S. Hrg. 111–155 

EXCESSIVE SPECULATION IN THE WHEAT MARKET 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 21, 2009 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 

EXCESSIVE SPECULATION IN THE WHEAT MARKET 

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

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53–114 PDF 2009

S. Hrg. 111–155 

EXCESSIVE SPECULATION IN THE WHEAT MARKET 

HEARING 

BEFORE THE

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

OF THE

COMMITTEE ON 

HOMELAND SECURITY AND 

GOVERNMENTAL AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED ELEVENTH CONGRESS 

FIRST SESSION 

JULY 21, 2009 

Available via http://www.gpoaccess.gov/congress/index.html 

Printed for the use of the Committee on Homeland Security 

and Governmental Affairs 

( 

(II) 

COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS 

JOSEPH I. LIEBERMAN, Connecticut, Chairman 

CARL LEVIN, Michigan 

DANIEL K. AKAKA, Hawaii 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

MARY L. LANDRIEU, Louisiana 

CLAIRE MCCASKILL, Missouri 

JON TESTER, Montana 

ROLAND W. BURRIS, Illinois 

MICHAEL F. BENNET, Colorado 

SUSAN M. COLLINS, Maine 

TOM COBURN, Oklahoma 

JOHN MCCAIN, Arizona 

GEORGE V. VOINOVICH, Ohio 

JOHN ENSIGN, Nevada 

LINDSEY GRAHAM, South Carolina 

MICHAEL L. ALEXANDER, Staff Director 

BRANDON L. MILHORN, Minority Staff Director and Chief Counsel 

TRINA DRIESSNACK TYRER, Chief Clerk 

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS 

CARL LEVIN, Michigan, Chairman 

THOMAS R. CARPER, Delaware 

MARK L. PRYOR, Arkansas 

JON TESTER, Montana 

MICHAEL F. BENNET, Colorado 

TOM COBURN, Oklahoma 

SUSAN M. COLLINS, Maine 

JOHN MCCAIN, Arizona 

JOHN ENSIGN, Nevada 

ELISE J. BEAN, Staff Director and Chief Counsel 

RACHAEL SIEGEL, GAO Detailee 

CHRISTOPHER BARKLEY, Minority Staff Director 

TIMOTHY R. TERRY, Minority Counsel 

MARY D. ROBERTSON, Chief Clerk 

(III) 

C O N T E N T S 

Opening statements: Page 

Senator Levin .................................................................................................... 1 

Senator Coburn ................................................................................................. 10 

Senator Collins ................................................................................................. 13 

Senator Tester .................................................................................................. 15 

Senator Bennet ................................................................................................. 15 

Prepared statement: 

Senator McCaskill ............................................................................................ 63 

WITNESSES 

TUESDAY, JULY 21, 2009 

Hon. Gary Gensler, Chairman, Commodity Futures Trading Commission ........ 16 

Thomas Coyle, Vice President and General Manager, Chicago and Illinois 

River Marketing LLC, Nidera, Inc., and Chairman, National Grain and 

Feed Association ................................................................................................... 33 

Hayden Wands, Director of Procurement, Sara Lee Corporation, and Chairman, Commodity and Agricultural Policy, American Bakers Association ...... 36 

Mark Cooper, Director of Research, Consumer Federation of America .............. 38 

Steven H. Strongin, Head of the Global Investment Research Division, The 

Goldman Sachs Group, Inc. ................................................................................. 39 

Charles P. Carey, Vice Chairman, CME Group .................................................... 52 

ALPHABETICAL LIST OF WITNESSES

Carey, Charles P.: 

Testimony .......................................................................................................... 52 

Prepared statement .......................................................................................... 143 

Cooper, Mark: 

Testimony .......................................................................................................... 38 

Prepared statement .......................................................................................... 87 

Coyle, Thomas: 

Testimony .......................................................................................................... 33 

Prepared statement .......................................................................................... 71 

Gensler, Hon. Gary: 

Testimony .......................................................................................................... 16 

Prepared statement .......................................................................................... 64 

Strongin, Steven H.: 

Testimony .......................................................................................................... 39 

Prepared statement .......................................................................................... 129 

Wands, Hayden: 

Testimony .......................................................................................................... 36 

Prepared statement .......................................................................................... 76 

APPENDIX 

‘‘Excessive Speculation in the Wheat Market,’’ Majority and Minority Staff 

Report, Permanent Subcommittee on Investigations, June 24, 2009 .............. 159 

EXHIBITS

1. Outstanding Chicago Wheat Futures Contracts Purchased by Commodity 

Index Traders, 2004–2009, chart prepared by the U.S. Senate Permanent 

Subcommittee on Investigations ...................................................................... 425 

Page

IV 

2 Chicago Wheat Prices, Daily Difference Between Futures and Cash Price 

(Daily Basis), chart prepared by the U.S. Senate Permanent Subcommittee on Investigations ............................................................................. 426 

3. Chicago Wheat Prices, Difference Between Futures Price and Cash Price 

(Basis) in Chicago at Contract Expiration, chart prepared by the U.S. 

Senate Permanent Subcommittee on Investigations ..................................... 427 

4. Example of a Hedge With Convergence, chart prepared by the U.S. Senate 

Permanent Subcommittee on Investigations .................................................. 428 

5. Example of a Hedge Without Convergence, chart prepared by the U.S. 

Senate Permanent Subcommittee on Investigations ..................................... 429 

6. Cash Price of Wheat (Soft Red Winter Wheat), chart prepared by the 

U.S. Senate Permanent Subcommittee on Investigations ............................. 430 

7. Document entitled The Case for Commodities as an Asset Class, prepared 

by Goldman Sachs and Co., June 2004 ........................................................... 431 

8. Responses to supplemental questions for the record submitted to Charles 

P. Carey, Vice Chairman, CME Group ........................................................... 498 

9. Responses to supplemental questions for the record submitted to Steven 

H. Strongin, Head of the Global Investment Research Division, The Goldman Sachs Group, Inc. ..................................................................................... 503 

10. Responses to supplemental questions for the record submitted to Mark 

Cooper, Director of Research, Consumer Federation of America ................. 507 

11. Responses to supplemental questions for the record submitted to The 

Honorable Gary Gensler, Chairman, Commodities Futures Trading Commission ............................................................................................................... 510 

(1) 

EXCESSIVE SPECULATION IN THE WHEAT 

MARKET 

TUESDAY, JULY 21, 2009 

U.S. SENATE,

PERMANENT SUBCOMMITTEE ON INVESTIGATIONS,

COMMITTEE ON HOMELAND SECURITY

AND GOVERNMENTAL AFFAIRS, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 2:34 p.m., in room 

SD–342, Dirksen Senate Office Building, Hon. Carl Levin, Chairman of the Subcommittee, presiding. 

Present: Senators Levin, Tester, Bennet, Coburn, and Collins. 

Staff Present: Elise J. Bean, Staff Director and Chief Counsel; 

Mary D. Robertson, Chief Clerk; Rachel Siegel, Detailee (GAO); 

David Katz, Counsel; Allison Murphy, Counsel; Christopher Barkley, Staff Director to the Minority; Timothy R. Terry, Counsel to 

the Minority; Marcelle John, Detailee (IRS); Kevin Wack, Congressional Fellow; Sam Katsin, Intern; Peter Kenny, Law Clerk; 

Malachi Zussman-Dobbins, Intern; Melissa Mann (Senator McCaskill); Nichole Distefano (Senator McCaskil); Jason Rosenberg (Senator Tester); Rachel Clark (Senator Tester); Catharine Ferguson 

(Senator Bennet); Brandon Milhorn (HSGAC/Senator Collins); Asha 

Mathew (HSGAC/Senator Collins); and Mary Beth Carozza 

(HSGAC/Senator Collins). 

OPENING STATEMENT OF SENATOR LEVIN 

Senator LEVIN. Good afternoon, everybody. The Subcommittee 

will come to order. 

For more than 5 years now, this Subcommittee has been taking 

a hard look at how our commodity markets function. In particular, 

we have examined how excessive speculation in those markets has 

distorted prices, overwhelmed normal supply and demand factors, 

and can push up prices at the expense of consumers and American 

business. 

In 2006, for example, the Subcommittee released a report which 

found that billions of dollars in commodity index trading on the 

crude oil market had pushed up futures prices in 2006, causing a 

corresponding increase in cash prices, and were responsible for an 

estimated $20 out of the then $70 cost for a barrel of oil. A 2007 

report showed how a single hedge fund named Amaranth made 

huge trades on the natural gas market, pushed up futures prices, 

and increased natural gas prices for consumers and American business. 

2 

At today’s hearing, our focus is on wheat. Using the wheat market as a case history, we show how commodity index trading, in the 

aggregate, can cause excessive speculation and price distortions. As 

in our prior investigations, this examination has taken us into the 

upside down world of financial engineering that we find ourselves 

in today, where instead of talking about supply and demand affecting wheat prices, we have to talk about the impact of complex financial instruments like commodity indexes, swaps, and exchange 

traded funds, and what happens when speculators buying these 

derivative instruments begin to dominate a futures market instead 

of the commercial businesses buying futures to hedge against price 

changes. 

These are complicated issues. It took the Subcommittee an entire 

year to compile and analyze millions of trading records from the 

three U.S. futures markets where wheat is traded, including the 

largest exchange of the three in Chicago. We also interviewed numerous experts, researched the issues, and released a 247-page report explaining our findings. 

Our report, which was issued by myself and Senator Coburn last 

month, concludes that the huge number of wheat futures contracts 

being purchased by derivative dealers selling commodity index instruments have, in the aggregate, constituted excessive speculation 

in the Chicago wheat market, resulting in unwarranted price 

changes and an undue burden on commerce. 

Our report presents a variety of data in support of its findings, 

but, necessarily, I can highlight only a few key points here. The 

first point is the huge growth in commodity index investments over 

the past 5 years. According to estimates by the Commodity Futures 

Trading Commission (CFTC), about $15 billion was invested in 

commodity indexes in 2003. By mid-2008, that figure had grown to 

$200 billion, a 13-fold increase. 

Commodity indexes are mathematical constructs whose value is 

calculated from the value of a specified basket of futures contracts 

for agricultural, energy, and metals commodities. When the prices 

of the selected futures go up, the value of the index goes up. When 

the futures prices go down, the index value goes down. 

Speculators don’t invest directly in a commodity index, since the 

index itself is nothing more than a number that constantly 

changes. Instead, they buy financial instruments—derivatives— 

whose value is linked to the value of a specified commodity index. 

In essence, speculators place bets on whether the index value will 

go up or down. They place those bets with derivative dealers, usually by buying a financial instrument called a ‘‘swap’’ whose value 

is linked to the commodity index. The derivative dealer charges a 

fee for entering the swap, and then effectively holds the other side 

of the bet. When the index value goes up, the speculator makes 

money from the swap. When the index value goes down, the derivative dealer makes money from the swap. 

Most derivative dealers, however, don’t like to gamble on these 

swaps; instead they typically hedge their bets by buying the futures contracts on which the index and related swaps are based. 

Then if their side of the swap loses value, they offset the loss with 

the increased value of the underlying futures. By holding both the 

swap and the futures contracts upon which the swap is based, deVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
3 

1See Exhibit No. 1, which appears in the Appendix on page 425. 

2See Exhibit No. 2, which appears in the Appendix on page 426. 

3See Exhibit No. 3, which appears in the Appendix on page 427. 

rivative dealers are protected from financial risk whether futures 

prices go up or down. By taking that position, derivative dealers 

also avoid becoming pure speculators in commodities; instead, they 

facilitate the speculative bets being placed by their clients, while 

making money off the fees paid for the commodity index swaps. 

Since 2004, derivative dealers buying futures to offset the speculative bets made by their clients have begun to dominate U.S. commodity markets, buying a wide range of futures for crude oil, natural gas, gold, corn, wheat, and other commodities. This chart, Exhibit 1,1 shows the impact on the Chicago wheat futures market 

alone. It shows that derivative dealers making commodity index 

trades have bought increasing numbers of wheat futures, with 

their aggregate holdings going from 30,000 wheat contracts in 2004 

to 220,000 in 2008, a seven-fold increase in 4 years. Derivative 

dealers making commodity index trades now hold nearly half of the 

outstanding wheat futures—long open interest—on the Chicago Exchange. 

Derivative dealers seeking to offset the speculative bets of their 

clients have created a new demand for futures contracts. Their objective is simple: to buy a sufficient number of futures to offset 

their financial risk from selling commodity index swaps to their clients. Their steady purchases of futures to buy wheat have had a 

one-way impact on futures prices—pushing the prices up. In addition, their purchases have created a steady demand for wheat futures, without creating a corresponding demand in the cash market. The result in recent years has been Chicago wheat futures 

prices which are routinely much higher than wheat cash prices, 

with a persistent and sizable gap between the two prices. 

Now, the next two charts show how this gap has grown over 

time. The first chart, Exhibit 2,2 looks at the day-to-day difference 

between wheat futures and cash prices in the Chicago wheat market over the last 9 years. It shows that, from 2000 to 2005, the average daily difference between the average cash and futures price 

for wheat in the Chicago market, also called the ‘‘basis,’’ ranged between 0 and 50 cents. In 2006, that price gap or basis began to increase, in sync with the increasing amount of commodity index 

trading going on in the Chicago wheat market. By mid-2008, when 

commodity index traders held nearly half of the outstanding wheat 

futures—long open interest—on the Chicago Exchange, the price 

gap had grown to between $1.50 and $2 per bushel, a huge and unprecedented gap. 

Now, the next chart, which is Exhibit 3 3 in the books, shows the 

same pattern when the Chicago wheat futures contracts expired. 

Wheat futures contracts are available in only 5 months of the 

year—March, May, July, September, and December. This chart 

looks at the expiration date for each of those five contracts from 

2005 to 2008 and shows the gap between the final futures price 

and the cash price on that date. The data shows that this gap, or 

the basis, grew from 13 cents per bushel in 2005, to 34 cents in 

2006, to 60 cents in 2007, to $1.53 in 2008, a more than ten-fold 

increase in 4 years, providing clear evidence of a dysfunctional 

4 

market. And, again, this increasing price gap took place at the 

same time commodity index traders were increasing their holdings 

to nearly half of the wheat futures contracts on the Chicago Exchange. 

To understand the significance of this price gap, we need to take 

a step back and focus on the purpose of commodity markets. Commodity markets have traditionally had two primary purposes: first, 

to help farmers and other businesses establish a price for the delivery of a commodity at a specified date in the future; and, second, 

to help them hedge against the risk of price changes over time. 

Futures prices are the result of numerous traders making individual bids to buy or sell a standard amount of the commodity at 

a specified date in the future. That date can be 1 month, 6 months, 

or even years in the future. At the same time this bargaining is 

going on to establish prices for the future delivery of a commodity, 

businesses are also bargaining over prices for the immediate delivery of that commodity. A price for the immediate delivery of a commodity is referred to as the cash price. Traditionally, futures prices 

and cash prices have worked together. That is because, as the delivery date in a futures contract gets closer, the futures price logically should begin to converge with the cash price so that, on the 

date the futures contract expires and delivery is due, the two prices 

are very close. 

Now that is what is supposed to happen. But in some commodity 

markets like the wheat market, price convergence has broken 

down. When price convergence breaks down, hedges stop working 

and no longer protect farmers, grain elevators, grain merchants, 

food producers, and others against price changes. And we will hear 

today how these businesses are losing the ability to hedge in the 

Chicago wheat market and are incurring unanticipated costs from 

failed hedges and higher margin costs. We will also hear how, in 

many cases, those businesses have to eat those costs because the 

fierce competition over food prices won’t allow them to increase 

their prices to cover the extra expense. In other cases, when they 

do pass on those higher costs, consumers, of course, lose. 

Virtually everyone this Subcommittee has contacted agrees that 

price convergence is critical to successful hedging. When the futures and cash prices don’t converge at the time a futures contract 

expires, hedges don’t work. There is no dispute over that. In the 

prepared statement, which I will put in the record, I provide a detailed explanation of why price convergence is essential to effective 

hedging. In the interest of time and because there is pretty much 

a consensus in support of that point, I am not going to repeat that 

explanation here. 

The key issue is what is causing the prices not to converge. 

While there are many possible contributing factors, including artificially low storage prices or delivery problems, our investigation 

found substantial and persuasive evidence that the primary reason 

why prices have not been converging in the Chicago wheat market 

is the large number of wheat contracts being purchased by derivative dealers making commodity index trades. 

Those derivative dealers have been selling billions of dollars in 

commodity index swaps to customers speculating on commodity 

prices. By purchasing futures contracts to offset their financial 

5 

risk, derivative dealers created an additional demand for wheat futures that is unconnected to the cash market, and that has contributed to the gap between the two prices. We know of no other significant change in the wheat market over the past 5 years which 

explains the failure to converge other than the huge surge of wheat 

futures bought by derivative dealers offsetting the sale of commodity index swaps to their clients. I emphasize the word ‘‘significant.’’ We know of no other significant change in the wheat market 

over the past 5 years. 

The massive commodity index trading affecting the wheat futures market in recent years was made possible in part by regulators. Existing law requires the CFTC to set limits on the number 

of futures contracts that any one trader can hold at any one time 

to prevent excessive speculation and other trading abuses. Those 

position limits are supposed to apply to all traders, unless granted 

an exemption or a waiver by the CFTC. 

With respect to wheat, the CFTC has established a limit that 

prohibits any trader from holding more than 6,500 futures contracts at any one time. But over the years, the CFTC has also allowed some derivative dealers to exceed that limit. The CFTC 

granted exemptions to four derivative dealers that sell commodity 

index swaps, allowing them to hold up to 10,000, 17,500, 26,000, 

and even 53,000 wheat futures at a time. The CFTC also issued 

two ‘‘no-action’’ letters allowing the manager of one commodity 

index exchange-traded fund to hold up to 11,000 wheat futures and 

another fund manager to hold up to 13,000 wheat futures. Together, those exemptions and waivers by the CFTC permit six derivative dealers to hold a total of up to 130,000 wheat futures contracts at any one time, instead of 39,000, or two-thirds less, if the 

standard limit had applied. 

Part of the reason that the CFTC granted these exemptions and 

waivers was because it got mixed signals from Congress. In the 

Commodities Exchange Act, Congress told the CFTC to set position 

limits to prevent excessive speculation, and it authorized the CFTC 

to grant exemptions only for commercial users needing to hedge 

transactions involving physical commodities in the cash market. 

But in 1987, two key congressional committees also told the CFTC 

to consider granting exemptions to financial firms seeking to offset 

purely financial risks. It was in response to this direction that the 

CFTC eventually allowed the derivative dealers selling commodity 

index instruments to exceed the standard limits. 

These exemptions and waivers have enabled derivative dealers to 

place many more speculative bets for their customers than they 

could have otherwise, resulting in an increased demand for wheat 

futures contracts to offset the financial risk, higher wheat futures 

prices unconnected to cash prices, failed hedges, and higher margin 

costs. 

That is why our report recommends that the CFTC reinstate the 

standard 6,500 limit on wheat contracts for derivative dealers. Imposing this limit again would reduce commodity index trading in 

the wheat market and take some of the pressure off wheat futures 

prices. If wheat futures prices remain higher than cash prices after 

the existing exemptions and waivers are phased out, our report recommends tightening the limit further, perhaps to 5,000 wheat conVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
6 

tracts per derivative dealer, which is the limit that existed up until 

2006. 

Our report also recommends that the CFTC examine other commodity markets to see if commodity index trading has resulted in 

excessive speculation and undue price changes. This Subcommittee 

has said before that excessive speculation is playing a damaging 

role in other commodity markets, especially the crude oil market 

where oil prices go up despite low demand and ample supplies. And 

I might add here that our full Committee has done some significant 

investigations and hearings on the same subject under the leadership of Chairman Lieberman and Ranking Member Collins. 

The CFTC has promised a top-to-bottom review of the exemptions and waivers it has granted to derivative dealers and has signaled its willingness to use position limits to clamp down on excessive speculation in all commodity markets, to ensure that commodity prices reflect supply and demand rather than speculators 

gambling on market prices to turn a quick profit. That review is 

badly needed, and we appreciate the agency’s responsiveness to the 

turmoil in the markets. 

[The prepared statement of Senator Levin follows:] 

PREPARED OPENING STATEMENT OF SENATOR LEVIN 

For more than five years now, this Subcommittee has been taking a hard look at 

how our commodity markets function. In particular, we have examined how excessive speculation in those markets has distorted prices, overwhelmed normal supply 

and demand factors, and can push up prices at the expense of consumers and American business. 

In 2006, for example, the Subcommittee released a report which found that billions of dollars in commodity index trading on the crude oil market had pushed up 

futures prices in 2006, caused a corresponding increase in cash prices, and were responsible for an estimated $20 out of the then $70 cost for a barrel of oil. A 2007 

report showed how a single hedge fund named Amaranth made huge trades on the 

natural gas market, pushed up futures prices, and increased natural gas prices for 

consumers and American business. 

At today’s hearing, our focus is on wheat. Using the wheat market as a case history, we show how commodity index trading, in the aggregate, can cause excessive 

speculation and price distortions. As in our prior investigations, this examination 

has taken us into the upside down world of financial engineering that we find ourselves in today, where instead of talking about supply and demand affecting wheat 

prices, we have to talk about the impact of complex financial instruments like commodity indexes, swaps, and exchange traded funds, and what happens when speculators buying these derivative instruments begin to dominate a futures market instead of the commercial businesses buying futures to hedge against price changes. 

