out of 

order here. I want to go back to Mr. Farley just a little bit, and 

I agree that markets are very efficient as long as there is not any 

circumstances that would cause markets to be inefficient. And I 

know that on your exchange you can trade commodities both with 

options and with futures, is that correct? 

160

Mr. FARLEY. That is right. 

Mr. NEUGEBAUER. And I think the limits, for example, on cotton 

is 300 points, the daily limit, is that correct? 

Mr. FARLEY. There is an exception to that rule but in general. 

Mr. NEUGEBAUER. Generally it is 300? 

Mr. FARLEY. 300. 

Mr. NEUGEBAUER. And so these special days that we have been 

talking about, I understand it that while the futures were limit up 

the margin calls were not based on the limit move but on the closing price of the options that day. People that weren’t even participating in the options were forced to make—normally you would 

make a margin call based on the limit move, is that correct? 

Mr. FARLEY. We have had a policy for about a decade of margining the way you described. 

Mr. NEUGEBAUER. And so all of a sudden the rules changed, and 

the people that thought that day that they were going to have to 

make a margin for a limit move had to make a margin for what 

would be the equivalent of four or five limit moves, is that correct? 

Mr. FARLEY. I am sorry, Congressman. I wasn’t specific with my 

answer. We didn’t change anything. We have had the same policy 

for a decade, and we didn’t change anything on March 3 and March 

4. 

Mr. NEUGEBAUER. So people did not have to put up a higher 

margin than just a limit move? 

Mr. FARLEY. They did. If I can, just by way of background. What 

you are describing is the price limit structure that is now really 

specific to the domestic agricultural markets. Going back 20 years, 

you can understand why these limits are in place. Money flows 

took a day or 2 and price dissemination to rural areas and other 

countries takes a while. For these small periods you put the price 

limits in place, and now our exchange as well as the other domestic 

exchanges represented here have these price limits in place, and 

we are no different. Most markets have moved away from these 

and we still have them. In the first 60 days of this year, we hit 

these limits 18 times. The most pronounced occasions were March 

3 and March 4, and what I mean by that was the options price was 

the furthest from the futures limit up price. 

Going back to close to a decade ago, our Board which was then 

composed of industry leaders, this is prior to the ICE acquisition 

of NYBOT, our Board put through a policy to margin the way you 

have described. That is, use the synthetic price or the real price 

being discovered in the options pit as the margining price for both 

futures and options. And it is a prudent rule. It really protects the 

clearinghouse which is of paramount importance to us. And that 

rule was approved by our cotton committees and our product committees at that time. And so on March 3 and March 4, we didn’t 

do anything different. The unfortunate reality for the industry is 

that the move was so significant that it put tremendous pressure 

on our customers to be able to come up with that money. As Mr. 

Weil indicated earlier, the margin requirement that day was over 

a billion dollars. I hope that answers your question. 

Mr. NEUGEBAUER. So when I asked you the question before, you 

said affirmative but then you are saying that you misspoke and 

161

that this policy of using the options for discovery or the limit was 

whichever higher has been the policy for 10 years? 

Mr. FARLEY. I believe that figure is 8 or 9 years. I don’t have the 

exact date, but that is right. 

Mr. NEUGEBAUER. And does that give any credit to the fact that 

some of the people trading in that way actually own the commodity, holding the commodity, and other people that are not holding the commodity? 

Mr. FARLEY. There are two different types of margin at a clearinghouse. There is initial margin and variation margin. In the case 

of our initial margin, we do differentiate between the two different 

types of traders. Whereas, variation margin is more straightforward at the end of the day we determine what is the best available price for margining purposes; and that determines the market 

to market value of all the hedges, both futures and options. 

Mr. NEUGEBAUER. I think all of us want the marketplace to function as consistently as it can. I think the problem is, and it has 

been articulated here by the people that are either storing or merchandising or growing these commodities because of these anomalies, as you call it, that happened. Basically, what it has done is 

it has taken a lot of people out of the marketplace that have been 

able to help producers manage their risk, and so that means that 

it is not working. Now I am not going to be one to radically throw 

out the baby with the bath water here, but I do think, and I would 

hope, that instead of relying on us, I would hope that the industry 

would sit down and start talking about making sure that we have 

a structural marketplace in place. 

