June 15, 2009 

David Stawick, Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

* *• * * O.F.T.C. 

I A OFF.·ICE OF THE SECRETARIAT 

~009 JUN 16 Arl 9 19 

Re: Whether to Eliminate the Bona Fide Hedge Exemption for Certain Swap dealers 

and Create a New Limited Risk Management Exemption From Speculative Position Limits (17 

CFR Part 150); RIN 3038-AC40 

Dear Secretary Stawick: 

Thank you for the invitation to provide comments on behalf of the American Feed Industry Association 

(APIA) regarding the Commodity Futures Trading Commission (CFTC) referenced Advance Notice Of 

Proposed Rulemaking (ANPR) published in the Federal Register on March 24, 2009. 

Feed represents approximately 70 percent of the on-farm cost of raising livestock and poultry. With the 

majority of the industry's input supplies priced on, or in reference to regulated commodities markets; :we 

significantly depend on an efficient and well-functioning futures market for both price discovery and,risk 

management. 

While it is clear that feed and food price increases in 2008 were the result of several factors, it has become 

evident that the index fund speculative effect was significant and can be readily addressed. This opportunity 

is still active and the effect will reoccur without the removal of the speculative position limit exemption for 

index funds on agricultural and energy commodities. 

Now celebrating its Centennial year, APIA, based in Arlington, Va., is the world's largest organization 

devoted exclusively to representing the business, legislative and regulatory interests of the U.S. animal feed 

industry and its suppliers. APIA also is the recognized leader on international industry developments. 

Members include more than 500 domestic and international companies and state, regional and national 

associations. Member-companies are livestock feed and pet food manufacturers, integrators, pharmaceutical 

companies, ingredient suppliers, equipment manufacturers and companies which supply other products, 

services and supplies to feed manufacturers. 

The feed industry makes a major contribution to food safety, nutrition and the environment, and it plays a 

critical role in the production of healthy, wholesome meat, milk, fish and eggs. More than 75 percent of the 

commercial feed in the United States is manufactured by APIA members. 

2101 Wilson Blvd., Suite 916, Arlington, VA 22201 

Tel.: 703/524-0810 FAX: 703/524-1921 E-mail: afia@afia.org www.afia.org 
American Feed Industry Association 

Comments to CFTC RIN 3038-AC40 

The Commodities Exchange Act (CEA) provides physical commodity customers (agriculture, airlines, 

transportation, etc.) with a viable price discovery mechanism and hedging as a risk mitigation tool for 

forward commodity needs and commitments. 

This process requires traditional speculator participation in markets to provide a buyer/seller relationship and 

market liquidity; however, this relationship changed in 2000 when Congress codified earlier CFTC 

regulatory action granting Wall Street banks an exemption from speculative position limits for hedging overthe-counter swaps and index transactions. These banks represent institutional investors, including pension 

funds, hedge funds, investment banks and university endowments. It is important to note that while these 

funds may be hedging their invested capital, the initial investments are speculative, and they are not hedging 

needs or commitments for the underlying commodities. AFIA strongly believes this exemption should be 

ended. 

There is large financial speculative interest in agricultural commodity futures markets today. In some crops, 

the trading on a daily basis almost meets the entire U.S. crop volume, significantly adding to price volatility. 

The size and influence of these large financial players was never contemplated during enactment of the 

original Commodity Exchange Act (CEA). The net result is speculator demand actually increases the more 

prices increase, providing unrealistic commodity price levels relative to true commodity demand. Index 

speculators do not normally sell, but rather buy and hold their index positions, thereby producing an artificial 

economic increase in demand and, in turn, commodity market pricing. 

As a result, the physical commodity customer today is unable to attain convergence between its hedge 

position and the cash market. The physical purchaser is forced to borrow significant funds to cover margin 

calls and/or sell commodities, usually at an inopportune time, to cover these distorted hedge costs. Thus, 

hedging as a risk management tool is no longer effective for its intended users. 

The magnitude of inflow of index speculator funds is dramatic, as is clear from the following examples: 

• Index speculators increased investments in 25 commodities from $13 billion in 2003 to $260 billion 

in 2008. 