These are complicated issues. It took the Subcommittee an entire year to compile 

and analyze millions of trading records from the three U.S. futures markets where 

wheat is traded, including the largest exchange of the three in Chicago. We also 

interviewed numerous experts, researched the issues, and released a 247-page report explaining our findings. Our report, which was issued by myself and Senator 

Coburn last month, concludes that the huge number of wheat futures contracts 

being purchased by derivative dealers selling commodity index instruments have, in 

the aggregate, constituted excessive speculation in the Chicago wheat market, resulting in unwarranted price changes and an undue burden on commerce. 

Our report presents a variety of data in support of its findings, but, necessarily, 

I can highlight only a few key points here. The first point is the huge growth in 

commodity index investments over the past five years. According to estimates by the 

Commodity Futures Trading Commission (CFTC), about $15 billion was invested in 

commodity indexes in 2003. By mid-2008, that figure had grown to $200 billion, a 

thirteenfold increase. 

Commodity indexes are mathematical constructs whose value is calculated from 

the value of a specified basket of futures contracts for agricultural, energy, and metals commodities. When the prices of the selected futures go up, the value of the 

index goes up. When the futures prices go down, the index value goes down. 

7 

Speculators don’t invest directly in a commodity index, since the index itself is 

nothing more than a number that constantly changes. Instead, they buy financial 

instruments—derivatives—whose value is linked to the value of a specified commodity index. In essence, speculators place bets on whether the index value will go 

up or down. They place those bets with derivative dealers, usually by buying a financial instrument called a ‘‘swap’’ whose value is linked to the commodity index. 

The derivative dealer charges a fee for entering the swap, and then effectively holds 

the other side of the bet. When the index value goes up, the speculator makes 

money from the swap. When the index value goes down, the derivative dealer makes 

money from the swap. 

Most derivative dealers, however, don’t like to gamble on these swaps; instead 

they typically hedge their bets by buying the futures contracts on which the index 

and related swaps are based. Then if their side of the swap loses value, they offset 

the loss with the increased value of the underlying futures. By holding both the 

swap and the futures contracts upon which the swap is based, derivative dealers 

are protected from financial risk whether futures prices go up or down. By taking 

that position, derivative dealers also avoid becoming pure speculators in commodities, instead facilitating the speculative bets being placed by their clients, while 

making money off the fees paid for the commodity index swaps. 

Since 2004, derivative dealers buying futures to offset the speculative bets made 

by their clients have begun to dominate U.S. commodity markets, buying a wide 

range of futures for crude oil, natural gas, gold, corn, wheat and other commodities. 

This chart, Exhibit 1, shows the impact on the Chicago wheat futures market alone. 

It shows that derivative dealers making commodity index trades have bought increasing numbers of wheat futures, with their aggregate holdings going from 30,000 

wheat contracts in 2004, to 220,000 in 2008, a sevenfold increase in four years. Derivative dealers making commodity index trades now hold nearly half of the outstanding wheat futures (long open interest) on the Chicago Exchange. 

Derivative dealers seeking to offset the speculative bets of their clients have created a new demand for futures contracts. Their objective is simple: to buy a sufficient number of futures to offset their financial risk from selling commodity index 

swaps to clients. Their steady purchases of futures to buy wheat have had a oneway impact on futures prices—pushing the prices up. In addition, their purchases 

have created a steady demand for wheat futures, without creating a corresponding 

demand in the cash market. The result in recent years has been Chicago wheat futures prices which are routinely much higher than wheat cash prices, with a persistent and sizeable gap between the two prices. 

The next two charts show how this gap has grown over time. The first chart, Exhibit 2, looks at the day-to-day difference between wheat futures and cash prices 

in the Chicago wheat market over the last nine years. It shows that, from 2000 to 

2005, the average daily difference between the average cash and futures price for 

wheat in the Chicago market, also called the basis, ranged between 0 and 50 cents. 

In 2006, that price gap or basis began to increase, in sync with the increasing 

amount of commodity index trading going on in the Chicago wheat market. By mid 

2008, when commodity index traders held nearly half of the outstanding wheat futures (long open interest) on the Chicago Exchange, the price gap had grown to between $1.50 and $2 per bushel, a huge and unprecedented gap. 

The next chart, Exhibit 3, shows the same pattern when the Chicago wheat futures contracts expired. Wheat futures contracts are available in only five months 

of the year, March, May, July, September, and December. This chart looks at the 

expiration date for each of those five contracts from 2005 to 2008, and shows the 

gap between the final futures price and the cash price on that date. The data shows 

that this gap, or basis, grew from 13 cents per bushel in 2005, to 34 cents in 2006, 

to 60 cents in 2007, to $1.53 in 2008, a more than ten-fold increase in four years, 

providing clear evidence of a dysfunctional market. And again, this increasing price 

gap took place at the same time commodity index traders were increasing their 

holdings to nearly half of the wheat futures contracts on the Chicago Exchange. 

To understand the significance of this price gap, we need to take a step back and 

focus on the purpose of commodity markets. Commodity markets have traditionally 

had two primary purposes: first, to help farmers and other businesses establish a 

price for the delivery of a commodity at a specified date in the future, and, second, 

to help them hedge against the risk of price changes over time. 

Futures prices are the result of numerous traders making individual bids to buy 

or sell a standard amount of the commodity at a specified date in the future. That 

date can be one month, six months, or even years in the future. At the same time 

this bargaining is going on to establish prices for the future delivery of a commodity, 

businesses are also bargaining over prices for the immediate delivery of that commodity. A price for the immediate delivery of a commodity is referred to as the cash 

8 

price. Traditionally, futures prices and cash prices have worked together. That’s because, as the delivery date in a futures contract gets closer, the futures price logically should begin to converge with the cash price so that, on the date the futures 

contract expires and delivery is due, the two prices are very close. 

That’s what supposed to happen. But in some commodity markets like the wheat 

market, price convergence has broken down. When price convergence breaks down, 

hedges stop working and no longer protect farmers, grain elevators, grain merchants, food producers, and others against price changes. We will hear today how 

these businesses are losing the ability to hedge in the Chicago wheat market, and 

are incurring unanticipated costs from failed hedges and higher margin costs. We 

will also hear how, in many cases, those businesses have to eat those costs because 

the fierce competition over food prices won’t allow them to increase their prices to 

cover the extra expense. In other cases, when they do pass on those higher costs, 

consumers lose. 

Virtually everyone this Subcommittee has contacted agrees that price convergence 

is critical to hedging. When the futures and cash prices don’t converge at the time 

a futures contract expires, hedges don’t work. Let me explain in more detail why 

price convergence is critical to the ability of farmers, elevators, and others to use 

the futures markets to manage their price risks. Let’s use the example of a county 

grain elevator that buys wheat from a local farmer, stores it, and sells the grain 

to a major bakery later in the year. 

When the grain elevator buys the wheat and stores it, the value of that grain will 

fluctuate as grain prices change over time. If grain prices go up, the wheat is worth 

more. If prices go down, the wheat is worth less and could even drop below what 

the elevator paid for it. To protect itself, the elevator typically turns to the futures 

market to hedge its price risk. 

This chart, Exhibit 4, shows how the elevator uses the futures market to protect 

itself from a drop in wheat prices. The example assumes the grain elevator bought 

wheat on July 15 for $4 per bushel and wants to sell it to a bakery in December. 

In July, when the elevator buys the wheat, it checks the futures prices and finds 

that the price for delivering wheat in December is $6 per bushel. Since that price 

is $2 more than what it paid for the wheat, the elevator wants to lock in that gain. 

So in July, the elevator obtains a futures contract to deliver a standard amount of 

wheat to a specified storage warehouse in December at $6 per bushel. 

The grain elevator is now said to be ‘‘hedged,’’ because it has grain in storage— 

which is called being ‘‘long’’ in the cash market—and a futures contract to deliver 

wheat at a specified price in the future—which is called being ‘‘short’’ in the futures 

market. In a properly functioning futures market, any loss in the cash value of the 

stored wheat from July to December should be offset by a gain in the value of its 

futures contract over the same period. 

Here’s how it works. When December arrives, the elevator acts to ‘‘unwind’’ its 

hedge so that it doesn’t have to actually incur the expense of delivering its wheat 

as the futures contract specifies—to a faraway warehouse—and can instead deliver 

it to its customer, the bakery. To offset its obligation to deliver wheat in December, 

the elevator goes onto the futures market in December and buys a futures contract 

obligating it to take delivery of the same amount of wheat during that same month 

of December. The contract to buy wheat in December can then be used to offset the 

$6 per bushel contract to sell wheat in December, and the two futures cancel out. 

The elevator is then free to sell its stored wheat to the bakery at the prevailing cash 

price. 

The key to a successful hedge here is whether the December cash and the December futures prices have converged. The example on the chart assumes that both the 

cash and futures prices have converged in December to $3 per bushel. That means 

the elevator, in December, can buy a December futures contract to take delivery of 

wheat at $3 per bushel, offset it against its contract promising to sell wheat in December for $6 per bushel, and realize a net gain of $3 in the futures market. In 

the cash market, the elevator can sell its grain to the bakery at the prevailing cash 

price of $3 per bushel, which is a $1 per bushel loss compared to the $4 it paid to 

buy the wheat. But that $1 loss in the cash market, when subtracted from the $3 

gain in the futures market, results in an overall gain of $2 per bushel—exactly what 

the elevator sought when it initiated the hedge in July. 

The December price convergence was critical to the success of the elevator’s hedging strategy. It is only because the December wheat futures price and the December 

wheat cash price were the same that the grain elevator was able to offset its December futures and December cash transactions, and realize the $2 gain promised by 

its hedge in July. 

The next chart, Exhibit 5, shows what happens when the cash and futures prices 

don’t converge. This chart uses the same assumptions—that, in July, the grain eleVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
9 

vator purchased wheat from a farmer for $4 per bushel and obtained a futures contract promising to sell the wheat for $6 per bushel in December. In this example, 

however, the futures price stays higher than the cash price throughout the life of 

the hedge. When the futures contract expires in December, the December futures 

price is $5 per bushel, while the December cash price is $3. That means when the 

elevator buys a futures contract in December to offset its earlier hedge, it will have 

to buy a futures contract at $5 per bushel, which when offset against its futures 

contract to sell the wheat for $6 per bushel, results in a net gain in the futures market of only $1 per bushel. In the cash market, the elevator still sells the wheat that 

it bought at $4 per bushel to the bakery for $3, resulting in a loss of $1 per bushel. 

Subtracting the $1 loss in the cash market from the $1 gain in the futures market 

leaves the elevator without any net gain to pay its expenses. 

If the elevator hadn’t bought a futures contract in December to unwind its hedge 

that way, it could have lost out even more, by having to pay the costs of transporting its wheat to an approved warehouse in December. The point of the hedge 

made in July was not to deliver wheat to a warehouse in December, but to lock in 

a gain and protect it from price changes. The effectiveness of that hedge requires 

price convergence, however, and that’s exactly what has been lacking on too many 

occasions in the Chicago wheat market in recent years. 

The key issue is what is causing the prices not to converge. While there are many 

possible contributing factors, including artificially low storage costs or delivery problems, our investigation found substantial and persuasive evidence that the primary 

reason why prices have not been converging in the Chicago wheat market is the 

large number of wheat contracts being purchased by derivative dealers making commodity index trades. Those derivative dealers have been selling billions of dollars 

in commodity index swaps to customers speculating on commodity prices. By purchasing futures contracts to offset their financial risk, derivative dealers created an 

additional demand for wheat futures that is unconnected to the cash market, and 

that has contributed to the gap between the two prices. We know of no other significant change in the wheat market over the past five years which explains the failure 

to converge other than the huge surge of wheat futures bought by derivative dealers 

offsetting the sale of commodity index swaps to their clients. 

The massive commodity index trading affecting the wheat futures market in recent years was made possible in part by regulators. Existing law requires the CFTC 

to set limits on the number of futures contracts that any one trader can hold at any 

one time to prevent excessive speculation and other trading abuses. Those position 

limits are supposed to apply to all traders, unless granted an exemption or waiver 

by the CFTC. 

With respect to wheat, the CFTC has established a limit that prohibits any trader 

from holding more than 6,500 futures contracts at any one time. But over the years, 

the CFTC has also allowed some derivative dealers to exceed that limit. The CFTC 

granted exemptions to four derivative dealers that sell commodity index swaps, allowing them to hold up to 10,000, 17,500, 26,000, and even 53,000 wheat futures 

at a time. The CFTC also issued two ‘‘no-action’’ letters allowing the manager of one 

commodity index exchange traded fund to hold up to 11,000 wheat futures and another fund manager to hold up to 13,000 wheat futures. Together, these exemptions 

and waivers permit six derivative dealers to hold a total of up to 130,000 wheat futures contracts at any one time, instead of 39,000, or two-thirds less, if the standard 

limit had applied. 

Part of the reason that the CFTC granted these exemptions and waivers was because it got mixed signals from Congress. In the Commodities Exchange Act, Congress told the CFTC to set position limits to prevent excessive speculation, and authorized the CFTC to grant exemptions only for commercial users needing to hedge 

transactions involving physical commodities in the cash market. But in 1987, two 

key Congressional Committees also told the CFTC to consider granting exemptions 

to financial firms seeking to offset purely financial risks. It was in response to this 

direction that the CFTC eventually allowed the derivative dealers selling commodity 

index instruments to exceed the standard limits. 

These exemptions and waivers have enabled derivative dealers to place many 

more speculative bets for their customers than they could have otherwise, resulting 

in an increased demand for wheat futures contracts to offset the financial risk, higher wheat futures prices unconnected to cash prices, failed hedges, and higher margin costs. 

That’s why our report recommends that the CFTC reinstate the standard 6,500 

limit on wheat contracts for derivative dealers. Imposing this limit would reduce 

commodity index trading in the wheat market and take some of the pressure off 

wheat futures prices. If wheat futures prices remain higher than cash prices after 

the existing exemptions and waivers are phased out, our report recommends tightVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
10 

ening the limit further, perhaps to 5,000 wheat contracts per derivative dealer, 

which is the limit that existed up until 2006. 

Our report also recommends that the CFTC examine other commodity markets to 

see if commodity index trading has resulted in excessive speculation and undue 

price changes. This Subcommittee has said before that excessive speculation is playing a damaging role in other commodity markets, especially the crude oil market 

where oil prices go up despite low demand and ample supplies. 

The CFTC has promised a top-to-bottom review of the exemptions and waivers it 

has granted to derivative dealers, and signaled its willingness to use position limits 

to clamp down on excessive speculation in all commodity markets, to ensure commodity prices reflect supply and demand rather than speculators gambling on market prices to turn a quick profit. That review is sorely needed, and we appreciate 

the agency’s responsiveness to the turmoil in the markets. 

I am grateful to my Ranking Member, Senator Coburn, and his staff for their participation in and support of this bipartisan investigation, and I would like to turn 

to him now for his opening statement. 

Senator LEVIN. I am very grateful to my Ranking Member, Senator Coburn, and his staff for their participation in and their support of this bipartisan investigation, and I turn to him now for his 

opening statement. Dr. Coburn. 

OPENING STATEMENT OF SENATOR COBURN 

Senator COBURN. Senator Levin, thank you very much and let 

me, first of all, tell you what a pleasure it is to get to work with 

you and to tell you how highly I think of your staff on this Subcommittee. They have been very helpful, and I have learned a great 

deal. This is the second hearing that I have been with Senator 

Levin on. 

Let me thank you for having the hearing. The people of Oklahoma, I think, are uniquely invested in the commodities market, 

not just the wheat but the oil and natural gas, and the subject is 

appropriate for them. 

As most people know, Oklahoma is the delivery point of West 

Texas Intermediate crude, the global benchmark. It is delivered not 

far from my home, and we also produce a tremendous amount of 

hard red winter wheat. So coming from a farming State, I have had 

a particular interest in this, and I am pleased with today’s hearing. 

And I have also heard from hundreds of our constituents, especially 

in the last year, that got caught in a bind in what happened. 

I understand that commodity markets exist to help buyers and 

sellers price their goods efficiently and to manage risks associated 

with producing and carrying inventory, with acquiring financing, 

with unanticipated price changes over time. Seasonally-produced 

crops such as wheat can be particularly vulnerable to some of these 

risks. 

At the outset, however, I want to be clear. I do not believe we 

are alleging any wrongdoing on the part of index investors or anyone else. These investments represent individuals making economic 

choices in a free market, regular Americans seeking slightly better 

returns for their university endowments, their stock portfolios, or 

their retirement funds. Index investors are really nothing more 

than many of us who have gotten somewhat more sophisticated in 

how we spread our risk and how we invest. 

Nor are we alleging that index investors caused high cash commodity prices or that they are somehow responsible for more expensive consumer goods, like cereal, crackers, and bread. Our investigation did not show that. Our investigation did, however, reVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00016 Fmt 6633 Sfmt 6601 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
11 

veal that an abundance of long open interest helped to inflate futures prices and thereby disconnect future prices from cash prices, 

impairing farmers’ and elevator operators’ ability to hedge price 

risk. Because, in the absence of convergence, elevator operators are 

often forced to liquidate their stock at a cash price well below the 

futures price at which they had established their hedges. This results in expensive and unnecessary losses and drives market participants not to use the futures market at all, and that is hardly 

a desirable result for us. 

Very few industry participants disagree that index fund participation contributed to the problems in the Chicago wheat market. 

For most, however, the focus of their criticism was not the index 

investors but the CME contract, which they believe created persistent structural problems in a market that the large index influx 

merely exacerbated. 

So what is the best solution? Frankly, I agree with Mr. Coyle, 

with the National Grain and Feed Association, that a free-market 

solution is most desirable, and I too prefer to see the wheat contract come back into balance with minimal intervention by the Federal Government. Is that possible? 

On the one hand, it has not yet done so, but, on the other hand, 

we have seen some recent changes to the CME contract that I hope 

will be sufficient. I applaud the CME for their recently-implemented contract changes; noting that just this month it amended 

its wheat contract, chiefly to provide for additional delivery locations and to increase the storage rate for wheat. 

Last, a word of caution. Like a lot of ‘‘solutions’’ to complex problems that Congress oftentimes gets involved in, including those offered here today—like compelled load-out, additional delivery 

points, higher storage fees, and even our own report’s recommendation—carry the risk of unintended consequences. While there is little doubt that scaling back index participation will work to improve 

convergence, investor capital does not stand idle for long, and interest will flow into other products and other markets, perhaps overseas. 

The world is flat when it comes to world economic and financial 

considerations, and global competition for capital has become more 

fierce than ever before. The United States is losing this competition 

to countries like Singapore, Luxembourg, Hong Kong, and especially the U.K. Nations such as these are making smarter tax and 

regulatory policies, and these decisions are paying great dividends 

in the form of increased jobs and investments for their citizens. 

These countries understand that financial activity, especially those 

relating to derivatives and money management, crosses international borders with the greatest of ease, and they have rolled out 

the welcome mat for them. 

So our challenge is to, as unintrusively as possible, help to restore the balance to the Chicago market and help to ensure a wellfunctioning marketplace, one with a helpful balance of liquidity, 

volatility, and risk, and one that does not necessarily harm economic activity. 

I thank the witnesses who are here today for their testimony and 

the time that they spent preparing that, and I would note, Mr. 

12 

Chairman, at 4 to 4:30 p.m., I will have to be gone, but I will return. 

PREPARED OPENING STATEMENT OF SENATOR COBURN 

Mr. Chairman, I want to thank you for calling this important hearing. The people 

of Oklahoma are, I think, uniquely invested in the commodities markets and are 

interested in the subject at hand. Oklahoma is the delivery point of West Texas Intermediate crude oil, the global benchmark. It’s delivered in Cushing, Oklahoma, 

not far from my home town of Muskogee. My state also produces a tremendous 

amount of ‘‘hard red winter wheat.’’ So, coming from a farming state, I have had 

a particular interest in this investigation and am pleased with today’s hearing. 

Commodity markets exist to help buyers and sellers price their goods efficiently 

and to manage risks—risks associated with producing and carrying inventory, with 

acquiring financing, with unanticipated price changes over time. Seasonally produced crops—such as wheat—can be particularly vulnerable to some of these risks. 

I know—I have a lot of friends back home who are farmers, merchants, and elevator 

operators, and I can tell you they’re hurting. As if soaring energy and fertilizer costs 

last year weren’t enough, folks also had to deal with volatile wheat prices at home, 

an evaporation of credit (if not outright insolvency) at their bank, and a stronger 

dollar that made their product less competitive abroad—where much of the Oklahoma wheat crop ends up. All of this on top of a persistent, years-long nonconvergence problem in the Chicago wheat market. 

At the outset, however, I want to be clear: we are not alleging any wrongdoing 

on the part of index investors or anyone else; these investments represent individuals making economic choices in a free market, regular Americans seeking slightly 

better returns for their university endowments, stock portfolios, and retirement 

funds. Index investors are really nothing more than teachers, firefighters, policemen 

and average hardworking people. Nor are we alleging that index investors caused 

high cash commodity prices or that they are somehow responsible for more expensive consumer goods like cereal, crackers, and bread. Our investigation did not support such conclusions. 

Our investigation did, however, reveal that an abundance of long open interest 

helped to inflate futures prices and thereby disconnect futures from cash prices, impairing farmers’ and elevator operators’ ability to hedge price risk. Because, in the 

absence of convergence, elevator operators are often forced to liquidate their stocks 

at a cash price well below the futures price at which they had establish their 

hedges. This results in expensive and unnecessary losses and drives market participants not to use the futures market at all, hardly a desirable result. 

Very few industry participants disagreed that index fund participation contributed 

to the problems in the Chicago wheat market. For most, the focus of their criticism 

was not the index investors, but the CME contract, which they believe created persistent structural problems in a market that the large index influx merely exacerbated. 

