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125() EYe St., N. W.. Suae 1003. Wmhinglon, D.C. 20005-3922, Phone: [2021289-0873, FAX: (21)2)289-5388. Web Silo: www.ngfa.org 

Mr. David Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

January 28, 2008 

f 

COMMENT 

RE: Risk Management Exemption From Federal Speculative Position Limits 

Dear Mr. Secretary: 

This letter transmits the position of the National Grain and Feed Association 

(NGFA) on the Commodity Futures Trading Commission (CFTC) proposal to establish a 

new risk management exemption for index and pension funds, as published in the 

November 27, 2007 edition of the Federal Register. 

The NGF A is the national trade association representing the grain, feed and 

processing industry. About 900 companies nationwide comprise the NGFA's 

membership, including grain elevators, feed manufacturers, grain and oilseed processing 

companies, futures commission merchants, introducing brokers, biofuels producers and 

marketers, flour millers, integrated animal operations and related commercial businesses. 

We estimate these companies operate upwards of6,000 facilities nationwide. The 

NGFA's member firms are traditional hedgers who rely on efficient and predictable 

performance of U.S. futures markets and contracts to manage inventory and price risk 

and to assist their farmer-customers to market their production. 

The NGF A is opposed to establishing a hedge exemption for index and pension 

funds at this time. We recommend that CFTC reconsider the stance it has taken on this 

proposal, with the understanding that agricultural futures markets were established with 

an economic purpose to serve as efficient, central public pricing and hedging vehicles for 

grain and oilseeds- a function that is not being well-served today. The CFTC may also 

want to evaluate any future no-action requests for hedge exemptions from index and 

pension funds and similar investment vehicles in this same light. 
Mr. David Stawick 

January 28,2008 

Page2 

Rationale 

In our letter of Jan. 21, 2008, in response to the CFTC's proposal to increase 

speculative position limits, we detailed some of the conditions in today's agricultural 

marketplace that led to the NGFA's position on the proposed risk management 

exemption. To recap: 

Today's agricultural marketplace is undergoing dramatic change: tight stocks, 

strong demand growth, higher transportation costs, and a seemingly endless supply of 

investment capital that wants to own agricultural commodities. At the same time, a lack 

of consistent cash and futures convergence has in some cases dramatically reduced 

hedging utility of the exchange-traded contracts and raised uncertainty for future 

performance. 

Together, these changes have resulted in an environment that is causing severe 

financial stress to commercial grain hedgers. With lending requirements to fmance 

inventories and margining at several multiples of usual levels, grain elevators are running 

up against borrowing limits. Banks, wary of convergence issues noted above, are 

beginning to restrict fmancing - particularly to hedge deferred grain purchases. One 

result is that some grain buyers are restricting or completely eliminating bids for deferred 

grain purchases from producers. 

Another consequence is that some elevators are being forced to liquidate 

inventories to eliminate margin calls and to free lines of credit for margin calls on 

deferred ownership. There is a genuine risk of "fire sales" if grain elevators run out of 

margin money- and to reiterate from the Jan. 21 letter, these are not grain elevators 

speculating on futures price movement - these are simply prudent operators hedging 

grain purchases from producers. 

In this environment, the marketplace is ill-equipped to efficiently absorb more 

investment capital and perform its core function of serving as an efficient tool for 

businesses hedging physical grain purchases - particularly when virtually all that 

investment capital is long-only and a large share of open interest essentially is "not for 

sale" for long periods of time. 

While there are those who might contend that the risk management exemption 

could provide a financial hedge of invested money for the middleman, the NGF A's view 

is that agricultural futures markets were established for the purpose of serving as 

efficient, central public pricing and hedging vehicles for grain and oilseeds. Until that 

purpose is fulfilled, we believe it is inappropriate to establish a direct, new route to the 

marketplace for more investment capital which could exacerbate current problems. 

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Mr. David Stawick 

January 28, 2008 

Page 3 

Recommendations for Analysis 

In addition to several recommendations for analysis in our spec limit letter, the 

NGF A would like to pose these additional questions for analysis specific to a potential 

risk management exemption for index and pension funds: 

1) What would be the impact on convergence of grain and oilseed contracts of 

establishing a new risk management exemption? 

2) What would be the impact on agricultural futures volatility of establishing a new risk 

management exemption? 

3) What are projected impacts on agricultural futures market volumes if index and 

pension funds are allowed to go directly on-exchange with positions exceeding spec limit 

levels? Will such action attract more investment capital than might be expected under the 

current regulatory approach? 

4) Is there evidence that a risk management exemption would allow speculative 

investors to take larger positions on the "short" side of the market and bring better 

balance to the marketplace? Have any index or pension funds, or swaps dealers hedging 

OTC transactions with such funds, taken short positions? How long do such funds, or 

swaps dealers hedging OTC transactions with such :fut).ds, typically hold their long 

positions before rolling? 

5) The CFTC has issued several "no action" letters to funds allowing them to exceed 

spec limits. What have been the impacts of those actions? Have any of these market 

participants taken "short" positions in agricultural futures markets? Given current 

conditions in agricultural markets, does the CFTC envision issuing more no-action letters 

if requested? 

6) The CFTC approved a hedge exemption for swaps dealers in 1991. Is there 

information on volumes of over-the-counter business being hedged in the agricultural 

futures markets by swaps dealers? Have any swaps dealers taken "short" positions? 

7) Are there instances in which firms normally classified by CFTC as commercial 

hedgers engage in an OTC transaction with an index or pension fund or similar entity and 

then hedge futures on-exchange? Are such transactions reflected in the "Index" category 

ofthe Commitments ofTraders report? Is any additional volume of investment capital 

being categorized as "Commercial" instead of"Index" due to the way funds or other 

products are designed? 

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Mr. David Stawick 

January 28, 2008 

Page4 

Answers to these questions should help all market participants determine whether a hedge 

exemption for index and pension funds is advisable, and under what conditions 

exemptions should be granted. 

As always, the NGF A ·deeply appreciates the opportunity to provide input. We 

look forward to a constructive conversation with CFTC and other market participants to 

help ensure that agricultural futures markets remain an effective tool for commercial 

grain hedgers. 

Sincerely, 

Rodney Clark 

Chair, Risk Management Committee 

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