• Index speculator investments in petroleum futures have increased by 848 million barrels over the last 

five years, almost matching the actual increase in Chinese demand of 920 million barrels of oil in the 

same five-year period. 

• Index speculators have stockpiled enough corn futures to fuel the entire U.S. ethanol industry at full 

capacity for a year. 

• Index speculators have stockpiled sufficient wheat futures to supply every American citizen with all 

the bread, pasta and baked goods they can eat for the next two years. 

Following is a summary of key facts and observations regarding the index funds involvement on commodity 

markets: 

1. The correlation between crude oil prices, corn prices and the S&P Goldman Sachs commodity index 

fund (GSCI) over the last two years is undeniable (see chart page 7). 

2. Index funds owned nearly the entire net long position in corn, soybeans and wheat as of March 17, 

2009 (see charts page 8). 

3. As of May 26, 2009, approximately $125.6 billion was invested in index funds; $84 billion was 

tracking the GSCI (60 percent of the total), $41.7 billion following the Dow Jones AIG fund (29.6 

percent of the total) and $15.2 billion tracking all others (10.8 percent) (see graph page 9). 

2 
American Feed Industry Association 

Comments to CFTC RIN 3038-AC40 

4. At the peak of the corn market in June 2008, GSCI fund investments had a value of $142.73 billion, 

now down to $84 billion (see table page 9). 

5. The allocation of investments in the GSCI index are 66.9% to energy, 13.8 percent to grain, 5.6 

percent to livestock, 3.9 percent to softs and 9.8 percent to metals. As a result, the driver of grain 

prices has been energy prices. If energy prices rise sharply, as occurred in the summer of 2008, a 

GSCI-tracking fund has to buy more grain (primarily corn) to maintain their balanced portfolio on a 

monthly basis. Conversely, if energy prices drop sharply, then they are forced to sell the grain 

positions. As oil goes, so goes corn, and to a lesser extent wheat and soybeans. (see chart page 10). 

At the peak of the grain markets, index funds owned over 450,000 contracts, or 2.25 billion bushels of corn. 

This represented 17 percent of the U.S. crop. With GSCI index investments consisting of approximately 63 

percent of index fund capital, this would translate to one investment strategy owning approximately 1.41 

billion bushels-- or 10% ofthe U.S. crop. This compares to what would be a normal speculative position 

limit of 22,000 contracts or 110 million bushels. This is staggering: 1.41 billion versus 110 million, 

controlled by one strategy. (see pages 11 and 12). 

Following are APIA's comments to the specific questions included in the Request for Comments: 

A. General Advisability of Eliminating the Existing Bona Fide Hedge Exemption for Swap 

Dealers in Favor of a Limited Risk Management Exemption 

1. Should swap dealers no longer be allowed to qualify for exemption under the existing bona fide 

hedge exemption? 

Swap dealers should only be granted an exemption if they can certify to the Commission that 

their clients are producers or users of the underlying agricultural or energy commodity 

(Commercial Hedgers). 

• CFTC should adopt a "see through" policy to clearly identify the true commercial 

(producers or users of the agriculture or energy commodities) vs. speculative 

investors. 

• CFTC should change its classification of current hedge exempted index funds and 

swap dealers from Commercial because they do not take delivery of the commodity, 

nor are they a physical participant. 

2. If so, should the Commission create a limited risk-management exemption for swap dealers 

based upon the nature of their clients (e.g., being allowed an exemption to the extent a client is a 

traditional commercial hedger)? 

The nature of the client should determine appropriate exemption or position limits: 

• A "see through" policy is required to clearly define the nature of the client. 

• If the client is a commercial client, the exemption should apply to the client. 

• If the client is a speculator, appropriate position limits should apply to the client. 

3. If the bona fide hedge exemption were eliminated for swap dealers, and replaced with a new 

limited risk management exemption, how should the new rules be applied to existing futures 

positions that no longer qualify for the new risk-management exemption? 

3 
American Feed Industry Association 

Comments to CFTC RIN 3038-AC40 

Swap dealers should be allowed to hold existing futures positions in excess of current 

Federal speculative position limits until the futures position expires, but must be compliant 

no later than six months from the effective date of the new rules. 