So what is the best solution? Frankly, I agree with Mr. Coyle, with the National 

Grain and Feed Association, that a free market solution is most desirable, and I, 

too, ‘‘prefer to see the wheat contract come back into balance with minimal intervention’’ from the federal government. The question is: is this possible? On the one 

hand it has not yet done so, but on the other we have seen some recent changes 

to the CME contract that I hope will do the trick. I applaud the CME for their recently-implemented contract changes. Just this month, it amended its wheat contract, chiefly to provide for additional delivery locations and to increase the storage 

rate for wheat. 

Lastly, a word of caution: like a lot of ‘‘solutions’’ to complex problems, those offered here today—compelled load-out, additional delivery points, higher storage fees 

and even our own report’s recommendation—carry the risk of unintended consequences. While there is little doubt that scaling back index participation will work 

to improve convergence, investor capital does not stand idle for long, and interest 

will flow into other products and other markets, perhaps overseas. The world is 

‘‘flat,’’ and global competition for capital has become more fierce than ever before. 

The United States is losing this competition to countries like Singapore, Luxembourg, Hong Kong, and especially the U.K. Nations such as these are making smarter tax and regulatory policies, and these decisions are paying great dividends in the 

form of increased jobs and investment. These countries understand that financial activity—especially those relating to derivatives and money management—crosses 

international borders with the greatest of ease, and they have rolled out the welcome mat. 

13 

So our challenge is to, as unintrusively as possible, help to restore balance to the 

Chicago market and help to ensure a well-functioning marketplace, one with a helpful balance of liquidity, volatility, and risk, and one that does not unnecessarily 

harm economic activity. 

I thank the witnesses for their presence here today and look forward to hearing 

their testimony. 

Senator LEVIN. Thank you so much, Dr. Coburn. 

Let me now call our first witness for this afternoon’s hearing: 

Gary Gensler, the new Chairman of the Commodity Futures Trading Commission, your first appearance before the Subcommittee. 

We welcome you. 

Pursuant to Rule VI, all witnesses who testify before this Subcommittee are required to be sworn, so I would ask you to please 

stand and raise your right hand. Do you swear that the testimony 

you are about to give this Subcommittee will be the truth, the 

whole truth, and nothing but the truth, so help you, God? 

Mr. GENSLER. I do. 

Senator LEVIN. Oh, I am sorry. Senator Collins, apparently had 

an opening statement, and in that case, I will interrupt Dr. 

Gensler’s testimony and call on you, Senator Collins. 

OPENING STATEMENT OF SENATOR COLLINS 

Senator COLLINS. Thank you, Mr. Chairman. I will not delay the 

testimony long, but I do appreciate the opportunity to make just a 

few comments. 

First of all, Mr. Chairman, let me thank you and recognize you 

for your many years of leadership in exposing excessive speculation, market abuses, and manipulation. As you kindly mentioned, 

last year Chairman Lieberman and I held a series of hearings investigating the skyrocketing price of energy and agricultural commodities. Our hearings gathered compelling evidence that excessive 

speculation in futures markets was a significant factor in pushing 

up oil and agricultural commodity prices. 

Chairman Levin and the Ranking Member, Senator Coburn, 

have undertaken an in-depth and exhaustive investigation of speculation by delving into the inner workings of the wheat market. I 

believe that the data and analysis that they have presented make 

another compelling case that excessive speculation has caused our 

commodity markets to become unmoored from those who actually 

make a living using the underlying commodities, as well as by the 

consumers who pay the ultimate price. 

I want to just share with the Subcommittee, quickly, an example 

that we talked about last spring. It involved a bakery owner from 

Maine, Andrew Siegel, who testified before us. He experienced a 

truly astonishing increase in the price of the 50,000 pounds of flour 

that he uses each week. In September 2007, he was paying $7,600 

per week for 50,000 pounds of flour. By February 2008, he was 

paying $28,000 a week for the same amount of flour. That obviously jeopardized his ability to continue in business, and he identified Federal ethanol policies as well as excessive speculation as the 

major culprit. 

So my point is that the working of these markets have real-life 

consequences. They affect not only the pension funds and university endowments and other institutional investors who are simply 

trying to get a better return and seek diversification of their assets, 

14 

but they also affect the small baker; they affect the elderly widow 

who is heating her home with heating oil; they affect the farmers; 

they affect the purchasers of agricultural and oil commodities. 

So to try to combat the effect that speculation has had in our 

commodity markets, I have introduced the Commodity Speculation 

Reform Act. This bill would limit the percentage of total contract 

holdings that non-commercial investors could maintain in any one 

commodity market, and the bill would also close the swaps loophole 

that currently allows financial institutions to evade position limits 

intended to prevent an investor from cornering a market. 

I do want to say that we have made progress in one area that 

our Subcommittee has focused on, and that is the lack of staff and 

other resources for the Commodity Futures Trading Commission. 

Along with Senator Durbin, I serve on the Subcommittee on Appropriations that has jurisdiction, and I am pleased to report to the 

Members of this Subcommittee that we have provided a 21-percent 

increase in the budget for the Commodity Futures Trading Commission. And I think this is going to help the CFTC to more effectively monitor markets, analyze the vast amount of complex trading data, and more quickly respond to problems in the operations 

of the futures markets. 

I personally believe that while I commend the Commission for 

looking at regulatory reforms, we also need to legislate in this area, 

and I know the Chairman has been a real leader as well in pursuing legislative reforms over the last few years. 

So I am very pleased to be here with you today, and thank you 

so much for allowing me to make some comments. 

PREPARED OPENING STATEMENT OF SENATOR COLLINS 

Mr. Chairman, thank you for your many years of leadership in exposing excessive 

speculation, market abuses and manipulation. Last year, Chairman Lieberman and 

I held a series of hearings investigating the skyrocketing price of energy and agricultural commodities. Our hearings gathered compelling evidence that excessive 

speculation in futures markets was a significant factor pushing up oil and agricultural commodity prices. 

Chairman Levin and Ranking Member Coburn have undertaken an in-depth and 

exhaustive investigation of speculation by delving into the inner workings of the 

wheat market. The data and analysis they have presented make another compelling 

case that excessive speculation has caused our commodity markets to become 

unmoored from those who actually make their livelihoods using the underlying commodities, as well as consumers who pay the ultimate price. 

Last spring, Andrew Siegel, the owner of a bakery in Maine, testified before the 

full Committee that the dramatic increase in the price of the 50,000 lbs. of flour 

that he used per week from September 2007 to February 2008 made it nearly impossible to operate his small business. He identified federal ethanol policies and excessive speculation as the major culprits. 

Our hearings demonstrated that massive new holdings of commodity futures by 

pension funds, university endowments, and other institutional investors appeared to 

be driving up prices. These investors’ intentions may be simply to provide good returns and investment diversification, but many experts believe the size of their 

holdings are distorting commodity markets and pushing prices upward. 

To combat the effect that speculation has in our oil and agricultural commodity 

markets, I have introduced the Commodity Speculation Reform Act. This bill would 

limit the percentage of total contract holdings that non-commercial investors could 

maintain in any one commodity market and close the ‘‘swaps loophole’’ that currently allows financial institutions to evade position limits intended to prevent an 

investor from cornering a market. 

Although commodity market reforms must still be made, Congress has made important progress addressing another problem our hearings identified: inadequate 

funding for the Commodity Futures Trading Commission (CFTC). The CFTC is reVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00020 Fmt 6633 Sfmt 6621 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
15 

sponsible for ensuring that the commodities markets provide an effective mechanism 

for price discovery and a means of offsetting price risks. But CFTC’s workload has 

grown rapidly over the past decade as trading volume increased more than ten-fold, 

reaching well over 3.4 billion trades in 2008. Actively traded contracts have grown 

by a factor of five—up from 286 in 1998 to 1,521 in 2008. 

As the Ranking Member of the Appropriations Subcommittee for Financial Services, I joined with Chairman Durbin to increase funding for the CFTC to $177 million—an increase of 10 percent over the President’s fiscal year 2010 request. This 

funding would provide CFTC with 21 percent more resources than last fiscal year. 

This additional investment will enable the CFTC to more effectively monitor the futures markets, analyze a vast amount of complex trading data, and more quickly 

respond to problems in the operations of the futures markets. 

I thank the Chairman and Ranking Member for their work in this area. It will 

help make the case for needed reforms. 

Senator LEVIN. Thank you so much, Senator Collins. Senator 

Tester. 

OPENING STATEMENT OF SENATOR TESTER 

Senator TESTER. Chairman Levin and Ranking Member Coburn, 

thank you very much for having this hearing. This hearing is liable 

to be a lot of fun for me. I should explain. I am a farmer, an actively engaged farmer. Last Sunday I got the combine ready to go 

so this weekend we can start harvesting wheat, hard red wheat. 

For years, the neighborhood has been talking about the fact that 

the Chicago Board of Trade has been playing poker with our livelihood. So it is an issue that is very important because, as Mr. 

Wands says in his statement, grain is not an asset class, but—and 

I paraphrase—food. So it impacts consumers, it impacts family 

farmers and farmers of all type; it impacts the middlemen, too. 

I guess I would just say—and if you can answer this in your 

opening statement, I will not have to ask: Does supply and demand 

exist in a cash market? Or has the futures market distorted that 

supply and demand? 

What is the overall impact on the cash market of futures trading, 

if any? 

So, with that, I will save my questions until the end. Thank you, 

Mr. Chairman. 

Senator LEVIN. Thank you, Senator Tester. Senator Bennet. 

OPENING STATEMENT OF SENATOR BENNET 

Senator BENNET. Thank you, Mr. Chairman. I would like to 

thank you and the Ranking Member for your leadership on this, 

and thank the staff as well for excellent work. The written materials for this hearing were among the most fascinating I have read 

in a long time. 

This issue is very important to my State. Farming is risky business. It is a notoriously thin margin the people in the food industry 

have, and it is not a business in which people enrich themselves 

or pay themselves large bonuses. 

I expect to hear a lot today about the value index traders have 

added to commodity markets by increasing liquidity and shifting 

risk off of farmers, processors, and end users. And while this is 

often true, in practice the written testimony that we read from traditional market users strongly suggests to me that it is harder to 

hedge risk today than it was 10 years ago. And that is what has 

16 

1The prepared statement of Mr. Gensler appears in the Appendix on page 64. 

my attention about the kinds of distortions that Chairman Levin 

talked about. 

So, Mr. Chairman, thank you for allowing me to make an opening statement, and thank you for holding this hearing. 

Senator LEVIN. Thank you so much, Senator Bennet. We appreciate both of those opening statements, and I am sorry I did not 

call on my colleagues for them. I sometimes get confused as to 

whether I am in the Armed Services Committee where our general 

practice is not to or our Subcommittee here where our general 

practice is to. So forgive me for that oversight. 

Now, Mr. Gensler, please. 

TESTIMONY OF HON. GARY GENSLER,1 CHAIRMAN, 

COMMODITY FUTURES TRADING COMMISSION 

Mr. GENSLER. Thank you, Chairman Levin, Ranking Member 

Coburn, Members of the Subcommittee. Thank you for letting me 

testify here today. I hope my written testimony can go into the 

record, and I will try to summarize as best I can and answer some 

of the questions. 

Senator LEVIN. All of the written testimony will be made part of 

the record. We will operate under a 10-minute rule here today, so 

try to summarize the best you can. When 10 minutes comes, I 

think you will be given a light, if that light system is working. 

Thank you. 

Mr. GENSLER. All right. Thank you. 

The Subcommittee’s report on excessive speculation in the wheat 

market is a very important contribution to the whole market’s and 

the CFTC’s understanding of the convergence problems in the 

wheat market. The wheat convergence problem is at the core of the 

CFTC’s mission, that all commodities contracts, but particularly 

those tied to physical commodities, need to be able to be relied 

upon by producers, farmers, grain elevator operators, end users, 

and the bakery owner that the Senator referred to. Also, for hedging and price discovery, we seek fair and orderly markets that have 

a price discovery function coming together free of manipulation and 

fraud, but also free of the burdens of excess speculation. 

I would like to start this afternoon with a quick review of the 

lack of convergence, which was so well summarized in your report, 

but also talk about at least three of the factors that we think are 

part of this phenomenon; and then, second, talk a little bit about 

what the CFTC has embarked upon most recently, and some of the 

hearings that we have coming up on some of these very related topics; and then, last, talk a little bit about some of the recommendations in your report. 

In terms of the wheat markets themselves and the wheat convergence, you are absolutely right and your charts were very helpful. 

There has been a lack of convergence in the market, meaning that 

the futures price and the cash price are not coming together. And 

this is at the absolute core of the markets and has been so for well 

over a century, since corn and wheat started on the Chicago Board 

in the 19th Century. And it has failed to converge. There is 

progress based on the difference with the Toledo price. Your chart 

17 

was Chicago, but I apologize I am using a different reference. The 

convergence problem got out to over $1 last year. It is now based 

upon some of the changes in the contract down to 80 cents in one 

spot, and some say it is a little bit better than that. But it is not 

satisfactory for the CFTC. We do not think this is enough progress, 

and we are going to be monitoring it very closely into the September contract, which is the next contract to come up. 

Three factors—I mean, many factors have been talked about in 

the marketplace, but there are three factors I would like to focus 

on today that we believe have contribute to this lack of convergence: one, the design of the contract itself; two, the influx, as you 

put it, of financial investors and index investors in the market; 

and, three, what I will call ‘‘large carry,’’ but I will talk about when 

this marketplace is at ‘‘fully carry.’’ That means basically that the 

prices of the out or deferred futures contracts are higher than the 

earlier months. 

In terms of the design of the wheat contract itself, much has 

been addressed by your report and by the CME to try to free up 

more delivery capacity. If a contract in the futures market is structured in such a way that the cash market and the futures market 

can come together, then it is more likely to converge. Senator 

Coburn talked about West Texas intermediate. That contract has 

converged, and it has a different contract design than this contract. 

The recent changes by the CBOT in this regard to try to address 

the contract effectively is trying to say there is more places that 

the wheat can be delivered. They have more than doubled that to 

try to say that there are more places wheat can be delivered into 

the contract to bring convergence. But as we have noted, it has not 

happened yet. 

A second factor in the marketplace is what I will call full carry 

or large carry, and it seems that there are more problems in convergence when we get to full carry. What does this mean? It means 

that the earlier contracts—there are five contracts in a year, as the 

Chairman mentioned. But the earlier contracts are priced lower 

than the later-dated contracts. And if it is attractive to a financial 

investor to hold that later-dated contract because they can get 

more than their cost of money at the bank, their cost to carry, and 

more than the storage cost, then they are more inclined to keep 

that contract out. At least the statistics that we look at indicate 

that the convergence problem is higher during these full carry periods than otherwise. 

If you look over the last 20 or 30 years, the wheat market usually is not at full carry, meaning it usually is not attractive to pay 

the bank, pay the storage, pay the insurance, and keep it. We have 

been in a period of full carry. Is this a symptom or a cause? Is it 

a symptom, something that is occurring because of other factors, 

possibly the index investors? Or is it a cause? But it is certainly 

related to this. 

And then, third, I wanted to mention the relative size of this 

market. The Chicago contract is really a very small market, about 

$1.5 billion a year annual production, real farmers producing 

wheat. It is about $1.5 billion. It is only 2 percent of the global production in wheat. However, this is a global contract that many investors are looking at and are looking to try to get exposure, to use 

18 

a financial word, ‘‘exposure’’ to this asset class. But it is real wheat. 

It is real farmers. It is only $1.5 billion of production. 

So the influx of index investors over this period of time has effectively taken about half of the long position. About half of the contracts are owned by effectively index investors. That is equivalent 

to about 3 years of annual production. So, on the shoulders of a 

very hearty Midwestern crop is placed the whole global financial 

markets trying to get exposure to wheat. And in all of the other 

markets that we follow—corn, soybean, crude oil, natural gas—this 

is the highest ratio with regard to the market. A little over half of 

the market is long index investing, and the ratio to the underlying 

annual production being over 3:1 gives you a sense of the magnitude that this small crop is sort of shouldering. I think all these 

factors relate to this lack of convergence. 

Now, with regard to the recent changes, as I said, these recent 

changes look directionally in the contract to be positive. We have 

an agriculture committee that advises us. We are looking at it very 

closely. We are going to keep a close eye on what happens in the 

September contract. But as I said, we at the CFTC are not satisfied 

with where this is. 

There are a number of other recommendations in the marketplace. Some were mentioned. Forced closeout, meaning that the 

grain that is in a delivery elevator or on a delivery point has to be 

actually delivered out to a future contract, is one alternative. Another alternative of moving the delivery points down the Mississippi closer to where the export market is. A third, which is used 

in Minneapolis, is called ‘‘cash settlement.’’ All three of these and 

others we think need to be considered and further looked at. 

We also believe broadly, more broadly to this circumstance, that 

we at the Commission should take a close look at all position limits 

for commodities of finite supply and look at the hedge exemptions 

that have been issued, really starting back in 1991. We publicly announced we are having hearings. We are having our first hearing 

next Tuesday, and then Wednesday, and then we have a third 

hearing the following week—where we have asked for a broad 

array of experts, probably from both sides of this debate, to come 

in and really talk to us about if we set position limits in the agricultural commodities, ought we not also set them for energy commodities? If we set them, shouldn’t we really mean them? And how 

should we look at this bona fide hedging exemption, which initially, 

as Congress laid out and the Chairman noted, was for commercial 

hedgers, but after 1991 was widened out for other hedgers? 

We are looking forward to hearing from a broad array of witnesses, but we think that our statute clearly says that we shall set 

position limits to protect against the burdens that may come to 

markets from excess speculation. I look forward in our questionand-answer period to get further into that. 

We also think we need to work with Congress and work aggressively with Congress to bring the whole over-the-counter derivatives marketplace under regulation; that if we only do this in the 

futures market, money can travel to other markets. So not only do 

we need to bring over-the-counter derivatives under regulation to 

better protect the American public and enhance transparency, but 

19 

we also need to bring aggregate position limits to the whole market 

structure. 

Mr. Chairman and this Subcommittee, in terms of the recommendations in your report, we are looking very closely at all the 

recommendations. As it relates to the hedge exemptions in the agricultural space, whether they be for the swap dealers or the noaction letters that you referred to, we are looking at those very 

closely. As I mentioned, the hearings next week are going to be 

very important to us as a Commission. But the individual exemptions and, particularly the no-action letter exemptions, say on their 

face that they were not consistent with the original intent of what 

a bona fide hedger is. I mean, they are financial investors, not directly commercial hedgers. We certainly would look forward to 

working with this Subcommittee about all of the recommendations, 

but the key recommendations on the hedge exemptions and no-action letters we are looking at very closely and will be taking up 

next week in our hearing. 

I think with that I am out of time and out of testimony. 

Senator LEVIN. Thank you so much, Mr. Gensler. 

We will have maybe 10 minutes for each of our questions on the 

first round. 

In your written testimony, you said the following: ‘‘The continued 

lack of convergence in important segments of the wheat . . .’’—this 

is page 1, third paragraph. ‘‘The continued lack of convergence in 

important segments of the wheat market has significantly diminished the usefulness of the wheat futures market for commercial 

hedgers. The reduced ability of these firms to hedge their price 

risks increases the cost of doing business. Ultimately, it is the 

American consumer who will bear the burden of these increased 

costs.’’ 

Am I reading your testimony accurately? 

Mr. GENSLER. Yes, I believe that convergence is at the core of our 

mission for a good reason. It is because we have to have convergence so that producers and grain elevator operators, millers, purchasers, and bakeries can hedge their risk, and then the American 

public benefits by that. 

Senator LEVIN. All right. And that the inability to hedge price 

risks increases the cost of doing business, and ultimately it is the 

American consumer who bears that burden? 

Mr. GENSLER. Yes. 

Senator LEVIN. You have also in your written testimony said 

that, ‘‘Hedging in the futures markets only works to the extent that 

the price of the commodity in the cash market and the price of the 

commodity in the futures market converge as a futures contract expires.’’ 

I just want to make that a clear statement, and I want to just 

make sure you stand by that statement. 

Mr. GENSLER. I stand by it. It is my written testimony. 

Senator LEVIN. All right. I want to put some focus on that written testimony. 

Now, will the CFTC, as part of its review, look at the question 

of whether or not commodity index trading constitutes excessive 

speculation in the aggregate so that position limits should be restored for derivative dealers? 

20 

1See Exhibit No. 3, which appears in the Appendix on page 427. 

Mr. GENSLER. The Commodity Futures Trading Commission is 

going to look at position limits across all classes of speculators. Our 

statute is set up in such a way that under the provisions, we are 

supposed to look at this and only exempt bona fide hedgers. So we 

will be looking at it not only for index investors and exchange-traded funds and exchange-traded notes, but also for swap dealers and 

across the broader class of speculators in financial markets. 

Senator LEVIN. Now, our Exhibit 3 1 and your reference to Toledo 

both show that the gap between futures and cash prices—in other 

words, the basis—has grown dramatically in the last 5 years—on 

our chart from 13 cents to $1.53. In your testimony, referring to 

the Toledo situation, the gap has gone during the same period from 

5 cents to $1.07. Is that correct? 

Mr. GENSLER. That is correct, sir. 

Senator LEVIN. In our case, it is a 13-fold increase in 4 years; 

with your material from Toledo, it is a 21-fold increase in 4 years. 

So even though the dollar amount may be somewhat less, $1.02, 

compared to the Chicago futures prices and cash prices in our report, which is $1.53, the percentage increase is actually greater in 

Toledo than it is in Chicago. 