I know that we have moved to electronic trading one of those 

days or very closely to that date. I just want to make sure that we 

are accomplishing the original goal here, and that is that these 

markets are really designed to help the agricultural market. Now 

I understand a lot of people want to hold American commodities because our dollar is diving and that one of the hedges for the dollar 

would obviously be to move into the commodities, and I understand 

that. That is something we have to address as well. I know my 

time has expired, and I would ask that Members be allowed to 

since this is such an important subject without objection that Members be allowed to submit questions to our panelists and hold the 

record open until such time as we get responses to those questions. 

Mr. SCOTT. Absolutely. We thank the gentleman from Texas for 

his insightful questions. I have a couple of questions I would like 

to ask. First, Mr. Farley, it seems that volatility is affecting a 

broad array of commodities. Looking at the different agricultural 

products that have traded on your exchange, how does your exchange work with the affected industries in periods of high volatility? 

Mr. FARLEY. Sure. I would like to answer that in two parts if I 

can. With respect to what the exchange can do in the period of volatility, the markets are volatile when the supply and demand equation is out of bounds or if supply or demand is growing—one is 

growing faster than the other. And today demand growth is far outstripping supply, and in that situation what an exchange can do 

primarily is continue to provide a mechanism for discovering price. 

It is by discovering that price and in these cases a high price that 

162

is going to attract additional investment capital, additional infrastructure into these industries and ultimately bring down the price 

of these commodities and the volatility of these commodities. 

Specifically, in terms of what we do to work with the industry, 

I think our exchange is unique in the respect that we work very 

closely with our industries. Each of our major products has a contract committee that is composed of industry leaders. In cotton, for 

instance, we have a panel made up of 20 industry leaders. The 

three CEOs of the top three cotton merchants globally are on that 

panel. And we actually cede the codification of the terms and conditions of our cotton contract to them. This is a really turbulent time. 

In a turbulent time, we need to work with that group, that committee, even more than usual. And I agree with what Congressman 

Neugebauer said, which is we should really work together on these 

issues and find common ground. 

Mr. SCOTT. Right. Let me ask you this. I just have a couple more 

follow-up questions, and then I have a general question for everyone. But, Mr. Farley, recognizing that price discovery and risk 

management are the primary functions of the futures market, I 

don’t quite understand why your exchange would set price limits 

on its futures contracts. You mentioned that you allow options to 

continue trading when futures hit the limit to provide a way to continue the price discovery function, but could you maybe a little better explain how that works? 

Mr. FARLEY. Well, these limits are a bit anachronistic, and they 

exist largely in the domestic agricultural commodities. The argument for price limits is that they prevent panic, a panic scenario, 

and by leaving the options open you provide a vent or a steam pipe 

during these periods where there is a lot of built up tension. Most 

markets have moved away from these limits, and it is something 

that we are evaluating together, and when I say together I mean 

with the industry what is the right structure. Are these anachronistic but they work or do these need to be substantially revised 

or even eliminated. 

Mr. SCOTT. The other part of that question, I wanted to get to 

the issue of the unregulated OTC trading of commodities that lacks 

transparency and yet has a major impact on the market. These 

opaque markets, what is your exchange doing to rein them in? 

Mr. FARLEY. I am the President and CEO of ICE Futures U.S. 

which we are a CFTC designated contract market here in the 

states, and we primarily trade in agriculture. Much of the talk on 

the earlier panels about ICE centered on our energy business. 

Since I can’t speak directly to that, but I would like to give a couple 

thoughts. The first thing I would like to say is that ICE as a broader company including the parent organization strongly supports 

any efforts at increasing transparency in these markets. I would 

like to correct the record of earlier testimony. ICE took a proactive 

stance on working with this Committee and Congress on the bill 

that was passed yesterday, and that bill does include position limits for the highly liquid OTC contracts which is a meaningful distinction from one of the discussions earlier. 

And ICE in general takes great pride in bringing transparency 

to OTC markets. In the energy markets a decade ago there was 

black and white. There was the listed market, which was perfectly 

163

transparent. There was the OTC market, which was perfectly 

opaque. And into that were all the ICE shades of gray if I can carry 

the metaphor maybe a little bit too far. 