B. Scope of a Potential New Limited Risk Management Exemption for Swap Dealers 

4. The existing bonafide hedge exemptions granted by the Commission extend only to those 

agricultural speculative position limits. Should the reinterpretation of bonafide hedging and any 

new limited risk management exemption extend to other physical commodities, such as energy 

and metals, which are subject to exchange position limits or position accountability rules? 

The changes should apply consistently to all commodities that have position limits or 

accountability limits. 

• This is particularly relevant to energy futures, given the demonstrated correlation 

between crude oil prices and agriculture commodity prices. 

C. Terms of a Potential New Limited Risk Management Exemption for Swap Dealers 

5. If a new limit risk management exemption were to be permitted to the extent a swap dealer is 

taking on risk on behalf of commercial clients, how should the rules define what constitutes a 

commercial client? 

Commercial clients should be defined as those that are physical producers, processors, 

manufactures or merchandisers of the commodity, and who depend on the markets for 

efficient price discovery function and: 

• Take a position or transaction in acontract for future delivery or in a commodity 

option in the commodities exchange to manage the price risk of commodities for 

these physical uses, and 

• Time their contracts or options to terminate with the ultimate sale or use of the 

physical commodities. 

6. How should the Commission (and, if applicable, the responsible industry self-regulatory 

organization (SRO)) and the swap dealer itself verify that a dealer's clients are commercial? Is 

certification by the dealer sufficient or would something more be required from either the dealer 

of the client? If so, what should be reported and how often- weekly, monthly, etc.? 

• Use the present clearing firm system to track and monitor commercial investors 

daily. 

• Swap dealers have the responsibility to clarify if clients are commercial (by the 

above definition) or non-commerical and obtain representation in writing from their 

clients. 

7. For a swap dealer's noncommercial clients, should the rules distinguish between different classes 

of non-commercials - for example ( 1) clients who are speculators (e.g., a hedge fund); (2) clients 

who are index funds trading passively on behalf of many participants; and (3) clients who are 

intermediaries (e.g., another swap dealer trading on behalf of undisclosed clients, some of whom 

may be commercials)? 

Including this distinction within the rules would enhance transparency. However, as each of 

these classes is non-commercials, they should each be subject to the appropriate speculative 

position limits. 

4 
American Feed Industry Association 

Comments to CFTC RIN 3038-AC40 

8. If a swap dealer were allowed an exemption for risk taken on against index-fund clients, how 

would the dealer satisfy the Commission that the fund is made up of many participants and is 

passively managed? Is certification by the dealer or fund sufficient or should the dealer or fund 

be required to identify the fund's largest clients? 

• An exemption for a swap dealer should only be granted where the dealer can verify 

that its clients are commercial (per the definition provided in question 5). 

• An exemption should only be allowed for the manager in control of the commodity 

investment. Thus, a passively managed fund should not be provided with an 

exemption from the speculative position limits. 

9. If a swap dealer were allowed an exemption for risk taken on against another intermediary, how 

would the dealer satisfy the Commission that its intermediary client does not in turn have 

noncommercial clients that are in excess of position limits? Is certification by the dealer or 

second intermediary sufficient or should the dealer or intermediary be required to separately 

identify the intermediary's largest clients? 

The exemption should only be allowed if the intermediary can verify its clients are 

"Commercial" (per the definition provided in question 5) and must be subject to the same 

recordkeeping and reporting rules included in the special calls for information. 

10. What futures equivalent position level should trigger the new limited risk management 

exemption reporting requirement? For example, under the rules of the on-going special call to 

swap dealers and index funds described earlier, a swap dealer must report any client in any 

individual month that exceeds 25 percent of the spot month limit, or the net long or short 

position of a client that in all months combined exceeds 25 percent of the all-months-combined 

limit. 

The same levels that trigger inclusion in the Special Call Report should also trigger a new 

limited risk management exemption reporting requirement. 

II. If none of a swap dealer's clients exceed required reporting levels in a given commodity, or none 

of such clients exceed reporting levels in any commodity, what type of report should be filed 

with the Commission -e.g., a certification by the swap dealer to the Commission to that effect? 

The swap dealer needs to accept the responsibility to act as clearing and provide monthly 

reports on individual investors and their positions. 