Mr. GENSLER. Both point to the same problem. 

Senator LEVIN. All right. And that is the problem that we want 

to focus on and are glad that you are focusing on. Our report concludes that the increase in the number of futures contracts from 

30,000 contracts in 2004 to 220,000 contracts in 2008 has created 

this additional demand for futures contracts unconnected to and 

without parallel in the cash market. Would you agree with that? 

In other words, there is no increase in the cash market that equals 

that increase in the futures market? 

Mr. GENSLER. That is correct, sir. The annual production and the 

number of millers and bakers and buyers are generally about the 

same. That is correct. 

Senator LEVIN. Now, are the demands of the derivative dealers 

for futures a significant cause of the increased number of futures 

contracts which are out there? We estimate it is about 45, 50 percent now in the futures market that is demand by the index investors. Do you have a percentage? Or do you disagree with our percentage that about half the market is now those index investors? 

Mr. GENSLER. We are looking at the same data. About half of the 

current market—I mean, it fluctuates, but about half of the current 

futures outstanding right now is in this long index investors or 

swap dealers who are intermediating for the index investors. 

Senator LEVIN. As to the issue of price convergence, a competing 

theory which has been offered for why there is a lack of price convergence is that the Chicago wheat contract is flawed. It makes delivery too difficult, allows holders of wheat to hang onto wheat too 

easily, and charges too little for storage. 

Isn’t it true that for most of the last 5 years, at least, the same 

wheat contract has been in place? 

Mr. GENSLER. It is true. I do think that some of those design 

problems in the wheat contract make this market far more susceptible to these problems. These problems occur more when we get 

21 

into a period of what I earlier called ‘‘full carry’’ as well. So if there 

was a perfectly blue sky out, everything was shiny, maybe you 

would not see as much of a convergence problem. But there is a 

problem in the design of the contract and we get into these periods 

of full carry, we see this far more aggravated. 

Senator LEVIN. Do you believe that the dramatic increase in commodity indexed trading and the futures which are purchased to 

hedge against a risk, has played a significant role in the failure of 

convergence? 

Mr. GENSLER. I think, Mr. Chairman, that it is part of the role. 

Senator LEVIN. Would you say it is a significant part? 

Mr. GENSLER. I would like to stay with, I think, it is a contributing factor to this. 

Senator LEVIN. And how much it contributes, are you going to let 

us know after some study is completed or what? 

Mr. GENSLER. Mr. Chairman, I think that we have to work to get 

the design of the contract better. We are watching that very closely. I also believe that we are going to take and use every authority 

we have currently, looking at position limits and hedge exemptions. 

So we are not actually separately studying whether it is a 5-percent contributor or a 75-percent contributor. We do think that in 

these market environments of full carry and with this contract design, it has been a contributing factor. 

Separate from that, we think that our authorities are such, the 

Congress said in the 1930s that we shall set position limits, and 

we should go about that job to help protect against the burdens 

that can come from excess speculation. 

Senator LEVIN. And when are you going to be deciding whether 

to carry out that mandate—in other words, remove the exemptions, 

remove the waivers? When are you going to be making a decision 

on whether you will be doing that? 

Mr. GENSLER. We are going to do it through this process of the 

hearings. We have three hearings set for the next 2 weeks, and 

then based upon those hearings, we have a Commission process. 

There are four of us now on the Commission, and we will work 

through that in as expeditious a manner as we can. 

Senator LEVIN. Do you expect that decision will be made by the 

fall? 

Mr. GENSLER. I would hope so, but also I recognize I have four 

commissioners and I have to count votes and work through a very 

complicated matter. And as you rightly noted, it has been since 

1991 that these exemptions have been in place in many instances. 

Senator LEVIN. The position limit that you have in effect prohibits traders from holding more than 6,500 contracts at a time, 

and that is designed to prevent excessive speculation. But the exemptions and the waivers have created some real big loopholes in 

that. 

In response to our questions, CFTC told us that it had granted 

exemptions to four derivative dealers selling swaps, and it provided 

no-action letters to two fund managers, which together would allow 

these six entities to hold up to 130,000 wheat contract instead of 

the 39,000 which would be allowed if that standard limit of 6,500 

contracts at any one time had applied. 

22 

Now, in its prepared settlement, the CME tells us that the number of exemptions is really much larger. They have granted exemptions to 17 entities selling commodity index swaps and allowed 

them to hold up to 413,000 wheat contracts at a time. They have 

also said in their prepared statement that, prior to being approved 

by the CME, all index traders were required to receive prior CFTC 

approval. The CME did not grant any exemptions to index traders 

that the CFTC had not already granted. 

So there seems to be a difference there. Your testimony is that 

six entities allowed to hold up to 130,000 wheat contracts, but the 

CME says 17 entities allowed to hold up to 413,000 wheat contracts, and I am wondering why those numbers are so different. 

Mr. GENSLER. Mr. Chairman, I believe that the exemptions you 

referred to that are in the CME testimony refers to 15 parties that 

have various hedge exemptions dating back sometimes 18 years, 

and these two no-action letters, approximating 400,000 contracts in 

aggregate. I believe that is an accurate figure. 

In the Subcommittee’s report, I believe that it is a slightly narrower question, which was just those granted explicitly for index 

investing. So I believe the 130,000 in your report, which is just a 

subset of the total 400,000, but I believe approximately 400,000 is 

an accurate figure for all hedge exemptions in this category. 

Senator LEVIN. All right. Again, I would say that in their prepared statement, prior to being approved by CME, they say all 

index traders were required to receive prior CFTC approval. 

Mr. GENSLER. Well, all hedge exemptions, whether they were explicitly for index trading or for other reasons, for agricultural do 

get CFTC exemptions, as opposed to crude oil which is done by the 

exchanges. 

Senator LEVIN. Thank you very much. Dr. Coburn. 

Senator COBURN. Isn’t the real reason that there is no problem 

with price convergence in Cushing, Oklahoma, is because if you 

have your name on that barrel of oil, you better be there in Cushing because delivery is going to happen? 

Mr. GENSLER. Senator, you are correct that is one of the design 

features. It is in essence a forced load-out, so to speak. 

Senator COBURN. So delivery does have a lot to do with some of 

this lack of convergence? 

Mr. GENSLER. Yes. 

Senator COBURN. Explain to me the history of why we went from 

5,000 to 6,500 contracts. 

Mr. GENSLER. Though I was not at the Commission at the time, 

the earlier look at this was—setting position limits for agricultural 

commodities was a concept to ensure that we have at least a minimum number of participants in a market and a diversity of speculators and diversity of points of view. And so the Commission set 

them so that no one trade could have more than 10 percent of the 

first part of the market, the first 25,000 contracts, and 2.5 percent 

of the rest. 

I believe that back then it was raised from 5,000 to 6,500 just 

because the overall market had grown. So it was trying to use percentage limits but adapt it for a larger market. 

Senator COBURN. And you testified earlier that this market really had not grown in terms of the actual wheat coming into it over 

23 

the last 10 years, essentially, in terms of raw product available for 

the contracts? 

Mr. GENSLER. Yes, I believe the question was the last few years. 

I do not know about the last 10 years. 

Senator COBURN. OK, so the last 5 years. So it would seem to 

me that if you have the same amount of wheat coming in and now 

50 percent of the contract purchases are by people who are not 

commercial—they are not end users, they are not what we would 

consider the traditional use of a commodity exchange to hedge or 

plan, it would seem to me that there is no question that there is 

a direct relationship of index funds and the long-held positions that 

would account for some of this non-convergence. Would you agree 

with that? 

Mr. GENSLER. Well, I think they are a contributing factor to it, 

and as I said, the CFTC I believe earlier was just looking that the 

overall market for the futures—not the cash but the futures had 

grown and was trying to keep up with that in moving that from 

5,000 to 6,500. 

Senator COBURN. So let us talk about corn then. Has the overall 

number of contracts on corn grown? 

Mr. GENSLER. I would probably have to get back to you on the 

exact dates and times on the corn. 

Senator COBURN. But there is no question we are planting a heck 

of a lot more corn in this country because we, in my opinion, have 

foolishly said we are going to use it for petroleum. But we do have 

more corn that is out there and more contracts, right? 

Mr. GENSLER. I do not have the exact figures in my head as to 

the number of contracts—— 

Senator COBURN. You came prepared for wheat today. I understand. 

Mr. GENSLER. I apologize. I can get back to you just on the number—— 

Senator COBURN. What I am trying to say is there is corn, there is soybeans, and there is wheat. You talked about this $1.5 billion 

worth of dollars in wheat. I know there is a whole lot more than 

that in corn, and we have had a tremendous stimulation to the production of corn. And so why aren’t we seeing similar problems with 

corn? Because I know there is index funds on corn as well. 

Mr. GENSLER. Right. Senator, I do believe the corn market and 

the corn futures market, both cash and futures, are much larger 

than wheat. And in wheat, we actually have on the Chicago market 

just 20 percent of U.S. production because we also have Kansas 

City, which is more related to Oklahoma. We have Minneapolis, 

which I think is probably more related to your home State; whereas, in corn, it has a very different contract design, much larger 

market. So index investors are a much smaller percentage of the 

open futures interest in corn just because the corn cash and futures 

market are much larger. 

Senator COBURN. And there is much less of a problem with convergence in those markets. 

Mr. GENSLER. There has been some convergence issues, much 

smaller in corn or in soybean. 

Senator COBURN. Right, OK. How aggressive should Congress 

be—and this is opinion, and I am not going to hold you to it, but 

24 

I would like to have your opinion because you are sitting there as 

the head of the CFTC. How aggressive should we be in going after 

this versus letting you under your authority try to fix this problem? 

Mr. GENSLER. I think this is a partnership with Congress. I 

think that there are many things we can do under our current authority, but there are many areas where we need help, as Senator 

Collins said earlier. We need help with resources, and we thank 

you very much for that recent vote in the Subcommittee. But we 

also need a great deal of help in terms of setting aggregate position 

limits and bringing reform to the over-the-counter derivatives marketplace. 

I think within our current authority we can address position limits for futures, both in the agricultural and energy space, and there 

will be a great deal of debate, and that is why we are having these 

hearings. I do think our authority is very clear that we can do this 

in the futures market, but we do need your help to make sure that 

then money does not flow elsewhere and that we just push it into 

a opaque or offshore market. 

Senator COBURN. Right. That is a concern that I have because I 

think if we become too restrictive here, the invested capital goes 

somewhere else. 

Senator Levin mentioned the price of oil and speculation on that. 

Is there any doubt in your mind on the effect of index funds on oil 

price. And this is for education. I am not trying to score a point. 

I am just trying to get educated. Do you think that they—when we 

had $140 a barrel—— 

Mr. GENSLER. I think, Senator, that we had a worldwide asset 

bubble in a lot of classes of assets. We saw it in the housing market, and the American people was hurt by that. But we also had 

an asset bubble that peaked in June 2008 in many commodity 

classes, not just wheat and corn but also oil and natural gas. That 

asset bubble had a lot of reasons, but part of it was financial investors thinking, all right, this is an asset class, just like I invest in 

stocks or invest in bonds or maybe emerging market stocks; we 

should move X percent into energy markets. 

And so I think it was a contributing factor, but there are many 

factors in the overall energy market. 

Senator COBURN. Do you think the double-down and double-up 

index funds that are double-hedged have any extra contribution to 

some of the phenomenon we have seen? 

Mr. GENSLER. I am not sure I am familiar with the double—— 

Senator COBURN. Well, like DXO, for example. That is one on oil, 

which is a double-up. For every point you get up, you get twice as 

much. In other words, it is doubly hedged. 

Mr. GENSLER. Oh, I see, yes. 

Senator COBURN. Do you think those have any impact at all on 

price swings? Do you think the average investor who is being told 

to invest in an index fund has any idea about what the risks associated with that are? 

Mr. GENSLER. I think the category that you named is just part 

of the broader phenomenon of asset investment that particularly 

when there are swings, when there is a swing in mood. 

Senator COBURN. Volatility. 

25 

1See Exhibit No. 5, which appears in the Appendix on page 429. 

Mr. GENSLER [continuing]. That it could bring in. In terms of the 

average investor—and certainly this is something, I am sure, that 

the SEC and Chair Schapiro and I will look at, too—I think exchange-traded funds can be a very good product when well understood by an investor in the stock market or even in the bond market. As for exchange-traded funds in the commodity markets, it is 

still open to me whether investors fully understand the high fees 

and the transaction costs because every one of these funds has to 

constantly roll their positions trying to chase to stay even with the 

underlying assets. 

Senator COBURN. A couple of the things that you have described 

in your testimony, solutions that might be possible—compelled 

load-out, changing delivery location to the Gulf, adding a new contract which is cash-settled. What are the potential unintended consequences if you were to do that? Have you thought through that? 

And could you discuss those with me? For example, shifting to the 

Gulf, what are the unintended consequences in the market if that 

were to happen? 

Mr. GENSLER. Senator, on each one of them, there are pros and 

cons and would have to actually be decided by the exchange themselves rather than the CFTC. We have included them in my testimony, to highlight there are alternatives. And we have an agriculture committee that advises us on these as well. 

Frankly, there are always winners and losers when you move a 

delivery point because the basis starts to shift between the cash 

and the futures market. So in that example, you can move down 

the Gulf, where most of the export market is and so forth. Originally the export market was off the Great Lakes if we go back decades. That is why the delivery points were close to Chicago. But 

as more of the export market has moved down the Mississippi, that 

is why some people have recommended that. But there would be 

some winners and losers. 

Senator COBURN. Farmers in Oklahoma during this phenomenon 

in 2008 wanted to sell their crops and could not because the grain 

elevators could not because everybody was blocked out. Everybody 

in agriculture lost. The question is: Who won? 

Mr. GENSLER. Not the American consumer. 

Senator COBURN. The American consumer did not win, but the 

American farmer sure as heck did not win either. 

Thank you, Mr. Chairman. 

Senator LEVIN. Thank you, Dr. Coburn. Senator Tester. 

Senator TESTER. Yes, I would like Exhibit 5 put up,1 and I would 

assume, Mr. Chairman, is this a real example or is it just a projected example? 

Senator LEVIN. Projected. 

Senator TESTER. It is a projected example. 

Senator LEVIN. Yes. 

Senator TESTER. OK. Kind of following on what Senator Coburn 

had to say, because the previous chart had a triangle where they 

converged. They both went down to $3. The futures fell quicker 

than the cash price did. Who loses when there is no convergence? 

26 

Mr. GENSLER. I think a lot of people lose when there is not convergence. 

Senator TESTER. Is it the farmer that loses? Is it the investor 

that loses? Who loses? 

Mr. GENSLER. The farmer and anyone in the physical commodity 

chain has less confidence in an ability to hedge their risk and less 

confidence in the underlying price discovery. 

Senator TESTER. OK. That is assuming the farmer hedges. 

Mr. GENSLER. It does, but if the farmer does not have hedging 

available to them, they are then bearing the risk. 

Senator TESTER. OK. So I guess what I am asking is, Is it the 

investor that loses there, or is it the farmer because this artificially 

depresses cash prices? 

Mr. GENSLER. What it goes to, to at least me, Senator, is the reliability of the price discovery in the market itself in that it becomes 

less reliable. To some farmers, they would say, rightly, the future 

is $2 more. Shouldn’t I get $2 more for my blood, sweat, and tears 

and all my inputs? 

Senator TESTER. Right. 

Mr. GENSLER. And that is a very valid question, and some farmers would not even use the contract because they would say it does 

not work. 

Senator TESTER. OK. And you do not need to bring the previous 

one up because you can imagine it. The previous one, the cash 

price still went to $3, which I think is an accurate example at some 

point in time. So the cash price, which is the market I sell on, there 

is no change. The change here is that the futures contract did not 

fall down to the price of the cash price. And so as a farmer who 

does not hedge, it is still $3 a bushel. Who loses on that? Somebody 

has got to lose because if there is not a loss with convergence, what 

is the negative? 

Mr. GENSLER. You are saying when it does converge? 

Senator TESTER. When it does not converge. 

Mr. GENSLER. Does not? 

Senator TESTER. I get it when it converges. When it does not converge—convergence is where you want to be. If you do not converge, what is the real problem here? Is there a problem or is it 

just a fact we do not converge? 

Mr. GENSLER. I believe it is a problem because the design of 

these contracts are that you can actually deliver, maybe not— 

maybe you would be the farmer that did not deliver, but that some 

farmer can put it in a vehicle or put it on a barge and actually 

physically deliver it. 

Senator TESTER. So these future contracts are based on real 

grain. You are not going to have more future contracts than you 

have grain available. 

Mr. GENSLER. There is supposed to be an ability to deliver into 

a futures contract, and even if there were more futures than there 

was grain, then anybody who has grain who meets the certain 

quality standards can deliver that grain into the future. You should 

be able to collect that $2 if you were willing to transport the grain 

to the delivery point. 

Senator TESTER. OK. Let us talk about the design that controls 

better, which is one of the solutions you talked about, and Dr. 

27 

Coburn said the world is flat, and he is probably right. If you design your contracts better, what would stop them from going to Europe or China—I do not know where these contracts are sold, but 

I assume they are sold other places—or Canada, other places than 

just here where they do not have as strict of controls? Or are the 

controls in place in all those other countries and they do not have 

this kind of—— 

Mr. GENSLER. We actually have the world’s majority share of 

trading of futures on wheat contracts. There is Kansas City, Minneapolis, and Chicago, the three big ones. It is well over half. I cannot recall the exact statistic. 

Senator TESTER. Does the convergence problem exist in the other 

parts of—— 

Mr. GENSLER. No. The convergence problem is big in Chicago. 

One of the things that is unique in Chicago is that market—which 

is only about 20 percent of the U.S. production—is the bellwether. 

That is the benchmark for a lot of historical reasons that had to 

do with Chicago’s dominance over Kansas or Minneapolis in terms 

of—— 

Senator TESTER. I understand that. 

Mr. GENSLER [continuing]. Risk capital. 

Senator TESTER. Can you speak to foreign markets where they 

sell futures contracts? Is there a convergence problem there? 

Mr. GENSLER. No, I am not aware of one, but maybe other experts could tell you later. I am not aware of a convergence problem 

there. It is really in the Chicago Board of Trade contract. 

Senator TESTER. OK. What impact, if any, do price supports from 

the Federal Government have on futures? 

Mr. GENSLER. I think that all economic factors—including price 

supports from the Federal Government and others—affect both 

cash and futures markets. 

Senator TESTER. I will get to that in a second. 

Mr. GENSLER. But I will try to address it now. I think that cash 

and futures are very linked. They should converge at the time of 

expiration. In grain markets as well as oil markets, the two relate. 

So any economic factor, whether it is Federal Government driven 

or elsewise, will affect both futures and cash markets, and particularly the outward dated ones. 

Senator TESTER. Does supply and demand exist in the wheat 

markets? 

Mr. GENSLER. I believe that supply-and-demand factors are very 

important in the wheat markets. 

Senator TESTER. OK. That is good enough. So—and it was about 

16 months ago—the price of wheat—and Senator Coburn was correct, the elevators would not buy it. But on their board they had 

somewhere around $18 to $20 a bushel, depending on what kind 

of quality you had. Now that same wheat is probably worth a third 

to 40 percent of what it was then. 

That difference in the marketplace—and it is a difference that 

Senator Collins talked about her baker. I mean, that is why it went 

up. It went up at the farm gate, which, quite frankly, I love, but 

I do not like to see it go up and down crazy. We like some consistency. And if the futures market forced it to go up and was part of 

28 

the impacts that forced it to go up—which I believe it was; I think 

it was much more than supply and demand in that particular case. 

Do you think that the three things that you talked about to 

change will solve that problem? And ultimately, in the end, what 

impact do you think that those three things will have on the cash 

price of wheat to the farm gate? 

Mr. GENSLER. I think if the exchanges decided to do it by moving 

delivery points or forced load-out or this cash-settled contract, we 

would have convergence between the cash and futures market for 

sure. I think that those three things would lead to convergence. 

The cash prices ultimately are tied, as you said, to supply-anddemand factors, but related to futures, they would be somewhere 

in between. I cannot predict, out of the 80 cents of lack of convergence now, whether it would be closer to the current cash price or 

closer to the current futures price, but obviously somewhere between that 80-cent spread. 

Senator TESTER. To be clear, I am not sure the price does reflect 

supply and demand, to be clear, because quite honestly there are 

a lot of things that—I mean, if you get rain in Kansas, the price 

of wheat can drop, and nobody knows that that is going to increase 

production an ounce at that point in time. 

Mr. GENSLER. Right. 

Senator TESTER. Just for my information—6,500 futures contracts, how many dollars are in a futures contract? What kind of 

money are we talking about? 

Mr. GENSLER. Well, it is not much because a futures contract is 

5,000 bushels. 

Senator TESTER. You are talking 325,000 bushels. 

Mr. GENSLER. Right, times $3 to $4, so it is about $1 million. 

Senator TESTER. OK. And how many of these folks are out there 

trading this? How many traders are out there, do you know? How 

many of these 6,500-bushel contracts are out there? How many 

people are eligible to trade up to 6,500 futures contracts? 

Mr. GENSLER. All the participants in the market are eligible to 

trade up to the 6,500 contracts. 

Senator TESTER. So I could do it if I wanted to. 

Mr. GENSLER. Yes. There are these exemptions that were previously referred to. Fifteen parties have hedge exemptions, and 

then there are these two no-action letters. I believe only eight or 

nine of them are currently over their limits right now. 