Mr. SCOTT. I think you did, and I certainly appreciate that answer. My time is slipping away. I did want to get this question in 

because I don’t think we could leave this day without putting this 

question on the table particularly for you all who have to deal in 

the commodities markets. The big issue now is the high cost of fuel 

and food. The agriculture industry and the Agriculture Committee 

has expanded its territory in a very significant way of being the arbiter of those two essential areas. Especially as we now move to renewable energies, which is basically agricultural products. And 

chiefly now we are at a problem of corn with the downward pressure on corn and our over abundance of using that for ethanol. 

We have just passed a farm bill. I would like to get your opinions 

on do you think that we have done enough in terms of what we 

have done in the farm bill of taking some of that pressure off of 

corn by decreasing the tax credits on corn-based ethanol and increasing the tax credits for cellulosic ethanol. And given the time 

frame of getting these new cellulose ethanol plants up and running, 

do you think we are too far behind the curve? What can we do to 

do a quicker—what is your assessment? Have we done sufficiently 

in this farm bill? Is there more we need to do to take the pressure 

off of corn, and what do you see the future in that area? Very 

quickly. 

Mr. NIEMEYER. Congressman, first of all, I want to thank you for 

everything that you have done in the farm bill in passing it. I don’t 

disagree with anything you said. Technology is moving at a fast 

pace. We are working right now with corn cobs, corn stalks, to 

make cellulosic ethanol. We have the technology. Maybe we don’t 

have it down pat yet but we are going to get it at a very reasonable 

price. The one thing that Congress shouldn’t do, it must not repeal 

the current RFS. We will have numerous economic studies that 

have indicated that the current ethanol demand has had very little 

role in the increase of corn prices, but a repeal of the waiver would 

have a significant psychological impact on the commodity markets 

that would virtually create a commodity bubble. 

The CHAIRMAN [presiding.] I thank the gentleman. His time has 

expired. The gentleman from Georgia, Mr. Marshall, for 5 minutes. 

Mr. MARSHALL. Thank you. I had to step out and meet with some 

folks from the German Parliament to talk about NATO security 

issues so a little transition here. And actually my question probably was being addressed given what I just heard. During the first 

panel you all probably heard Mr. Fenton estimate or at least say 

that they had estimated that the impact of the weak dollar on the 

increase in the cost of oil was about 25 percent. That was his rough 

guess, and he described how they came about that estimate. What 

we hear is that there are various market forces that are causing 

the increase in food prices. One of the things that we regularly 

hear is that the decision to move to ethanol is one of the market 

forces that is causing this increase in food prices; and it is because 

so much of our acreage is now devoted to energy that might otherwise be devoted to producing food. 

164

And I think I just heard you, Mr. Niemeyer, is it, I think I just 

heard you say you have studies that tend to show that is not the 

case. I would be very interested to hear to what extent. 

Mr. NIEMEYER. We have a lot of studies. One of the things that 

we have talked about today, this being a hearing on the CFTC, was 

are these markets really reflecting fundamentals. You know, in 

2005–2006 marketing year our price of corn was $2 a bushel, and 

at that same time that is the year you passed the first renewable 

fuel standard bill. Quite honestly, I thought it was very interesting 

because at that time we were producing, we were utilizing about 

1.6 billion bushels of corn to make ethanol, and now we are going 

to be using 3. So that was an increase of 1.4 billion bushels of corn 

going to ethanol. But in the same time frame that nobody seems 

to want to talk about, we went from 11.1 billion bushels of corn to 

13.1 billion bushels of corn, which is a 2 billion bushel increase. So 

even though we had a 2 billion bushel increase in supply, we only 

had a 1.4 billion bushel increase in demand on the same time 

frame, I just don’t think that justifies a $3 plus move in the corn 

price. 

The other thing is as a farmer and as a trader, I look at the Chicago Board of Trade, and I see that this last year we produced a 

13.1 billion bushel corn crop. Currently, we have a 1.3 billion bushel carryover. I don’t get it. There are elevators at home full of corn. 

There is corn laying on the ground. And then we have this problem 

of convergence. There is a larger demand for futures than there is 

for cash. The same thing happened in the wheat market by $2.50 

a bushel. That is the reason the bankers will not lend elevators the 

money to margin more grain, and then I am put in a position of 

margining my own position which really creates a lot more of a 

problem. 

Mr. MARSHALL. Right. Any of the others? Mr. Clark. 