I2. Should there be an overall limit on a swap dealer's futures and option positions in any one 

market regardless of the commercial or noncommercial nature of their clients? For example, "A 

swap dealer may not hold an individual month or all-months-combined position in an agriculture 

commodity named in I50.2 in excess of 10 percent ofthe average combined futures and deltaadjusted option month-end open interest for the most recent calendar year." 

With the appropriate "see through" transparency of investors' status (commercial vs. noncommercial) and reporting of positions and enforcement of the appropriate speculative 

position limits, there is not a need to place an overall limit on swap dealers, as long as its 

clients are in compliance. 

5 
American Feed Industry Association 

Comments to CFfC RIN 3038-AC40 

13. If a new limited risk-management exemption for swap dealers is created, what additional 

elements, other than those listed here, should be considered by the Commission in developing an 

exemption? 

We believe the recommendations proposed in these comments will provide the transparency, 

reporting, and enforceable position limits required. 

D. Other Questions 

14. How should the two index traders who have received no-action relief from Federal speculative 

position limits (see footnote 15) be treated under any new regulatory scheme as discussed 

herein? 

• Given the significant position that these two index traders have acquired, these 

recommendations will only be effective if all index traders held to the same 

speculative position limits and compliance requirements. 

• These index traders should be allowed to hold existing futures positions in excess of 

current Federal speculative position limits until the futures position expires, but must 

be compliant no later than six months from the effective date of the new rules. 

15. What information should be required in a swap dealer's application for a limited risk 

management exemption? 

If a limited risk management exemption is implemented, the swap dealer should be required 

to: 

• Certify that its clients are commercial (per the definition provided in question 5). 

• Accept responsibility to act as clearing for its clients and provide monthly reports on 

individual investors and their positions. 

• Submit to special calls for information from the Commission and exchanges. 

• Certify that futures positions will be terminated by first notice day. 

APIA appreciates the opportunity to provide comments. Please do not hesitate to contact me if I can provide 

further information or you have questions regarding the feed industry's position on this recommendation. 

APIA looks forward to working with the Commission to ensure the markets remain an effective tool for the 

end-users. 

Respectfully submitted, 

Joel G. Newman 

President & CEO 

6 
American Feed Industry Association 

Comments to CFTC RIN 3038-AC40 

Relative Value of the GSCI Index vs. Crude Oil and Corn 

220.-------------------------------------------------------------------~ 

---.-- GSCIIndex 200+-----1 --- Crude Oil 

--Corn Futures 

-- CrudeOil 

40+------~------~------~----~--~--~------~----~------~------~~ 

Jun-07 Aug-07 Nov-07 Jan-08 Apr-!i8 . Jun-08 Sep-08 Dec-08 Feb-09 May-09 

Source: Brock Associates, 2009 

7 
American Feed Industry Association 

Comments to CFTC RIN 3038-AC40 

Corn: Commitments of Traders 

Futures and Options Combined, as March 10,2009 500000 .---------.;__ ______ _:_ ____ ---'. ____ --, 

300000 

u "

E 100000 

E 

0 

u 

;; -100000 

.., 

"' ~ 

0 -300000 8 

.,; 

-500000 

Source:CFT -700000 .L.:__c..:::_:_ _______________________ _j 

3/10/2008 5110/2008 7110/2008 9/10/2008 11/10/2008 1/10/2009 3/10/2009 

-Large Speculators -Commercial -.Small Participants - · ·- Index Funds I 

Source: Brock Associates, 2009 

Wheat: Commitments of Traders 

Futures and Options Combined as of March 10,2009 250000 .----------------------------, 

200000 ·· .... 150000 

tJ 

~u 100000 

50000 

~ E 

~ -50000 

-100000 

Source: CFTC -200000 .L_ _________________________ _j 

3110/08 5/10/08 7110108 9/10/08 11/10/08 1/10/09 3110/09 

.--------------------------------------, 

-Large Speculators --Commercial -Small Participant~ - ··- Index Funds 

Source: Brock Associates, 2009 

Soybeans: Commitments of Traders 

Futures and Options Combined, as March 10 , 2009 300000,---------------------------, 