Senator TESTER. OK. I appreciate your being here, and I appreciate your answering the questions. I, quite frankly, am like probably most people; I do not understand this. In fact, I do not understand it so bad that 22 years ago I got out of the conventional grain 

market because I did not want to have to put puts and calls and 

all that garbage. I just wanted to raise wheat and sell it for a reasonable price. 

And so I made some conversions in my operation, but what I will 

tell you is this: If you can do things in the marketplace to stop artificially inflating or artificially deflating the price of wheat—and I 

am much more concerned about the latter than the former—you 

have been successful. Thank you. 

Mr. GENSLER. Thank you, Senator. 

Senator LEVIN. Thank you, Senator Tester. Senator Collins. 

29 

Senator COLLINS. Thank you, Mr. Chairman. 

Senator Tester, are you telling us that it is easier to be a U.S. 

Senator than to be a wheat farmer? 

Senator TESTER. I go back every weekend because it is much 

easier to be a farmer. [Laughter.] 

Senator COLLINS. Mr. Gensler, let me ask you a basic question. 

Why does the CFTC set position limits for agricultural products 

but allow the exchanges to decide whether or not there should be 

position limits for energy products, like oil? 

Mr. GENSLER. Senator, I am trying to figure that out myself. It 

is a lot of history before us. We were originally set up in the Great 

Depression, our predecessor was, and we set agricultural limits. 

When the oil products started trading in the late 1970s, there was 

a deference to the exchanges to do it. There are some agricultural 

products, like livestock, where there is also deference to the exchanges. 

What is clear to us in terms of our legislative history, is that the 

exchange’s only responsibility is to protect against what is called 

manipulation and congestion, and they only set position limits for 

the last 3 days of the spot month for oil products. 

We have a responsibility under our statute to set position limits 

to protect against the burdens that may come from excessive speculation, this concept of making sure there is a minimum number of 

players in a marketplace. So we are going to look very actively 

through the hearings and hopefully post the hearings at possibly 

setting position limits for energy futures as well. 

Senator COLLINS. I certainly hope that you will. I do not think 

it makes sense—even though I have great respect for the exchanges—to delegate that authority. It does not make sense to me 

that for most agricultural products the Commission is setting the 

position limits, but when it comes to energy products, it is left up 

to the exchanges. 

Do you need legislative authority to set position limits when it 

comes to oil products, or do you already have authority? 

Mr. GENSLER. I believe that we have ample authority to do it 

with regard to futures. As it relates to swaps and over-the-counter 

derivatives, we would have to work with Congress to get that authority. 

Senator COLLINS. Well, I certainly want to give you that authority. 

I want to go back to some testimony you gave. I believe you said 

that the index traders, the non-commercial traders, because of 

waivers and no-action letters may have held up to 60 percent of the 

outstanding wheat contracts. Is that accurate? Did I understand 

that? 

Mr. GENSLER. Currently the index investors through swap dealers have about half of the market. It has ranged from as low as 

35 percent to about 55 percent in the last number of contracts, but 

yes. 

Senator COLLINS. So that is a huge influence on the market. And 

did that come about because of the exemptions that the Commission started granting in 1991 to the 6,500 wheat futures contract 

limit? 

30 

Mr. GENSLER. I think it was certainly facilitated by that, but I 

think the index investment came about in large part because there 

was a change of focus, maybe even philosophy, about 4 or 5 years 

ago that commodities were an asset class. Though some parties 

used to invest, it dramatically took off around 2004 and 2005. Your 

earlier reports have shown this in the oil markets as well and so 

forth. 

Senator COLLINS. It is my understanding that the exemptions 

permitted four of the swap dealers to exceed that limit, so instead 

of being held to 6,500, one was 10,000, one was 17,500, one was 

26,000, one was 53,000, and then there were two no-action letters 

that allowed an index-related exchange fund to hold up to 11,000 

contracts, and another fund manager to hold up to 13,000 wheat 

futures contracts. 

I do not know what the right number is for a position limit. I 

do not know whether the recommendation of PSI that it return to 

5,000 is correct or whether 6,500 is correct. And I would look to the 

Commission to set the right level. 

But I am concerned if index funds are not held to the same level 

that everyone else plays by and if there is a difference in the levels 

for commercial traders versus non-commercial traders. 

Is there a reason that there should be a different limit? 

Mr. GENSLER. Again, Senator, I am finding myself in vast agreement with you and the Chairman on these matters. The reasoning 

in the past was that the index investors or the swap dealers were 

hedging a financial risk, not necessarily a strict commercial risk 

tied to the ownership of grain. They were hedging a risk of inflation, that if they invested in commodities, they were somehow 

hedging their financial risk rather than a strict product or merchant risk. 

Senator COLLINS. The problem is if it has an impact on the market as a whole. I understand that the index funds are just trying 

to do their fiduciary duty and get as good a return as possible. But 

I am concerned about what the impact is of this massive influx of 

funds and the number of contracts that are held by non-commercial 

traders. 

Mr. GENSLER. Yes, and, Senator, I think that there is a very 

strong logic that whatever position limits we have be consistently 

applied across the markets; and whether they are at 6,500, as you 

said, or some other number. If we move forward in the oil space, 

we should find a consistent approach that makes these markets 

work to the benefit of the American public and ensure that they 

are fair and orderly and that we do protect against some burdens 

of the excess outsized positions. 

Senator COLLINS. Exactly. And that is what I think we should do, 

vest in the Commission, if you need additional authority, to directly 

set those position limits in both agricultural futures markets and 

the energy futures markets, and then it seems to me they should 

be the same for all players. And that is what I would like to encourage you to take a look at. 

I want to switch to another issue. Last year, we had a lot of discussion about closing what is known as the ‘‘London loophole,’’ and 

it is my understanding that this is the loophole that allowed traders to trade U.S. oil futures contracts on a foreign exchange withVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00036 Fmt 6633 Sfmt 6601 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
31 

out facing the same sort of position limits that they would on an 

American exchange. And, typically, I believe this activity took place 

on ICE in London, and there were various bills that we introduced 

to ‘‘close the London loophole.’’ 

What the Commission did at about that same time is to enter 

into an information-sharing agreement with the U.K. regulator, the 

Financial Services Authority. But I am told that earlier this 

month—it was supposed to allow for better information sharing, 

and transparency—but I am told that earlier this month there was 

an incident that has caused many people to question the adequacy 

of that information-sharing agreement. 

Specifically, it is my understanding that earlier this month PVM 

Oil Futures Limited, a London-based oil brokerage firm, admitted 

that one of its traders had been able to artificially cause the price 

of crude oil to spike by 2 percent in just 1 minute, and that this 

information was not conveyed promptly by the FSA, the British 

regulator, to the Commission. 

What is your reaction to that incident? 

Mr. GENSLER. The incident that you are referring to, I will call 

it a ‘‘rogue trader’’ at this broker in London on the Brent crude contract, not on the WTI but the Brent crude contract. We actually 

were informed by the FSA within a number of hours. I do not know 

if it was a half a day because there are some time differences and 

so forth, but I did see that report in the Financial Times on London. I do not know what it was referring to because it was not 

maybe in an hour, but it was certainly within half a day or so that 

we knew about it. 

I think on the more substantive point, what we were able to do 

last year as a Commission is to make sure there is information 

sharing. We announced just 2 weeks ago that we are going to include in our Commitments of Traders report, in our weekly trading 

report of all the large trader positions on the West Texas Intermediate and other linked contracts of ICE. They are also subject 

to position limits as of last year. We are now looking at what other 

gaps might be remaining between our current regime with ICE and 

if there is anything further, again, to best protect the American 

public. The information sharing is going to be pushed out into the 

Commitments of Traders report, and they are actually committed 

and subject on the linked contracts to be within our position limit 

regime. 

Now, I say ‘‘our position limit regime.’’ We have not set position 

limits yet. But if we were to set position limits, we would set it 

both on NYMEX and the ICE contracts. 

Senator COLLINS. Thank you. Thank you, Mr. Chairman. 

Senator LEVIN. Thank you very much, Senator Collins. And we 

would be asking you to let us know what your position is on that 

legislation to close the London loophole for the record, if you would. 

Mr. GENSLER. I would look forward to doing that. 

Senator LEVIN. I have a few additional questions for you, and 

then Senator Collins may have some. Then we will move on to the 

next panel. 

We recommend in our report that the CFTC phase out all of the 

exemptions and waivers that have been granted to commodity 

index traders and to reinstate the 6,500 limit for them. Do you beVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00037 Fmt 6633 Sfmt 6601 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
32 

lieve that you currently have the authority to take that step should 

you decide to do so? 

Mr. GENSLER. I think that we have the clear authority to do it 

as it relates to the two no-action letters. Right on the face of it, 

they do not qualify for the bona fide hedge exemption. As it relates 

to all of the hedge exemptions, the other 15, I think that we have 

the authority, but those were issued under rules of the Commission, and so it takes a different process and approach, and—— 

Senator LEVIN. It would take a rulemaking? 

Mr. GENSLER. Probably. 

Senator LEVIN. All right. But you have the authority, should you 

decide to issue that rule? 

Mr. GENSLER. Well, I am going to have to ask my general counsel—which I should be thanking you for, by the way, that Dan 

[Berkovitz] joined us at the Commission. 

Senator LEVIN. He looks very happy where he is at. Can you find 

out whether or not he believes that authority exists? 

Mr. GENSLER. He said he will do it for us, and we will get back 

to you. I believe we do have it, but if there are any gaps in that, 

we will be asking for your help on that. 

Senator LEVIN. All right. Exchanges typically charge a transaction fee and a clearing fee for each commodity trade that takes 

place on the exchange or is cleared. So, naturally, the exchanges 

do not want limits that are going to reduce their fee income. 

Now, is that an economic consideration that you will be taking 

into account in your review? 

Mr. GENSLER. No. 

Senator LEVIN. Finally, let me give you this series of questions 

that are linked together. You said that the major influx of derivative dealers or index traders have contributed to the failure of convergence. You have told us that this afternoon. 

You have told us, I believe, that the lack of convergence hurts 

people who want to hedge, such as elevators. Are you with me so 

far? 

Mr. GENSLER. Yes. That is a ‘‘yes’’ to both of those. 

Senator LEVIN. All right. Now, if elevators are hurt, because they 

cannot effectively hedge, is it fair to say that farmers who deal 

with those elevators would also be hurt? 

Mr. GENSLER. Yes. I believe that farmers, merchants, anyone 

down the production line who cannot hedge is left with the risk 

that then they do not have as good an opportunity. This is at the 

core of these markets to make sure that farmers, merchants, elevator operators, and even ultimate purchasers can hedge their risk 

and make their own economic choices whether to hedge or not to 

hedge. 

Senator LEVIN. All right. Now, some have said that if you imposed standard position limits on commodity index traders, it will 

not be effective because they are going to get around the limit by 

setting up new subsidiaries to engage in commodity index trades. 

Should you decide to impose the standard position limits, what is 

your response to that argument—that you could not do it if you 

wanted to, they will just get around it? 

Mr. GENSLER. I think that they need to be set at the control or 

legal entity position. I would also say that we need to work toVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00038 Fmt 6633 Sfmt 6601 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
33 

1The prepared statement of Mr. Coyle appears in the Appendix on page 71. 

gether on the over-the-counter derivatives marketplace. If we set 

them in the futures marketplace, we have to be cognizant that 

some trades will just move over there to the over-the-counter derivatives marketplace. 

Senator LEVIN. Thank you very much. 

Mr. GENSLER. Thank you, Mr. Chairman. Thank you, Senator 

Collins. 

Senator LEVIN. We appreciate very much your testimony. 

Thanks. 

I would now like to welcome our next panel to this afternoon’s 

hearing. First, Thomas Coyle, who is the Vice President and General Manager of Nidera Inc., and the Chairman of the National 

Grain and Feed Association. 

Hayden Wands, who is the Director of Procurement at Sara Lee 

Corporation and Chairman of Commodity and Agriculture Policy at 

the American Bakers Association. 

Mark Cooper, who is the Director of Research for the Consumer 

Federation of America. 

And Steven Strongin, Head of the Global Investment Research 

Division of Goldman Sachs Group. 

We very much welcome you. We appreciate your cooperation. As 

you heard before, pursuant to Rule VI, all witnesses who testify before this Subcommittee are required to be sworn, so at this time 

I would ask all of you to please stand and to raise your right hand. 

Do you swear that the testimony you will provide this Subcommittee will be the truth, the whole truth, and nothing but the 

truth, so help you, God? 

Mr. COYLE. I do. 

Mr. WANDS. I do. 

Mr. COOPER. I do. 

Mr. STRONGIN. I do. 

Senator LEVIN. The timing system is, again, a 10-minute timing 

system. I guess we are going to ask for 7 minutes on this one because we have four witnesses on this panel, so let me try a 7- 

minute round for your oral testimony. Your entire statement will 

be made part of the record, and we will first call on Mr. Coyle. 

TESTIMONY OF THOMAS COYLE,1 VICE PRESIDENT AND GENERAL MANAGER, CHICAGO AND ILLINOIS RIVER MARKETING LLC, NIDERA, INC., AND CHAIRMAN, NATIONAL 

GRAIN AND FEED ASSOCIATION 

Mr. COYLE. Thank you, and good afternoon, Chairman Levin. I 

appreciate the opportunity to testify today, and I congratulate you 

on the recent publication of a very interesting and insightful report 

about the U.S. wheat markets. We believe this extensive report 

looks at futures markets from a new perspective. We agree strongly 

with the key conclusions and believe it is critical that steps are 

taken to correct the imbalances documented in the report. 

That said, we believe there are actions that can be taken to 

achieve this goal before implementing a restriction on trading, 

which is a key recommendation of the report. 

34 

As capital invested in agricultural futures has increased dramatically in recent years, we have become convinced that it has reduced 

the effectiveness of futures as a hedging tool for grain hedgers. The 

impact has been very dramatic on the Chicago Board of Trade 

wheat contract where commodity index traders hold 56 percent of 

open interest when spread trades are excluded. Their share of open 

interest has remained at a consistently high level regardless of 

price and today represents ownership of more than 160,000 contracts, which is almost two times the size of the U.S. soft red wheat 

crop. 

These positions held by commodity index traders are primarily 

long only, held for extended periods, and are not responsive to 

changes in price. We believe this situation, in which a large portion 

of the open interest is not for sale at any price for extended periods, has drained liquidity out of the contract and contributed to extreme volatility. 

We believe strongly that invested capital has been the significant 

factor contributing to a disconnect between cash wheat values and 

wheat futures prices—a view confirmed in your report. 

Efficient performance of futures markets is critically important 

to grain hedgers and producers. Futures markets help grain hedgers manage price and inventory risk, assist producers and elevators 

in valuing their product, and facilitate risk transfer and marketing 

opportunities. Performing these key tasks requires a dependable 

relationship, convergence between cash and futures. 

Last year’s extreme volatility in wheat markets emphasized this 

disconnect between cash and futures for soft red wheat. While cash 

markets work to seek fair value of the crop, traditional basis relationships between cash and futures no longer seemed to apply. The 

result was an unprecedented increase in basis risk for grain elevator operators and a serious concern for the banks that provide their 

financing. The imbalance was so acute that basis levels in the interior increased to more than $2 per bushel to offset the high price 

of futures and seek the market value for physical bushels. 

As cash and futures diverged, grain hedgers were also subject to 

larger and larger margining requirements to maintain their 

hedges. The Ag banking system performed well in 2008, but our industry narrowly escaped a real tragedy in which many firms could 

have been forced out of their hedge positions and out of business. 

Today, there is a real concern about whether lenders have the capacity to respond to a repeat situation. 

To put this serious situation in perspective, I will share a case 

of a very well-run and conservative grain elevator operation in 

Michigan. The company projected a $10 million financing shortfall, 

but in a 3-week period in early 2008, the amount grew to $70 million. For a country elevator operation, this is unheard of. Fortunately, we were able to acquire their inventories and take assignment of their forward contracts. I can give you an example of a 

similar situation in Wisconsin, where the result was not so fortunate. 

The risk of running out of capital was so severe in 2008 that 

many elevators were forced by financial constraints to reduce or 

even eliminate cash forward contract offerings to producers. Producers were frustrated in their attempts to lock in favorable pricing 

35 

opportunities at a time when fuel costs and other input costs were 

escalating dramatically. Our industry’s traditional function as a 

conduit for efficient pricing for the producer was impaired as the 

relationship between cash and futures deteriorated in wheat. 

The NGFA has worked actively with the CME for solutions to 

these performance problems, and we appreciate the CME Group’s 

openness and responsiveness to our industry’s concerns. We hoped 

that markets would correct themselves over time, as efficient markets tend to do over time. However, the extraordinary situation in 

the wheat contract has prevented the market from correcting in a 

timely manner. 

The CME has just implemented a number of changes to the 

wheat contract, and these follow a range of changes that were 

made a year ago as well. Included in the recent changes are seasonal storage rates and the addition of many new delivery locations. These are significant changes that should have a positive impact. 

We are hopeful that these contract changes will move the wheat 

contract back towards convergence, but they may not be enough. If 

the current changes do not re-establish convergence, the CME 

Group must be prepared to move quickly on additional measures 

to complete the task. We believe the CME Group is committed to 

restoring contract performance and already has a concept of variable storage rates under consideration that we believe holds promise. It will be critically important that the CFTC move contract improvements through its approval processes expeditiously. 

One important component in the discussion is enhanced transparency in futures markets. The Commitments of Traders report 

changes implemented by the CFTC in early 2007 were very useful. 

To further enhance transparency, we recommend that the Commission add the same level of detail to the lead month—the contract 

month with the largest open interest. While this would not necessarily improve convergence, the information would assist hedgers 

in their decisionmaking and would also assist the Commission and 

policymakers in evaluating participation of various types of traders. 

Finally, the one area of the report that we are not ready to embrace is the recommendation to restrict participation by these new 

financial participants. Despite the difficult environment and the 

imbalance they have created, we would prefer to see the wheat contract come back into balance with minimal intervention. However, 

if contract changes at the CME are unable to achieve convergence 

quickly, we recognize that restrictions may become necessary. 

That ends my testimony, and I will be happy to answer any 

questions. 

Senator LEVIN. Thank you very much, Mr. Coyle. Mr. Wands. 

36 

1The prepared statement of Mr. Wands appears in the Appendix on page 76. 

TESTIMONY OF HAYDEN WANDS,1 DIRECTOR OF PROCUREMENT, SARA LEE CORPORATION, AND CHAIRMAN, COMMODITY AND AGRICULTURAL POLICY, AMERICAN BAKERS 

ASSOCIATION 

Mr. WANDS. I would like to thank the Senate Permanent Subcommittee on Investigations, and especially Chairman Carl Levin 

and Ranking Member Tom Coburn, for holding this critically important hearing on excessive speculation in the wheat markets. 

Again, my name is Hayden Wands. I am Director of Procurement 

at Sara Lee. I am here today speaking on behalf of the American 

Bakers Association as the Chairman of the American Bakers Association (ABA) Commodity and Agricultural Policy Committee. 

Since the inception of the grain exchange over 150 years ago, 

bakers have utilized the exchanges for purchases of necessary ingredients. These markets enabled farmers to know what price they 

can receive for their grains in the coming months and years and 

allowed manufacturers to plan for their businesses’ futures by 

using these same price points as a component for the food products 

they produce. This was, and still should be, the intent of these critical markets. 

Unfortunately, the use of these markets has dramatically 

changed since 2005. With the influx of index funds, volatility increased and commodity prices rose to record levels in 2008. While 

other supply-and-demand issues also impacted prices in 2008, the 

record investment of index funds cannot be overlooked. They are 

buying agricultural commodities and using the investments as a 

new marketable asset class. Grain is not an asset class, but an ingredient in many basic foodstuffs—staples of the American diet. 

The resulting volatility caused by the influx of index funds in the 

wheat market has been dramatic. Historically speaking, a 10-cent 

price change in wheat futures contracts was considered extreme. 

But today market fluctuations of 30 to 40 cents a day are all too 

common. Currently, index funds own 196 percent of this year’s 

wheat crop. To put that in perspective, index funds own 22 percent 

of the soybean crop and only 13 percent of the corn crop. 

The increase in volatility can be seen in the increase of the 

monthly trading ranges of wheat. In 2005, the monthly trading 

range’s average was 39 cents a bushel. In 2008, trading ranges increased by 461 percent to $1.81 a bushel and are currently at 269 

percent above 2005 levels at $1.05 a bushel. As long as index funds 

continue to hold such a large share of wheat contracts and do not 

have to operate within limits, volatility in the markets will continue to harm farmers, food producers, and American consumers. 

The significance of the index funds’ positions is increased due to 

the finite nature of the supply of the physical wheat. With accumulation of long-only positions by index funds, the availability of futures contracts diminishes as they effectively take contracts out of 

the available pool. As a result, the few remaining contracts are 

price rationed to reduce the demand for additional purchases of 

contracts, which greatly increases volatility. 

Bakers cannot escape the impact of index fund activities. For example, as wheat prices skyrocketed to record highs in 2008, bakers 

37 

were forced to increase prices for their baked goods or consider 

other equally undesirable measures, such as decreasing staff or 

shutting down operations entirely. 

Members of the ABA testified before Congress regarding this impact. Frank Formica, owner of Formica Brothers Bakery at Atlantic 

City, New Jersey, testified before the House Committee on Small 

Business, noting he typically paid $7,000 a week for flour, but in 

April 2008, he paid $20,000 a week for the same amount of flour— 

a three-fold increase in cost. Many other bakers shared similar stories about flour cost increases during this same time period. 