Mr. CLARK. I am not sure that I am expert enough to comment 

on what percentage of the price move has been responsible for ethanol, so I won’t even want to try to comment on that. I think there 

are a lot of studies out there being done by universities and other 

people that are trying to peg that. But I think unquestionably, 

without a doubt, there is unprecedented demand for commodities. 

There is nobody in this room certainly that could deny that. There 

is unprecedented demand for corn. We simply cannot raise enough 

corn. And you can say that, soybeans, wheat, whatever the case 

may be, we are struggling in the United States to grow enough 

commodities to meet the overall demand. 

And you ask it in the context of the farm bill. Our position at 

the NGFA, we are disappointed that the farm bill did not open up 

some CRP ground to let out some fully sustainable tillable ground 

and allow us to produce more. 

Mr. MARSHALL. Well, that just wasn’t going to happen. I tried. 

Mr. CLARK. I know that. 

Mr. MARSHALL. I sort of tried to lead the way a little bit. 

Mr. CLARK. We have to find a way to grow more commodities. 

Mr. MARSHALL. And is that because there is a world market? 

Mr. CLARK. As the dollar weakens and as other countries get 

more wealthy, they move from when you were eating meats, China 

165

into the market eating two to three meals a day now, and India, 

it is worldwide demand and it is real. 

Mr. MARSHALL. The problem that most folks have with this is to 

the average consumer this has happened in the last 4 or 5 or 6 

months, and these trends we have been discussing are trends that 

have been going on for really quite some time so what is unique 

now is what people ask us. That is a statement. My time is up. I 

appreciate—I would be very appreciative of any follow-up that you 

might care to give to the Committee that identifies what is different now, and if nothing else maybe you are going to be suggesting again that it has something to do with these OTC funds 

and something with the markets. I don’t know. 

Mr. WEIL. I would like to make a comment. Right now there are 

no spec limits especially on the OTC funds, and their influence on 

the market is building, and I think that has added some volatility 

to certainly the cotton futures. I can’t really speak to the other 

commodities. I am sure that is the case as well. But that is a place 

that in our recommendations we would like to see more transparency with regards to the OTC, and they should be limited. Certainly, those that are not traditional hedgers should be in a different category and recognized as such and limited to a degree. 

Right now the lenders who finance the industry are extremely fearful. They don’t understand what is going on, and that is our life 

blood as our excess capital whether it be banks or holding companies somewhere. 

Getting on to another subject with the supply of cotton and why 

the fundamentals were completely—the fundamentals were just 

completely ignored. Cotton is at a 50 percent stock to use ratio. If 

we don’t plant one seed of cotton this year, we have enough cotton 

to supply the world. We, being the world, have enough cotton to 

supply the world’s needs for 6 months, and we are going to be 

planting cotton this year. Producers have a capital commitment to 

cotton all over the world. They do in this country. They have been 

paring that down because they see a lot more track of this in the 

grain markets, but they still want to grow cotton. I mean that is 

their expertise, and they still want to pursue that. And thanks for 

passing the farm bill. That certainly gives them some relief. 

The CHAIRMAN. Thank you. Let me thank each of you for your 

patience today through the voting. Fortunately, we only had one 

set. This I think has been an excellent hearing. I thank you for 

your participation, and I would say to you that we will have more 

in the weeks to come because I think this is an issue that requires 

our attention. This is an important issue for the American consumer, and with that, I would ask the Ranking Member if he has 

any final comments before we adjourn. 

Mr. MORAN. Mr. Chairman, thank you. I agree with you this has 

been an interesting and useful hearing, and I appreciate the testimony we have heard from all three panels. I have a couple of additional questions, particularly from staff that I would like to submit 

to our witnesses in writing and ask for their response. And I look 

forward to working with you in the next few weeks as we determine what direction we go in additional hearings. 

The CHAIRMAN. I thank the gentleman. And let me just ask each 

of you, other Members will submit questions, and if you would 

166

within the next 10 days, please get that back to the Committee. I 

would appreciate it. Under the rules of the Committee, the record 

of today’s hearing will remain open for 10 days to receive additional materials and supplement a written response from witnesses 

to any questions posed by a Member of this panel. This hearing of 

the Subcommittee on General Farm Commodities and Risk Management is adjourned. 

[Whereupon, at 2:15 p.m., the Subcommittee was adjourned.] 

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