200000 

tl !! 100000 

E 

0 

u 

] 

.., ~ 

8 -100000 

.,; 

-200000 

Source: CFTC 

~oooooL--------------------------~ 

3110/2008 5/1012008 7110/2008 9/1112008 11/10/2008 1/10/2009 311012009 

I -Large Speculators --Commercial ----Small Participants - · ·- Index Funds I 

Source: Brock Associates, 2009 

8 
American Feed Industry Association 

Comments to CFTC RIN 3038-AC40 

Relevant Statistics for Investor Activity 

Total Investment* 4/29/2008 6/17/2008 1 0/28/2008 2/17/2009 

S&P GSCI $126,838 $142,729 $52,949 $56,980 

DJ-UBS $90,985 $98,916 $39,316 $28,312 

Total $217,824 $241,645 $92,265 $85,291 

Total Cash Injections ** 

S&P GSCI -$65 $2,141 -$2,031 -$389 

DJ-AIG $1,902 $1,805 -$4,056 -$656 

Source. PKVerleger LLC 

* Million·s as of Date **Millions, Four-Week Moving Average 

Money in Commodity Index Funds* 

Other, $8.9 

'Figures are the Industry's best estimate, as of May 26, 2009 

Source: Brock Associates, 2009 

9 

Rogers 

International 

Commodities, $6.3 

5/26/2009 

$83,930 

$41,682 

$125,611 

$943 

-$5 
American Feed Industry Association 

Comments to CFTC RIN 3038-AC40 

Commodity Index Funds 

100.0% 

90.0% 

80.0% 

70.0% 

60.0% 

50.0% 

40.0% 

30.0% 

20.0% 

10.0% 

0.0% 

Rogers International 5 & P Goldman Sachs 

Commodities Commodities 

Dow Jones AIG 

Commodity 

Deutsche Bank Liquid Reuters/Jefferies CRB 

Commodity 

li!i Energy II Grain [] livestock D Softs • Meta Is I 

Index Fund Position 

500,000 

450,000 

400,000 

350,000 

.!!! 300,000 u 

Ill 

... 

E 250,000 8 

-0 200,000 '1:1: 

150,000 

100,000 

50,000 

~ 

"' .., 

s 

... 

:::1 .., i .. 

en 

Source: Brock Associates, 2009 

--soy 

"' 

~ z 

-+-wheat 

::; 

... 

:::1 .., 

10 

' 

=~~-;~ r·-----------------------, 

"" 9 

c 

"' .., "" "" l i l!l 

c 

"' .., 
American Feed Industry Association 

Comments to CFTC RIN 3038-AC40 

INDEX FUND POSITIONS 

in Corn, Wheat and Soybeans 

May 6, 2008 

Commodity Net long Contracts #of Bushels %of total Market Value* 

Corn 443,560 2.2 Billion 55.1% $13.1 Billion 

Wheat 192,310 961 Million 23.9% $5.06 Billion 

Soybeans 169,119 845 Million 21.0% $12.3 Billion 

Total 804,989 4 Billion $30.5 Billion · 

March 17, 2009 

Commodity Net long Contracts #of Bushels %of total Market Value* 

Corn 226,611 1.13 Billion 49.3% $4.41 Billion 

Wheat 130,845 654 Million 28.4% $3.61 Billion 

Soybeans 102,617 513 Million 22.3% $4.68 Billion 

Total 460,073 2.3 Billion $12.7 Billion 

Source: CFTC Commitment ofTraders 

* Market value estimated as closing price of nearby futures on reporting date 

11 

% oftotal % of US Production 

43.0% 17% 

16.6% 43% (all wheat) 

40.3% 31% 

%of total % of US Production 

34.7% 10% 

28.4% 26% (all wheat) 

36.8% 16% 
American Feed Industry Association 

Comments to CFTC RIN 3038-AC40 

Index Fund Net Position as% of Open Interest 

Corn Ch. Wheat Soybeans Soy Oil cattle Cotton Hogs KC Wheat 

Index Fund Net Position as %of US production 

Corn Ch. Wheat Soybeans Soy Oil Cattle Cotton Hogs KC Wheat 

Source: Brock Associates, 2009 

12