The impact of market volatility has driven away smaller but extremely important market participants. Small businesses, including 

bakers, grain elevators, and millers, who cannot qualify for large 

credit lines may find it extremely difficult to participate in the current market. These businesses may look for alternative hedging 

mechanisms since hedging in the futures market may become an 

activity reserved for companies that carry extremely large amounts 

of liquidity and credit. 

In addition, the lack of convergence continues to be a major issue 

in the futures market. ABA strongly believes that the lack of convergence exhibited in the market, and particularly in the Chicago 

wheat market, is a symptom of the problem caused by the accumulation of long-only positions by index funds rather than the root of 

the problem itself. If contract limits were placed on index funds, 

lack of convergence would be addressed. 

Index funds have erroneously been categorized differently from 

that of a traditional speculator. They operate under the auspices of 

a bona fide commercial hedger. Bona fide commercial hedgers receive an exemption allowing them to operate without contract limits and are only limited to the actual amount of grain they produce, 

store, or use for feed or food production. Due to this discrepancy, 

the index funds currently operate in the market without encountering any natural or regulatory limits to the amount of contracts 

that can be purchased. 

ABA strongly believes that index funds must operate within the 

confines of a contract limit similar to the limits that traditional 

speculators have efficiently operated for many years. Placing limits 

on hedge fund activity will be critical in restoring the integrity of 

the Chicago wheat contract, as well as all wheat contracts, and will 

allow the market to return to manageable volatility. As such, the 

ABA fully supports the Subcommittee’s recommendation to phase 

out existing wheat waivers for index traders by creating a standard 

limit of 6,500 wheat contracts per trader. 

Volatility in the markets is a major concern to the baking industry. Today’s volatility represents millions of dollars daily in undue 

financial risk. Commodity markets will be able to once again respond to natural and fundamental supply-and-demand influences 

through implementation of contract limits. 

I would again like to thank Chairman Levin and Ranking Member Coburn as well as Members of the Subcommittee for the opportunity to provide the views of the American Bakers Association on 

this important subject. Thank you. 

Senator LEVIN. Thank you so much, Mr. Wands. Mr. Cooper. 

38 

1The prepared statement of Mr. Cooper appears in the Appendix on page 87. 

TESTIMONY OF MARK COOPER,1 DIRECTOR OF RESEARCH, 

CONSUMER FEDERATION OF AMERICA 

Mr. COOPER. Thank you, Mr. Chairman. In my testimony, I outline a broad empirical and theoretical explanation of how excessive 

speculation has made a major contribution to the recent gyrations 

and failures in commodity markets and why they harm the public. 

I have made my case with respect to oil and natural gas, which is 

what I know best, but based on my reading of the Subcommittee’s 

analysis of the wheat market, I am convinced that everything I 

have said applies to wheat as well. 

The debate over excessive speculation is over. The reports of the 

Subcommittee on oil, natural gas, and most recently wheat, as well 

as my own analyses of oil and natural gas, which antedated those 

of the Subcommittee, leave no doubt about the fact that excessive 

speculation was an important cause of problems in commodity markets. The only question on the table is: What should we do to prevent excessive speculation from afflicting these markets in the future?’’ 

Good analysis must be the launch point for good policy. A valid 

scientific claim that A causes B requires three critical elements 

that are in your report: 

One, temporal sequence. A must proceed B. 

Two, correlation. A and B should move together in the expected 

direction. 

And, three, explanatory linkage. There needs to be a mechanism 

that shows how and why A would move B. 

The policy relevance of scientifically valid causal claims is that 

policymakers can adopt policies to change A and expect that the effect will be to change B. In the case of commodity prices, if it is 

concluded that excessive speculation is harmful and it is concluded 

that the influx of financial investors—as Mr. Gensler calls them, 

perhaps to preserve the good name of speculators—then policies to 

dampen the influx of those funds will reduce speculation and improve the outcome for consumers. 

It is absolutely clear that these markets are vital to the functioning of our economy. The purpose of commodity markets is to 

smooth the flow of production in the real economy to allow farmers 

and bakers to plan, hedge, and organize their production. It is absolutely clear that excessive speculation disrupts this flow. It raises 

price, creates volatility, drives these people out of the market, 

makes it difficult to hedge, and difficult to plan their production. 

You have ample evidence of that. 

This Subcommittee’s research demonstrates the three elements 

of causal explanation. There is no doubt about the temporal sequence between the influx of funds and the dramatic increase in 

price volatility and other aberrations in these markets. And when 

you buy a futures contract, as you have heard, you influence the 

price. You set the price by holding that open position at the price 

you have agreed to. Explanatory linkages here as well. These financial investors behave according to a financial logic which treats 

commodity futures as assets, not resources. They pay less attention 

to the fundamentals of the real economy and more attention to fiVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00044 Fmt 6633 Sfmt 6601 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
39 

1The prepared statement of Mr. Strongin appears in the Appendix on page 129. 

nancial formulas. Index traders just kept pouring money in and adjusting their portfolios according to the logic of their index managers. When regulators finally threatened oversight and when general liquidity in the economy dried up, the financial investors vacated the market. And lo and behold the aberrations declined, as 

you have seen. 

Near-perfect correlation like this, with perfect correlation on the 

way up and perfect correlation on the way down, is very rare and 

very persuasive. The reason the opponents or critics of your bill— 

your report cannot offer you an alternative explanation is that finding that perfect correlation is very difficult. They just say, well, it 

must have been something else because we do not think it was 

what you think it was. 

But even more importantly, you have heard today the underlying 

mechanisms that link the influx of traders to the problems. Traders 

profit from rising and volatile prices in a variety of ways, and they 

contribute to those outcomes. As account values rise, excess margins and special allowances allow traders to take money out of 

their market or leverage more trading to keep the upward spiral 

going. Traders and exchanges benefit from transaction fees that 

grow with value and volume. As long as there is more money coming into these markets that is willing to bid up the price, the old 

money already in the market benefits by staying long. 

Of course, it is easy to ensure the inflow of funds when the managers of those funds also are the advisers to these financial investors who tell them what to do. It is easier to sustain the upward 

spiral of prices when speculators are also the analysts who release 

reports hyping the market with reports of how high prices are and 

how they will go. When oil was $145 a barrel last year, Wall Street 

was telling us they had to go to $200, it would go to $200. I will 

remind you it is $60 today after the speculative bubble has burst. 

So setting position limits is one step that is absolutely critical. 

Defining entities properly is another step. Mis-defining index traders as commercials was disastrous. They are not. They do not take 

delivery. They do not look at the real market. They only look at 

their financial performance. 

Eliminating conflicts of interest would be extremely important as 

well. We have the individual firms on too many sides of this transaction, and ultimately we really have to think about the incentives 

we have given for the financialization of everything in America as 

an asset class and fail to pay enough attention to the real economy. 

We have to change the incentives so activity goes back into the real 

economy as opposed to these purely financial activities. 

Thank you. 

Senator LEVIN. Thank you very much, Mr. Cooper. Mr. Strongin. 

TESTIMONY OF STEVEN H. STRONGIN,1 HEAD OF THE GLOBAL 

INVESTMENT RESEARCH DIVISION, THE GOLDMAN SACHS 

GROUP, INC. 

Mr. STRONGIN. Thank you very much, Chairman Levin. We commend you for your leadership in addressing the factors affecting 

the functioning of the commodity markets, which we view as a critVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00045 Fmt 6633 Sfmt 6601 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
40 

ical endeavor. We appreciate the opportunity to present our 

thoughts on your report entitled ‘‘Excessive Speculation in the 

Wheat Market.’’ This is a substantial piece, which provides a rich 

and detailed history of the wheat market and raises critical issues, 

such as the importance of price convergence between the cash and 

futures markets. 

I have been involved with the commodity markets for the last 15 

years, having helped construct and manage commodity index products for much of that time. I served as a member of the Policy 

Committee for the Goldman Sach’s Group, Inc. (GSCI), from 1996 

to 2007, at which time the index was sold to the S&P, and I have 

continued to serve on the Policy Committee maintained by the 

S&P. 

When we conceived of the GSCI in the early 1990s, we did so 

with an eye toward improving liquidity by helping fill the gap between the large numbers of producers who needed to hedge their 

risk and the more limited number of consumers who are willing to 

provide those hedges. Since then, passive investments have become 

a crucial source of this liquidity. Capital provided by passive investments is needed to balance these markets, helping them to fulfill their mission of allowing producers and consumers to operate 

more efficiently and manage their price risk. Yet investors who 

have provided this liquidity have been, in our opinion, inappropriately characterized as speculators with no real economic interest in 

these markets. 

Most of these investors are, in fact, large-scale asset allocators 

who seek to invest in markets in which capital is in short supply. 

In doing so, they aim to earn a reasonable long-run return by improving the underlying economics of the industry. They, therefore, 

require real economic justifications for their investments. 

As such, their primary concerns mirror those of the Subcommittee—namely, what is the realistic capital needed by these 

markets? Will investment distort prices and, therefore, reduce longrun returns? And are these markets liquid enough not to be distorted by passive capital? 

Reflecting these concerns, we have sought to structure the GSCI 

so that it provides the greatest possible liquidity with the least possible market impact from passive investments. We have regularly 

assessed whether capital allocated to individual contracts exceeds 

the ability of these markets to absorb that capital. 

Turning our attention to the specific issues raised and recommendations made by the Subcommittee’s report. As we mentioned earlier, this is a substantial piece, but our ongoing work assessing the liquidity of the GSCI leads us to some important and 

differing conclusions from some of those reached in the report. We 

outline these key differences here and refer you to our written testimony for greater detail. We hope our thoughts prove useful. 

First, the Subcommittee report concludes that passive index investments have been responsible for price volatility in the CME 

wheat market. We monitor distortions in the markets by comparing 

market performance across contracts. For example, comparing price 

performance of Chicago wheat to the performance of other agricultural markets without passive index investments. In these markets, we observe similar price moves. For example, wheat contracts 

41 

not included in passive indices, such as Minneapolis wheat, have 

experienced even greater price volatility than Chicago wheat. For 

example, Minneapolis wheat increased by over 270 percent from 

January 1, 2007, to the peak, while wheat prices in the Chicago 

market rose by 170 percent. 

We also monitor this issue by looking at the performance of commodities that are subject to similar economics as Chicago wheat, 

such as rice and oats. Here we also find similar price patterns. For 

example, Chicago wheat, and oat prices have declined by 58 percent and 54 percent, respectively, from the peak to July 15, 2009. 

This analysis strongly implies that passive investments were not 

the cause of the price distortions in the Chicago wheat market. 

Therefore, restrictions in passive investments would not likely have 

lessened price volatility. 

We would also note that our work on the impact of speculation 

shows that non-index speculation has had far more impact than 

passive index investments, both per dollar invested and in total. 

The reason for this is simple. Index investments are made slowly 

and predictably, and contracts are exited well before settlement. 

Non-index investments, however, tend to be strongly correlated 

with underlying fundamentals, and they tend to be focused on price 

levels. Thus, their size is adjusted to passive index investments, 

offsetting the effects of those investments. 

Second, the Subcommittee report also concludes that passive 

index investments impede price convergence in the Chicago wheat 

market, which we believe is a very important issue. However, our 

view is that this lack of convergence is driven by flaws in the design of the futures contracts. Put simply, the high degree of flexibility of delivery options built into the Chicago futures contracts 

and the difficulty of delivery into those contracts for producers 

makes the futures more valuable than the underlying wheat. This 

is particularly true when the volatility of cash wheat prices is high. 

If we compare the value of these options with the basis volatility 

raised as a concern by the Subcommittee, it is clear that contract 

design caused much of the basis risk. 

The importance of the delivery restrictions in the Chicago wheat 

market, pushing up the value of the futures relative to the cash 

market is something the Chairman and the Members of the Subcommittee have already highlighted with respect to the WTI market. We think the solution parallels suggestions made by the Subcommittee about oil—namely, expand the number of delivery sites 

and generally ease the terms for delivery. 

The Subcommittee also suggests that position limits or the elimination of index investing would reduce volatility in wheat prices. 

Given our view that index investing did not cause price volatility 

or convergence issues, we do not think there will be much to gain 

by implementing such restrictions. However, there could be significant negative consequences. 

First, a large number of index investors are based outside the 

United States. Given that there are equivalent contracts traded on 

non-U.S. exchanges, much of the activity generated by these investors would likely migrate offshore. 

Second, the proposals currently being suggested would not actually restrict the aggregate size of the positions taken by U.S. invesVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00047 Fmt 6633 Sfmt 6601 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
42 

tors. Instead, these positions would likely be splintered across multiple brokers, multiple ETFs, and multiple mutual funds so that 

each of these vehicles would remain below individual position limits. In stressful market conditions, such a splintering would likely 

lead to even greater market volatility as the sale of large positions 

tends to destabilize markets under stress. When these positions are 

in the hands of a single party or a small numbers of parties, their 

orderly sale is possible. However, when these positions are in the 

hands of multiple dealers or funds, each dealer or fund manager 

is incentivized to sell quick before the others do. This is especially 

true for dealers running smaller trading books or for fund managers who compete for the best relative performance. For these participants, a faster sale is best. This can lead to disorderly markets 

and extreme volatility. Thus, it is our view that splintering existing 

positions could lead to greater price volatility and increase the likelihood that prices overshoot underlying fundamentals. 

Attempts to regulate volatility have rarely, if ever, succeeded. 

Yet they often have unintended and significant consequences. 

Therefore, as we look to the future, we think the harmful volatility 

that has been observed in markets in the recent past begs us to 

focus on the question of which types of market rules and oversights 

allow participants to best manage their risk at a reasonable cost. 

Thank you for taking the time to listen to our prepared remarks, 

and we look forward to answering your questions. 

Senator LEVIN. Well, thank you all very much for your testimony. 

Let us try a 10-minute round here for this first round of questions. 

Let us start with you, Mr. Coyle. Your testimony as fairly 

dramaticly that producers have been frustrated, cash forward contracts were impaired because the relationship between cash and futures markets deteriorated. You are hopeful that contract changes 

will help, but you said that they may not be enough. And you indicated that if the contracts do not achieve convergence quickly, 

intervention may be necessary. I am trying to summarize your testimony. 

How quickly do they need to converge in order to meet your 

standard? 

Mr. COYLE. I would say that we would want them to converge 

this crop year. It takes a certain amount of time to make these 

changes, but there have been changes implemented already, and I 

would expect that sometime between September’s expiration and 

December, the CME can roll out their next change in contract specs 

if they do not see that the current changes have had the impact. 

While the changes they have made are very positive, there is a 

certain amount of skepticism that it will actually achieve the goal. 

Certainly it is in the right direction. 

Senator LEVIN. Do you believe that the dramatic increase in the 

investment by the index traders, contributed to the lack of convergence? 

Mr. COYLE. No, sir. I believe it caused it, singlehandedly. Not a 

contribution. It is the single issue that has caused the problem in 

convergence. 

Senator LEVIN. You go even beyond the CFTC director. 

Mr. COYLE. Yes, sir. 

43 

Senator LEVIN. Mr. Wands, do you believe that the huge investment by index traders is either a contributing, major, or exclusive 

reason why we have seen convergence fail? 

Mr. WANDS. Well, we feel that their presence and their size has 

exacerbated the problem dramatically. 

Senator LEVIN. Is it fair to say that you feel it is a major factor 

in the failure of convergence? 

Mr. WANDS. It is a predominant factor, yes. 

Senator LEVIN. All right. Mr. Cooper. 

Mr. COOPER. I actually agree with Mr. Gensler, and certainly 

when I testified in oil—fundamentals matter and so they do play 

a role here. But excessive speculation matters, too. That is the important point, and as I saw it, at least $40 a barrel, it grew to $65 

or $70 a barrel. That is enough money to get your attention even 

if fundamentals count for something else. 

Senator LEVIN. All right. Now, Mr. Strongin, do you agree with 

Mr. Coyle and Mr. Wands that the influx of these index funds into 

the market, which now results in them controlling about 50 percent 

of the market, is either the factor, as Mr. Coyle said, in terms of 

the loss of convergence or a principal factor, as Mr. Wands said, in 

terms of loss of convergence? Would you agree with that? 

Mr. STRONGIN. I would not, Mr. Chairman, respectfully. 

Senator LEVIN. That is all right. Now let us get to the point that 

the contract was not significantly changed until recently. Is that 

not true, Mr. Strongin? 

Mr. STRONGIN. It has not changed effectively at all. 

Senator LEVIN. And yet we see this huge spike in the futures 

contracts and the huge gap that now exists between futures and 

cash prices. And the contract did not cause that, presumably, or 

the shortfalls in the contract did not cause that, because that spike 

took place while the contract did not change. 

Mr. STRONGIN. The problem is that there is an embedded option 

inside of the futures contract for below-market cost of storage, 

meaning that if you own the futures contract, you can avoid paying 

the full price of storage and store wheat. 

Senator LEVIN. That was true for 5 years, wasn’t it? 

Mr. STRONGIN. Absolutely true. 

Senator LEVIN. All right. So that has not changed. 

Mr. STRONGIN. No. But the value of it did change. There are two 

things that drive the value of it: one, the cost of storage; and, two, 

the volatility of the prices around that storage. And as we saw in 

many markets in this environment, the volatility picked up a lot, 

and options increase in value when volatility goes up. 

Mr. Gensler referred to this—the cost of storage went up because 

the grain elevators were full, and the shadow price of the grain elevator storage, because they had run out of space, was even greater. 

As a result, that value of below-market storage went way up. So 

the option value went way up, and that is effectively what we are 

applauding when we look at the basis. 

Senator LEVIN. Let me go back now to Mr. Coyle. Can you comment on storage prices and whether or not the change in storage 

prices can explain this increase in the basis gap? 

Mr. COYLE. Yes, sir, I can explain it, and I would say with certainty that is not the case. Yes, storage costs have gone up, and, 

44 

yes, I will agree with Mr. Strongin that there is a contract design 

issue. I will even agree that storage changes, like the variable storage rate the CME will next consider, can have an impact. And recent changes in the storage rates are a move in the right direction. 

However, at this moment we have a record number of shipping 

certificates that have been issued against the—— 

Senator LEVIN. I am sorry. Record number of—— 

Mr. COYLE. Shipping certificates. That is a representation of inventories. A record number of shipping certificates issued against 

the CME futures contract, and that has not solved the problem. 

And we do not have consumers taking ownership of those shipping 

certificates and those inventories because they think it is a good 

value because it is a cheaper source of cash. 

Senator LEVIN. Well, I am not sure I understand your explanation as to why you disagree that the storage cost shift cannot explain this increase in the gap between futures and cash prices. Try 

it again. 

Mr. COYLE. While it may be more costly to build today, we have 

always had the issue of storage, of full carry. In the current environment, we have a market that is full carry, which means it currently pays all of the costs of storage, even the higher Board of 

Trade storage rates, and we still have a 70-cents-per-bushel convergence problem. 

To suggest that the optionality of owning the Board of Trade Futures, which means it gives you the opportunity to have the access 

to this cheaper storage, is a reason that the futures price is higher 

is just something that we would disagree with. 

Mr. COOPER. Chairman Levin, I would take another tack at his 

answer because you focused on the cost of storage and the value 

of storage, but he hypothesized an increase in volatility. I would 

submit, as I do in my testimony, that the presence of these indexed 

funds is the cause of that increase in volatility. So at that level, 

the answer is too cute by a half. 

Senator LEVIN. All right. Let me go back to Mr. Coyle. You are 

something of an expert, I believe, in terms of elevators, are you 

not? 

Mr. COYLE. Yes, sir. 

Senator LEVIN. What is your expertise? 

Mr. COYLE. Well, I manage a business that happens to own the 

largest Board of Trade delivery elevator for corn, beans, and wheat, 

so we specialize in grain storage, and I am a member of the grain 

industry, so I have spent most of my career managing grain elevators and the risk around those. 

Senator LEVIN. Now, when there is a lack of convergence, who 

is hurt? You are an expert. Tell us. 

Mr. COYLE. The first person that is hurt is the grain elevator operator because, by definition, the convergence problem increases 

the amount of basis risk. A grain elevator that buys grain, whether 

it is Michigan, Wisconsin, Ohio, Indiana, anywhere, buys grain assuming a relative relationship to the Board of Trade, finds that as 

the prices go up after he bought the grain that the basis is lower 

6 months down the road after he has paid the cost to store that 

grain. So that would be the initial cost. 

45 

But then there are the other factors. The farmer, of course, is 

then hurt, because as the grain elevator operator has more risk, he 

has to pass that along to the farm community through lower basis 

levels. In addition, as you have got this basis convergence problem, 

banks are more concerned about loaning money, so your cost of 

money goes up. And maybe you even get into a situation, as we did 

last year, where there is a concern that there is not enough capital 

at all, and so you stop offering bids to farmers. 

I would say in the last 12 months, probably the single biggest 

person harmed would be the farmer, because, in fact, the grain elevators stopped bidding for grain 6 months out, 7 months out, 8 

months out because they were afraid they would not have the capital to margin their accounts. 

Now, this is not 100 percent of the problem with convergence. 

The fact is, in 2008 when the market rallied, there were a number 

of issues that made the market higher. It could be the biofuels, the 

fight for acreage. There are a number of things that made the market go higher, but this convergence problem does put at risk the 

availability of capital to run your business. 

Senator LEVIN. In addition to the elevator operator and the farmer, tell us about the consumer. How does that get passed on? 

Mr. COYLE. We have heard the comments that costs have gone 

up, and I think that is true, but again, a number of issues have 

had an impact on why the price of commodities is higher. But the 

whole issue of convergence is that the basis levels actually went 

lower to offset the price of higher futures. While the price of futures went from $5 to $6, basis levels went from $.25 under to a 

$1.25 under. In reality, the price that the farmer was selling grain 

at, and the price that the consumer was paying, was the fair value 

for wheat, right? So I wouldn’t argue that there was so much volatility and so much unknown and so much risk that overall prices 

were higher. But, by and large, the higher futures price was offset 

by a drop in the basis. 

Senator LEVIN. Finally, let me just ask one question of Goldman 

Sachs’ representative Mr. Strongin. You have indicated you don’t 

think there should be position limits on index traders at all, is that 

correct? 

Mr. STRONGIN. I said that position limits would likely not fix this 

problem, sir. 

Senator LEVIN. Do you oppose position limits on index traders? 

Mr. STRONGIN. I don’t think it will help the problem, and yes, I 

do oppose it. 

Senator LEVIN. How about other types of folks who you have said 

have a bigger impact on futures than index traders. Should anyone 

have limits? 

Mr. STRONGIN. Actually, we have argued generally that the position limits should be on speculative positions. They should be generally applied. And probably the most important notion would be 

what some of our internal people would sort of say, look to, look 

through, which is putting the position limits on the end users. 

Senator LEVIN. Would that include your customers? 

Mr. STRONGIN. That would include our customers. 

Senator LEVIN. So you do believe there should be position limits 

on index traders’ customers? 

46 

Mr. STRONGIN. Yes. We don’t think—index positions on the index 

traders or the hedgers—not going through all the terms that were 

used to describe the hedgers here—really is about form of investment as opposed to actual position limits, where if you put it on 

the customers, it is actually changing the position limits and the 

positions. 

Senator LEVIN. Let me just be real clear. You believe there 

should be position limits on the customers of index traders? 

Mr. STRONGIN. Yes. 

Senator LEVIN. Thanks. Thank you. Dr. Coburn. 

Senator COBURN. Let me ask this question of Mr. Coyle. What 

has the price convergence problem been for wheat at Minneapolis? 

Mr. COYLE. We have not had a convergence problem in the Minneapolis—— 

Senator COBURN. Do they trade index funds there? 

Mr. COYLE. I understand very little. 

Senator COBURN. Very little. What about Kansas City? 

Mr. COYLE. They do have index trading there. I am not aware 

that there is a convergence problem in Kansas City. 

Senator COBURN. So they have index trading there, but they 

don’t have a convergence problem yet. Our position on the Chicago 

Exchange is that there is a correlation between index trading and 

price convergence. 

Mr. COYLE. Yes. 

Senator COBURN. Explain that to me. 

Mr. COYLE. Yes, sir. I think the issue is magnitude. We have a 

large index trading in soybean and corn futures, as well. But as 

Mr. Wands mentioned, you have a much smaller share, all right, 

on a relative basis if you compare that—— 

Senator COBURN. You mean less than the 50 percent? 

Mr. COYLE. Yes, less than 50 percent, 35 percent, let us say, 

rather than 55 percent. But also, if you look at the magnitude of 

the crop, as Mr. Wands said, the open interest held by index funds 

is 13 percent of the size of the corn crop. In the case of soybeans, 

it is 22 percent. In the case of wheat, it is 195 percent. It has just 

out-balanced the size of the crop relative to size of the market participation. 

In reality, that has actually gotten worse, because last year, we 

had a huge production in the United States, 600 million bushels of 

wheat. This year, it is only 414 million bushels. So in reality, a 

year ago, that same number was 145 percent. This year, it is 195 

percent. It is a function of just too much for the market to handle. 

Senator COBURN. OK. Does the higher volume generated by the 

commercial index traders actually increase liquidity or decrease liquidity, in your opinion? 

Mr. COYLE. In my opinion, it decreases liquidity. It actually increases volume, but it actually drains liquidity. If you have half of 

the trade that won’t sell, then when the next buyer wants to buy, 

they can only buy half of what is out there. 

Senator COBURN. Well, but they do sell. They just roll. 

Mr. COYLE. They roll, but they buy and sell it the same day. 

Senator COBURN. Yes. 

Mr. COYLE. If we have a business, someone wants to buy U.S. 

wheat and the price rallies 50 cents a bushel and the farmer has 

47 

already sold most of what he wants to sell this month, where does 

the next sale come from? At this point, it comes from a speculator 

that wants to be short because it is not going to come from the primary long. So in a normal market situation for—— 

Senator COBURN. Fifty percent of the primary long? 

Mr. COYLE. Yes, sir. 

Senator COBURN. OK, and not—some primary longs will sell, but 

50 percent of them won’t. 

Mr. COYLE. Fifty percent of the open interest—56 percent of the 

actual flat price related open interest is held by somebody that will 

not respond to short-term economics. 

Senator COBURN. OK. So let me go to you, Mr. Strongin. Have 

I got this right, that I could actually buy an index fund, pay the 

storage cost, and net about 4 percent versus the cost of my money, 

if nothing changed in terms of the price of the contract and I just 

kept rolling the contract? 

Mr. STRONGIN. I am not sure I understand the question because 

there is not a free lunch in that process. 

Senator COBURN. Well, if, in fact, I can get half of one percent 

for my money in a CD and there is minimal price changes but high 

volatility on contracts for wheat and I can make money off the storage differential, can I not, in fact, markedly increase my yield 

versus the half-a-percent or quarter percent that I could get for my 

money somewhere else? 

Mr. STRONGIN. So the index investor is only holding the investments while it is in futures and in no time takes advantage of the 

reduced storage costs. 

Senator COBURN. So who makes the money off that? 

Mr. STRONGIN. Well, the person who takes advantage of it is the 

person who needs wheat in the future and this way can store it 

below market cost and they are simply willing to pay for that. In 

other words, you can think about it almost like prepaying a discount card. If I can get below-market storage for a certain period 

of time, I am willing to pay up front for that below-market storage. 

So they are not actually going to make money. They are just paying 

money now. That is why the futures costs more than the cash because they get the right to store it at below-market rates after that. 

Senator COBURN. OK. Does everybody at the table agree that 

there needs to be changes in the contract on wheat? 

Mr. COYLE. I certainly do. 

Senator COBURN. Mr. Cooper. 

Mr. COOPER. I am—as I understand it, it will help, but it won’t 

solve the problem. 

Senator COBURN. What would solve the problem? 

Mr. COOPER. I think more aggressive position limits, conflict of 

interest properly classifying traders, a whole series of steps are 

necessary to reform this and other commodity markets. 

Senator COBURN. If you do all those things, won’t this money go 

to an overseas market? 

Mr. COOPER. Well, as Mr. Gensler pointed out, the United States 

is a big place and people want to be able to trade in U.S. instruments and U.S. markets. So there will be plenty of liquidity in this 

market. There is excess liquidity in a certain sense in this market, 

this huge influx of capital. So it is my belief that the United States 

48 

can, in fact, establish a set of rules that will make for an orderly 

market and plenty of traders will come here to preserve the liquidity of this market. 

Senator COBURN. So you think there is minimal risk for us of losing capital in this country by making these changes? 

Mr. COOPER. I think there is a minimal risk because of the commodities that people want to trade in. West Texas intermediate is 

a U.S. commodity designated for trade in U.S. markets, and as I 

understand it, foreign boards of trade desperately want to be able 

to trade that stuff. So if they refuse to conform to our statutes and 

they can’t trade here, they will basically be unimportant. So this 

is a big place and I firmly believe that if we organize our markets, 

we won’t be at a competitive disadvantage. 

The interesting thing is that when you talk about London and 

Paris, those governments are looking very carefully at much more 

strict regulation than we actually are. If you look at the conversation, they are sort of pulling the Americans along. So it may well 

be that those markets are not going to be less regulated and therefore more attractive. I think the world is moving towards a much 

higher level of prudential regulation in all the major exchanges. 

Senator COBURN. Mr. Strongin, your comments on that? 

Mr. STRONGIN. Different activities have different mobility. In this 

case, you have a large number of non-U.S. investors who have easy 

access to non-U.S. futures contracts. That activity would exit the 

United States very easily. 

I do not think it would imperil the functioning of our futures 

markets because we do have in truth large domestic individuals on 

both sides. But it would reduce the liquidity. It would shift—it 

could potentially source the center point of liquidity away from the 

U.S. markets in some cases. It is a cautionary tale, but German 

bonds now trade almost entirely out of London for similar reasons. 

So it is not automatic that the activity will be here. But the United 

States is an important enough market that it would continue to 

function afterwards. 

Senator COBURN. But there is some risk? 

Mr. STRONGIN. Of significant activity leaving. 

Senator COBURN. Yes. OK. Mr. Coyle, you don’t think that we 

ought to eliminate index trading on the Chicago Board, is that correct? 

Mr. COYLE. At this time, that is correct. 

Senator COBURN. Can you foresee a time when you would think 

that should be done and why? 

Mr. COYLE. Well, I would say first, we would like to see the results of the current major changes in the Chicago Board of Trade’s 

contract, allow them to come out with a next set of changes if they 

are necessary, and I would say a good percentage of people think 

that probably will be required to see if that can restore the balance 

and it converges as the market needs. 

If by some chance that can’t be done, then we don’t rule out that 

something will need to be done, some other step. But I would question whether or not a change in the limits or the exemptions would 

actually solve the problem. 

First, and it relates to a comment that was made earlier, the current limits of 6,500 contracts, that is $162 million. Any individual 

49 

in this room could actually buy 8 percent of the U.S. wheat crop 

with the current limits. That is one comment. 

Second, if capital really wants to deploy in commodities, then 

there are a lot of ways even within those limits that you can restructure your product so that you can find other ways to deploy 

that capital. It is certainly not as efficient as they can do it today 

in a futures market where the costs of execution are so cheap, you 

don’t have counterparty risk, and so on. But it can be done. 

And then there is the risk of the unintended consequences, I 

would say particularly if, in fact, this same capital decided that it 

wanted to pursue the physical market instead of the futures market. We would fix the convergence problem immediately because 

they would actually buy the physical bushels which they are not 

buying today. But if they did that, we would lose a lot of transparency that we enjoy today because we get to see those contracts. 

My company has been contacted by two funds in the last month 

alone, looking for ways to now participate in the physical market. 

You can imagine if 195 percent of the equivalent of the crop is 

owned today in futures contracts, what would happen if they wanted to buy physical bushels? You would have the physical price go 

up, all right. The convergence problem would go away. You 

wouldn’t know where it is at and we actually would have an inflation problem and millers, when they needed to buy the wheat, 

couldn’t buy it. 

Senator COBURN. Mr. Strongin, what do you attribute the tremendous increase in activity in index funds, especially as related 

to commodities? I know they are everywhere, but what do you attribute that to? Is that an increased sophistication of the American 

investor? Is that the American investor who is wanting to get hard 

commodities to hedge against the future? What is the overall reason why we are seeing this tremendous shift to index funds, away 

from specific assets? 

Mr. STRONGIN. Part of it has to do with the way the word ‘‘fundamentals’’ has been used here. Fundamentals can apply to two 

very different things. One of them, which is the way it is normally 

used in this conversation, is today’s cash market. How much supply, how much demand, what price balances at. 

The second has to do with investment. Today when investors look 

at the global economy, when they look at the emergence of China, 

when they look at the emergence of India, when they look at what 

is going on in Latin America, they see incredible need to invest and 

they believe that they need prices that are high enough to drive 

that investment and they believe that commodity prices will rise 

and commodity industries will become more valuable. 

And so across the board, whether it is in terms of investing in 

Brazil or investing in emerging markets in general, investing in oil 

companies or in hard commodities, you see investors trying to protect themselves from the pressures that will create. As you look at 

the necessary demand of the emerging market, you want to have 

exposure to basic commodities. You want to have exposure to energy. You want to have exposure to grains. You want to have exposure to all raw materials. 

And they have increased their exposure to those things in all 

ways, whether it be through index participation or direct equity inVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00055 Fmt 6633 Sfmt 6601 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
50 

vesting. You can see it in the percent of the S&P made up by commodity companies. You can see it in how the emerging markets are 

priced relative to the developed markets. People want that exposure because when they look at future demand and the need to invest, they see that as a key central element of a forward economy 

and forward fundamentals. 

Senator COBURN. Right, and that is why we see China doing 

what they are doing. 

Mr. STRONGIN. That is right. And to the point I made earlier, 

they are actually buying physical commodities and that has a lot 

more power to move prices than these futures do. 

Senator COBURN. OK. 

Mr. COOPER. Senator, could I try a slightly different answer? And 

I don’t disagree with the fact that physical assets are important, 

I believe, in market fundamentals. But the other thing we have 

done is we have distorted the incentives in our country to over-reward short-term financial rewards and under-reward long-term investment in the real economy through a long series of policies that 

make it easier to make money by flipping things than by investing 

in hard physical assets, and I mentioned that in my testimony. It 

is really important that we rejigger those incentives so that you 

can make as much money with a real good investment in the real 

economy as you can by getting into short-term financial gains. 

Senator COBURN. The difference there being is that if you are 

doing it in the short-term, you are going pay regular, ordinary income tax rates versus capital gains rates, which is a disincentive 

to flip—— 

Mr. COOPER. And we used to have taxes on short-term capital 

gains which—— 

Senator COBURN. We still do. They are at your ordinary income 

tax rate. 

Mr. COOPER. And they were higher before and they were lowered 

and that has helped this shift. 

Senator COBURN. I guess your testimony would be that we 

should raise taxes? 

Mr. COOPER. I actually believe we should raise taxes to promote 

investment in the real economy, absolutely. 

Senator LEVIN. Mr. Wands, who is representing the American 

Bakers Association, you have testified that contract limits need to 

be restored, I believe. Is that correct? 

Mr. WANDS. Yes. Well, what we are asking for is that index 

funds be termed speculators and they fall under those type of contract limits. 

Senator LEVIN. All right, and that there not be waivers or exemptions? 

Mr. WANDS. Correct. 

Senator LEVIN. And what is the effect of lack of convergence on 

bakers? 

Mr. WANDS. Well, it is not—as Mr. Coyle commented, I think it 

is more significant on the production side, starting with the country elevator and then falling to the farmer. The lack of convergence 

on the bakery side, typically, we lock in our prices fairly well in advance so we don’t have the ramifications that the production side 

does. One thing that can hurt us is if we lock in our basis, which 

51 

we can do from time to time, and the market rallies severely, as 

Mr. Coyle said, then the basis falls significantly and then we will 

be—if you chose to lock in your basis early, you will be at a significant disadvantage to, say, your competition who waited. So there 

is volatility for us in the basis depending on when we lock it in. 

But again, it is more on the production side and the producer side. 

Senator LEVIN. But the volatility in the basis has had an effect 

on you. What is the cause for this huge fluctuation in the price of 

flour? 

Mr. WANDS. Well, if you break down the price of flour, for the 

most part, when we look at our risks, about 70 percent of the defined risk, roughly about 70 percent of the risk that you can hedge 

either by buying basis or selling mill feed or buying futures price, 

70 percent of it is related to futures. It is not an exact correlation, 

but as futures rise, that is going to reflect significantly on the flour 

price, more than the basis or the other ingredients in pricing flour. 

Senator LEVIN. So the price of futures going up is what has that 

effect? 

Mr. WANDS. Significant, yes. 

Senator LEVIN. And we have shown the correlation between the 

huge influx of money from the index funds to the increase in the 

futures prices. 

Mr. WANDS. Yes. That is correct. Somebody earlier asked about 

Kansas City. While the index funds do have a presence in Kansas 

City, it is significantly less than in Chicago, and you have to remember that while you are dealing with a 400 to 450 million bushel soft wheat crop, you are looking at a billion bushel hard wheat 

crop—hopefully bigger this year—so their presence in Kansas City, 

while it is there, is not nearly as significant as Chicago and you 

don’t have the convergence problem in Kansas City. 

Senator LEVIN. It is not nearly as significant as in Chicago—— 

Mr. WANDS. Correct. 

Senator LEVIN. You are all set. Thank you very much. You have 

been a fine panel. We appreciate your presence. 

We will now call on our third panel. Finally, we call on Charles 

Carey, Vice Chairman of the CME Group. Thank you for your patience, first of all, Mr. Carey. 

The CME Group was formed by the recent merger of the Chicago 

Mercantile Exchange (CME), and the Chicago Board of Trade and 

the New York Mercantile Exchange. 

Pursuant to Rule 6, all of our witnesses must be sworn, so we 

would ask you now to stand and raise your right hand. 

Do you swear that the testimony that you will be giving will be 

the truth, the whole truth, and nothing but the truth, so help you, 

God? 

Mr. CAREY. I do. 

Senator COBURN. Mr. Chairman, I would like to just insert a 

comment into the record from our last panel. I got to thinking what 

the Consumer Federation of America said. He wanted to raise 

taxes to spur investment. I am not sure many people recognize that 

as a legitimate economic policy. 

Senator LEVIN. OK, thank you. 

52 

1The prepared statement of Mr. Carey appears in the Appendix on page 143. 

Under our timing system today, Mr. Carey, we ask that you limit 

your oral testimony to 10 minutes, but your entire statement will 

be made part of the record. Please proceed. 

TESTIMONY OF CHARLES P. CAREY,1 VICE CHAIRMAN, CME 

GROUP, CHICAGO, ILLINOIS 

Mr. CAREY. I am Charles P. Carey, Vice Chairman of the CME 

Group. Thank you, Chairman Levin and Ranking Member Coburn, 

for inviting us to testify today, respecting the June 24, 2009 staff 

report titled, ‘‘Excessive Speculation in the Wheat Market.’’ 

I was Chairman of the Chicago Board of Trade, the home of the 

soft red winter wheat market, prior to the merger that created 

CME Group. I trade wheat, corn, and other agricultural products 

and I am the point person on the Board of Directors for dealing 

with the grain markets. I deal with the concerns respecting the impact of index traders on our markets expressed by our members 

and the agriculture industry and have been directly involved in the 

Chicago Board of Trade’s ongoing efforts to modify the wheat contract to assure better convergence. 

As you are aware, some of our commercial customers believe that 

index trading may be having unwarranted impacts on our wheat 

market. We responded to these concerns by arranging for an independent analysis of this thesis across grain markets. We also cooperated with the others conducting such studies and we analyzed 

all the studies of this subject that preceded the report prepared by 

this Subcommittee. 

None of the relevant studies that we dealt with supported the 

conclusion that index traders or swap dealer participation in our 

markets was the cause of volatility, high commodity prices, or lack 

of convergence. Indeed, in our corn and soybean markets, there 

have been no significant convergence issues even though there is 

substantial participation in those markets by index traders and 

swap dealers. Despite the clear conclusions of these independent 

professional studies and our own experience in other grain markets, the concerns remain. 

Those who are not professional statisticians or economists continue to focus on the confluence of unexplained price behavior in 

the large share of open interests held by non-commercial participants. It is difficult to ignore that coincidence and some of our 

traders and customers assumed that there was a strong chance 

that the two were connected. Professional economists and statisticians explained to us, however, that it was necessary to show causation, not just coincidence, and that it is a common logical error 

to attribute cause based only on correlation. 

Many had hoped that this Subcommittee study and report would 

add new evidence and clarify the relationship between index trading and the lack of convergence or any other unexplained price effect. The Chicago Board of Trade is absolutely committed to solving 

the convergence problem. Like you, we would have been pleased if 

the report had provided a simple explanation and easily deployed 

solution. Unfortunately, economists and the informed critical response to the report tell us that it does not explain the lack of conVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00058 Fmt 6633 Sfmt 6601 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
53 

vergence and that its proposed solutions are more likely to be 

harmful to the functioning of our markets than helpful. 

You asked us to answer five questions and to discuss the Subcommittee’s recent staff report, ‘‘Excessive Speculation in the 

Wheat Market.’’ My written testimony provides extensive, well documented and reliable answers to those questions. I don’t intend to 

use this limited time to restate those answers. Instead, I want to 

focus on our efforts to deal with the likely causes of the lack of convergence between futures prices for soft red winter wheat and the 

reported bid prices for that commodity. 

In our efforts to eliminate this divergence, we share a common 

goal with the Subcommittee. We differ only on how to get there. 

We absolutely agree with the Subcommittee’s concern that the lack 

of convergence impairs the value of our market and it needs to be 

corrected. We share the concern of knowledgeable economists who 

have examined this market and who have carefully reviewed the 

Subcommittee’s report that the evidence produced in support of the 

conclusion that index traders are the principal cause of the lack of 

convergence and persistent contango has not been validated by any 

of the statistical measures that are accepted by experts in the field. 

Our analysis of some of the report’s conclusions is included in my 

written testimony. 

In particular, we are concerned with the measure of cash price 

used to calculate the value of the cash and futures converge. Neither the price of the actual transactions nor the midpoint of actual 

purchases and sales was used. Instead, the report used a national 

average price as represented by the MGEX-DTN soft red winter 

wheat index as the cash market price. Basis was then calculated 

as a futures price minus the MGEX software index price. At best, 

this number represents the price at which some elevators, most 

outside the delivery area, claim they were prepared to purchase 

during a relevant period. 

The choice of this measure does not reflect true delivery market 

economics. Economists and traders expect futures prices to converge to the price of the cheapest to deliver based on location and 

grade. There is no theory supporting the implicit claim that futures 

prices will converge to the average hypothetical offer prices in multiple locations. 

We are concerned that the report’s focus of blame on index traders and speculators directs attention away from appropriate efforts 

to identify any structural problems with the contract specification 

and impairs our ongoing efforts to cure the problem by fixing those 

terms. Assigning responsibility for the convergence problem to the 

wrong cause will only delay its solution and may result in greater 

problems. 

The Chicago Board of Trade has implemented very significant 

changes to the delivery specifications of the soft red wheat contract. 

We have acted in accordance with our obligations under the CEA 

respecting the timing of changes to enumerated futures contracts 

with open interests and have attempted to take account of the suggestions of all segments of the industry to whom this contract is 

important. We have also implemented the changes in an orderly 

fashion so that we will have sufficient time to judge their effectiveVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00059 Fmt 6633 Sfmt 6601 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
54 

ness and so that we do not in haste overshoot the market and risk 

damaging the liquidity on which the market users depend. 

We have authorized a wide-ranging addition of delivery points 

and facilities. We had 58 new locations for delivery that will provide an additional 90 million bushels of capacity on the Ohio and 

Mississippi Rivers and in a 12-county area of Northwest Ohio. We 

expect that this will relieve any congestion issues that prevented 

arbitrage from driving the convergence within historic ranges and 

better align our delivery locations with the primary flow of soft red 

winter wheat in the domestic cash market into the New Orleans 

Gulf for export. Similar changes made to the corn and soybean contracts in 2000 greatly enhanced the performance of these contracts 

and we expect similar results from these changes in the wheat contract. We have also implemented seasonal storage rate adjustments 

that are intended to incent shorts who want deliverable wheat or 

who can acquire deliverable wheat to make delivery when the basis 

moves to unjustifiable differentials. 

The higher futures storage rate during the July-December period 

reflects the higher seasonal storage rates in the cash market when 

wheat that has just been harvested competes with the upcoming 

corn and soybean harvests for storage space and will allow wider 

carrying charges, if needed, throughout the country elevator system 

for producers with on-farm storage. The higher futures storage 

charges will also encourage buyers who stand for delivery and must 

pay the storage rate to the seller to either load out or redeliver the 

wheat, both of which will enhance convergence. 

On September 1, a reduced level of allowable vomitoxin will be 

implemented which will convert the contract from a feed-grade 

wheat contract to a human consumption grade. We expect that this 

change will have a positive impact on convergence for the following 

reasons. The estimated cash market discount for wheat with four 

parts per million of vomitoxin is 12 cents per bushel and that differential will be applied to four parts per million wheat delivered 

against futures contracts. Par delivery will require no more than 

three parts per million of vomitoxin, which is expected to improve 

the cash futures relationship by 12 cents per bushel. 

The second reason is the industry standard for vomitoxin in the 

domestic milling and export markets is two parts per million, and 

we will implement this level in delivery specifications for the futures contract in September 2011, with three parts per million remaining deliverable at a 12-cent—actually, it is a 12-cent discount, 

at four parts per million, a 24-cent discount. This final change in 

the quality specifications for the wheat contract will align our par 

quality specifications with industry standards while providing the 

flexibility to deliver lower-quality wheat at a significant discount 

when higher quality is not available. 

It is possible that we will see some significant improvement in 

contract performance by mid-September and certainly by the end 

of the year. The basis has already strengthened. It was $2 last 

year, and as we have seen, the charts have gotten better, and as 

we checked it today, it was somewhere around 80 under, so—— 

If the results fail to meet our expectations, we have additional 

modifications at the ready and are prepared to continue to modify 

the contract or to introduce a new contract to provide a safe and 

55 

1See Exhibit No. 1, which appears in the Appendix on page 425. 

2See Exhibit No. 3, which appears in the Appendix on page 427. 

effective environment to permit producers and users to hedge their 

needs and to provide effective price discovery to the remainder of 

the market. We respectfully suggest that this is a more reasoned 

approach than the one that discourages market participation with 

the attendant risk of damage to market liquidity. 

We are committed to dealing effectively with the lack of convergence by attacking the structural problems regarding specifications 

in delivery. In this regard, we are aligned with the report’s recommendations. We do not, however, believe that restrictions on 

index traders beyond those that we already impose are anything 

but a distraction from our efforts. 

Thank you very much. 

Senator LEVIN. Thank you very much, Mr. Carey. 

Exhibit 1,1 which has been put up, and I think it is in your book, 

if we could put that up again, tracks the number of wheat futures 

contracts purchased by commodity index traders from 2004 to 2009. 

We obtained this data from the CFTC on index trading in the 

wheat market. It shows that commodity index traders have dramatically increased their purchase of wheat futures from 30,000 

contracts in 2004 to 220,000 in 2009. You have indicated in your 

prepared statement that from 2006 to the present, the percentage 

of long open interests held by commodity index traders fluctuated 

between 51 percent in January 2006, to 32 percent in October 

2006. The most recent data for July indicates the percentage to be 

46 percent. 

So I am correct, I believe, that you agree as a factual matter that 

since 2006, commodity index traders have typically held almost 

half of the outstanding wheat futures contracts on the Chicago Exchange, is that correct? 

Mr. CAREY. Yes, sir. 

Senator LEVIN. Would you also agree that prior to 2004, commodity index trading was not a big factor on the Chicago wheat futures exchange? 

Mr. CAREY. Commodity index trading? 

Senator LEVIN. Yes, in the Chicago wheat futures prior to 2004. 

Mr. CAREY. It has experienced tremendous growth. We didn’t 

have numbers prior to 2006, but according to these numbers, yes. 

Senator LEVIN. So you would agree that it was not a big factor 

prior to 2004? 

Mr. CAREY. But it existed. To what extent, I don’t have the numbers. 

Senator LEVIN. Do you believe that it was a big factor prior to 

2004? 

Mr. CAREY. No. I would expect that this chart is pretty accurate. 

Senator LEVIN. All right. Now, Exhibit 3 2 is a chart showing the 

basis or the gap between the futures and the cash prices for wheat 

on the expiration date for each of the five wheat contracts that 

were traded on the Chicago Exchange from 2005 to 2008. We obtained the final futures prices on the last day of each contract, then 

went to data compiled by the U.S. Department of Agriculture showing what the cash price was on that day in Chicago. The U.S. DeVerDate Nov 24 2008 14:05 Nov 16, 2009 Jkt 053114 PO 00000 Frm 00061 Fmt 6633 Sfmt 6601 P:\DOCS\53114.TXT SAFFAIRS PsN: PAT
56 

partment of Agriculture obtained its cash prices by asking elevators in the Chicago area to report their bids to buy wheat on that 

day. It then produced a daily price report which is available on its 

website. 

Would you agree that this data shows a significant jump in the 

basis since 2006? 

Mr. CAREY. Absolutely. Yes. There has been a lack of convergence, which is what we are trying to tackle right now. 

Senator LEVIN. Right. So you would agree that the basis, the 

price gap, is larger than has been historically the case, is that correct? 

Mr. CAREY. Yes, sir. 

Senator LEVIN. Now, were there changes in the contract that 

were made between 2004 and 2009? 

Mr. CAREY. Well, recent vomitoxin changes. I can’t remember the 

first time we went from five to four, but now we are going from 

four to three. But most of the changes have just taken place in the 

most recent July contract, sir. 

Senator LEVIN. And yet we see this major change in the basis 

while the same contract was in effect, is that correct? 

Mr. CAREY. Yes, sir. 

Senator LEVIN. So it can’t be that the contract is the problem, or 

can it be? 

Mr. CAREY. Well, it could be. 

Senator LEVIN. You say no expert says, for instance, that the increase in investment by index traders is the cause of the lack of 

convergence. You said no expert says that. 

Mr. CAREY. According to the reports that we had, that might 

have been a factor. But the reports—— 

Senator LEVIN. It might have been a factor? 

Mr. CAREY. Some part of it. I think there were other factors, too, 

as we recognize. 

Senator LEVIN. How big a factor is it? 

Mr. CAREY. I would leave that to the experts, and they didn’t—— 

Senator LEVIN. Well, we had three experts here today. We had 

one who was the head of the Commodity Futures Trading Commission. He said it is a factor. We then had the elevator operators representative here, Mr. Coyle, who said it is probably the principal, 

almost the exclusive factor. I would think he is an expert. He 

knows firsthand. Mr. Wands, of American Bakers, says that it was 

a significant factor in the lack of convergence. Are they not experts? They are out there every day in that area of work, are they 

not? 

Mr. CAREY. They have an opinion. 

Senator LEVIN. Is it an expert opinion? 

Mr. CAREY. From where they stand. 

Senator LEVIN. And they say that index trading is either exclusively or significantly a cause, or in the case of Mr. Gensler, a 

cause in the lack of convergence. And would you agree with any of 

those experts? 

Mr. CAREY. Would I agree with them? Not exclusively. We all 

have our own opinion. I would say that we have a global benchmark and a correlation of 92 to 96 percent to world wheat prices 

and that is why we are tackling the design issues, sir. And I think 

57 

that they have the opinion that this is the cause, the sole cause. 

I believe that there are a fair amount of causes to create this lack 

of convergence. 

Half of the conversation I heard today revolved around volatility 

versus lack of convergence. So there were a lot of issues being discussed and debated here, but this is a cause and I would agree 

with Mr. Gensler. It is a cause, but it is not exclusive. 

Senator LEVIN. Well, the only one who said it was exclusive, and 

that was the first time he testified, the first time around, was Mr. 

Coyle, and then he said a principal cause. I don’t think anyone 

ended up saying it is an exclusive cause. Is it a significant cause, 

and if it is a significant cause, it seems to me something has got 

to be done about it. We have either got to get position limits back 

on, or we have to do something which addresses that part of the 

cause. 

Now, if the contract is part of the cause, you will find out pretty 

soon, won’t you? 

Mr. CAREY. Yes, sir—— 

Senator LEVIN. By when? 

Mr. CAREY. Well, we heard Mr. Coyle, who is more involved in 

the cash grain market on a daily basis than I am, but he said that 

he would give it a couple of delivery cycles, and the vomitoxin 

change is September, and he said that he would hope within this 

cycle. And I think we are working hand-in-hand with him. We have 

a similar interest. Convergence is key and providing contracts that 

work is key. I think we also share the same opinion that just limiting participation without examining the problem and fixing the 

problem. If that is the sole problem, fine. But we want to remain 

a problem as the global benchmark for commodity trading and we 

want this convergence issue to be handled properly. 

Senator LEVIN. Well, I am glad to hear you acknowledge at least 

that it is a contributing factor. That is more than we got out of 

your printed testimony. Where in your printed testimony does it 

say it is a contributing factor to the lack of convergence? 

Mr. CAREY. I don’t believe it says that in there. 

[Pause.] 

Senator LEVIN. You said you should know whether any changes 

in the contract have a significant effect on the convergence issue 

and that would be two cycles, is that what you said? 

Mr. CAREY. Well, we are coming up to one more change in September, sir, and we hope to get through. I would echo Mr. Coyle’s 

remarks that we need to go through a couple of delivery cycles, 

whether it is December or whether it is March delivery. By that 

time, we should know whether or not this convergence is going to 

take place with these changes or if additional changes need to be 

put in. I believe that our staff is working with the Commission and 

with the industry to come up with a solution that does place convergence at the forefront of our changes. 

Senator LEVIN. Thank you very much. I will be right back. 

Mr. CAREY. Thank you. 

Senator COBURN [presiding]. Well, thank you for your testimony. 

You all do want the convergence problem fixed? 

Mr. CAREY. Absolutely. 

58 

Senator COBURN. It is not really good for your business in the 

long term, is it? 

Mr. CAREY. That is correct, Senator. 

Senator COBURN. It is not good for you as a market, either, is it? 

Mr. CAREY. That is correct, Senator. 

Senator COBURN. So people are going to start loading out of CME 

to somewhere else in the world if it is not fixed? 

Mr. CAREY. Yes, they will find another place. I think I disagree 

with ideas in some of the testimony that took place, that money 

can’t move offshore or to different marketplaces. Today, the Dalian 

Exchange in China trades more volume than the Chicago Board of 

Trade soybean, meal, or oil contract. Today, there is a wheat contract in France. I know that there has been rhetoric that says they 

are going to suppress this excess speculation, but I will tell you to 

look at what is going on in the world. There was an article Monday 

morning that oil trading is growing in London, where it doesn’t 

agree necessarily with what we are hearing. So yes, I think that 

we have to recognize that we live in a global environment. 

Senator COBURN. And do you agree with the gentleman from 

Goldman Sachs that people are looking to invest in assets that are 

hedging for their future and that one of the things they invest in 

is commodities, both hard and soft commodities? Do you agree with 

that? 

Mr. CAREY. Clearly. These swaps dealers exemptions, most of 

them aren’t speculators. Most of them are investors. 

Senator COBURN. OK. I am going to ask you a question as if I 

were a purist. If we have commodity markets, we have producers 

and we have end users, but those markets never really function 

very well unless you have a certain amount of speculators in there 

to help create the market, is that correct? 

Mr. CAREY. That is true. 

Senator COBURN. There is no question, and you would agree, I 

believe, that we have had a marked increase in activity in speculation, either through index funds or some other way, on these commodities? 

Mr. CAREY. We have had an increase in interest. We have had 

some extreme volatility, and we have had some very unusual situations that I think were a big part of the cause of this volatility, 

whether it is the ethanol you cited or whether these investors are 

coming into this area for a reason. 

Senator COBURN. Right. And so the gentleman from Goldman 

Sachs said he didn’t think position limits would solve the problem 

for a couple of reasons, and extrapolating from what he said, do 

you agree that there will be just more firms with smaller positions 

that will do more of that that ultimately might have more damage 

to the market, as he testified? 

Mr. CAREY. Yes, they could. The fact of the matter is, I am more 

concerned about exporting a business that we have here in the 

United States than I am about how people are going to try to access these markets. 

Senator COBURN. But if they can’t access your market, then you 

are not going to be able to export that business. 

Mr. CAREY. No, what I am saying is that somebody takes the 

business offshore—— 

59 

Senator COBURN. Yes. 

Mr. CAREY [continuing]. Or into a dark pool of liquidity, because 

investors will seek the marketplace and that asset class in a different way. 

Senator COBURN. The profitability—and I want to be fair in this 

hearing and I think the Chairman will agree—there is no question 

you have a financial interest in increased trading on your exchange, correct? 

Mr. CAREY. Yes, but we also know that if there is no integrity 

in our contracts, that people will leave. But yes, clearly, we get 

paid fees per contract. 

Senator COBURN. So if we eliminated tomorrow all index trading 

on your exchange, that would have a significant financial impact 

on CME Group? 

Mr. CAREY. Yes. Clearly, it could have some impact. 

Senator COBURN. I want to go back to this idea of convergence. 

I believe it is multifaceted and I believe index does have something 

to do with it. Tell me what you think are the factors that you have 

identified, as consistent with your testimony and anything else, 

that you think are the factors that have led to this lack of convergence. What do you think is going on? I mean, just flat out, what 

are all the variables that you all see, and after you tell me those, 

what do you see as the answer to fixing that? I know we have 

talked about the timing of getting some of these changes through, 

modifying the contract, but what do you see as the factors that are 

influencing this lack of convergence? 

Mr. CAREY. Well, I think that it was identified here by both Mr. 

Gensler and Mr. Coyle, in that it is a 400-million-bushel crop this 

year. It was 600 million bushels last year. Yet people come here because it is the global benchmark and it is where the liquidity is 

and so people want to trade it. And so we correlate more to a world 

price than we do to a Toledo or Chicago price, and so this is what 

is causing some problems in the marketplace and we have to find 

a way to bring convergence. But we are a financial services company and we want to be able to offer these products to the world. 

We want to remain the global benchmarks for grain trade. 

Senator COBURN. So one of the problems, you think, is because 

you are trying to—— 

Mr. CAREY. It is contract design, sir, and deliveries and these are 

the things that we are addressing. 

Senator COBURN. And you told the Chairman that you think that 

index does have some influence on it? 

Mr. CAREY. Yes, obviously, we have—— 

Senator COBURN. So we have contract design and index trading. 

What else? 

Mr. CAREY. Well, I think you had a period of tremendous volatility caused by factors, not just by speculation, but by world factors. The fact that last year, the wheat stocks in the world were 

the lowest since 1947, with the Marshall Plan. They were 60-year 

lows, and that is when President Truman was pretty angry about 

trading in wheat futures. So I think that and the ethanol pulling 

acres out of wheat production, I think we suddenly ran into the 

worst planting conditions last spring on top of energy prices, and 

we don’t control our destiny when it comes to energy prices in this 

60 

country, so that while there can be short-term surpluses and we 

look at these reserves, the world knows that we don’t produce 

enough oil to support our demand over time. 

So there are a lot of factors that would lead people into investing, 

but overall, there is still a fair amount of open interest in these 

contracts by these investors that we are talking about, and yet the 

markets have come down dramatically. So I think the markets are 

trying to work. 

Senator COBURN. Well, I would add a fifth factor. One of the reasons people were investing there is fear of not getting a return in 

other investment vehicles. 

Mr. CAREY. Absolutely. 

Senator COBURN. So we listed five, fear of not getting a return, 

ethanol and the shift in plantable acres, decreased worldwide reserves, index trading, and contract design. So are you all looking 

at the things that you can have a play on, the things that you can 

influence, do you have a plan, a design so that you address the 

ones that you can address? 

Mr. CAREY. We do, and we are meeting with the Commission and 

we are meeting with the industry and it goes back over a year. 

When we went to $12 or $13 a bushel in Chicago and farmers 

couldn’t sell, part of it was the banking crisis at the time. It was 

a strain that nobody had anticipated—— 

Senator COBURN. And the elevators couldn’t borrow money to buy 

wheat. 

Mr. CAREY. That is right, and suddenly the only place people 

could go was to the futures market, and so they went to the futures 

market. And so it took some time for this to settle down. But the 

market has converged. It has come back dramatically and we hope 

the changes will have it converge even better so that these kinds 

of problems don’t exist for these short hedges, because there 

was—— 

Senator COBURN. Well, I was just going to point to that chart. 

We are now—I think the end one on the last contract there was 

what, $1.20? 

Mr. CAREY. It could be. It was a little bit—yes, it is between—— 

Senator COBURN. And we are now, 80 cents? 

Mr. CAREY. Yes, somewhere between 80 and a dollar. 

Senator COBURN. What would you expect the convergence to be 

after these next two contracts close? 

Mr. CAREY. I would hope it would be well under 50 cents or 40 

cents. You have to take into account that prices are higher, the dollar is lower. All these things have taken place since these charts 

were first drawn. 

Senator COBURN. But that is still historically very high, you 

agree? 

Mr. CAREY. It is high, but the price went up because of the other 

problems. The fact that it is fulfilling, I think whoever said that 

should look at the price of grains today, and look at the price of 

corn today, because it is not a self-fulfilling investment. It just is 

not. 

Senator COBURN. All right. Mr. Chairman, thank you. I appreciate this hearing. 

Senator LEVIN [presiding]. Thank you very much, Dr. Coburn. 

61 

Let me close by thanking, first of all, our last witness. Mr. Carey, 

thank you for coming. 

We obviously have identified a problem here that the amount of 

index trading has created volatility, has contributed, many think in 

a major way, but has contributed, I think, by consensus to the lack 

of price convergence. That has had a very negative effect on a 

whole host of people. It doesn’t have to be that way. 

The CFTC has told us they are going to review these exemptions 

and waivers to see if they should be eliminated, and we look forward to that. That is going to happen hopefully in the next few 

months. Also in the next few months, you are going to redesign or 

continue to redesign your contract, Mr. Carey. We are going to see 

what kind of effect that has. 

And then there is the financial reform bill which is in Congress 

to regulate over-the-counter and derivative dealers, and that all is 

going to come into play in the fall, as well. So a lot of things are 

going to converge. There may not be price convergence in your 

wheat market, but there is going to be convergence of a lot of factors in the fall. 

We may have additional questions for our witnesses, so we will 

keep the record open for 10 days. 

We very much appreciate the cooperation of all of our witnesses 

and the hearing is adjourned. 

[Whereupon, at 5:49 p.m., the Subcommittee was adjourned.] 

(63) 

A P P E N D I X 

PREPARED STATEMENT OF SENATOR MCCASKILL 

I want to first thank the Subcommittee for their truly comprehensive investigation and leadership on this issue. This report 

hits home. For over the past year I have received numerous calls 

from farmers across Missouri who are seeing their livelihoods fade. 

Now volatility is nothing new in Ag markets, and frankly investment interest in the wheat markets does help to provide price discovery. But from 2007 to 2008 the average daily basis for wheat 

traded on the Kansas City Board of Trade rose by 51 cents per 

bushel. During 2008, the maximum basis reached to about 90 

cents. The market just doesn’t seem to be working and as the gap 

between futures and cash prices widens, the chances for our farmers to get a fair shake quickly declines. In this economy, price convergence is essential. 

My farmers are telling me that right now the price is holding at 

$5.42 a bushel—the grain elevator takes $1.20 and minus the cost 

of seed, fertilizer, rent, etc., they’re losing about $50 per acre. Multiply that by 3,000 acres or so and that’s a lot of money. The negative basis was much higher this time last year—as much as $ 2.29. 

What it boils down to is that this money comes out of the pocket 

of the farmer. It’s been likened to just giving away a third of your 

crop. 

As long as the negative basis keeps increasing, so does a farmer’s 

ability to turn a profit. Ultimately, if the vicious cycle continues, 

farmers are saying they just won’t plant as much wheat. That’s 

clearly not a solution any of us are looking for. 

I know I don’t have to remind my colleagues it’s not just a Missouri issue. Price convergence is critical for farmers to stop treading water everywhere. 

I implore the CFTC to work with the relevant exchanges and 

find sensible ways to establish convergence in the market. Missouri 

farmers need help and they need it quickly. With escalating input 

prices and the extreme volatility in these markets our farmers 

must have a quick solution. 

Thank you again for the Subcommittee’s work. I’ll be interested 

in hearing from the panels on how we can come to a compromise 

to restore natural order to these markets. 

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