January 1 7, 2008 

Mr. David Stawick, Secretary 

Commodity Futures Trading Commission 

Three Lafayette Center 

1155 21st Street NW. 

Washington, DC 20581 

Fax 202-418-5521 

Email secretary@cftc. gov 

Re: Revision of Federal Speculative Position Limits 

COMMENT 

Our company AGRIServices of Brunswick, Brunswick, Missouri is involved in the trading of 

grain in the U.S. Over the last 2.5 years we have experienced an abrupt decrease in the 

"convergence" of cash grain prices with the futures-market prices in Chicago, Kansas City, and 

Minneapolis. In each of the seven agricultural and processed commodities traded on those 

exchanges, cash prices have increasingly failed to ''converge," i.e., to reach an exact equivalence 

with futures, as is the primary function of futures markets, during each successive period when 

contracts expire. 

Agriculture is unique in that the entire year's supply is "manufactured" in one lump, at harvest 

time, creating a natural warehousing function in the industry: A huge quantity must be stored at 

harvest, to be allocated out as needed through the following summer. That is why there are 

forward futures contracts: To reflect a different future price relative to the spot contract, 

accurately representing carrying charges (i.e., warehousing profits) which signal the 

warehouseman (grain elevators) whether the market needs him to ship or store grain. Accurately 

reflecting cash-market carrying charges is the sole reason why futures markets were created, to 

avoid the boom-and-bust of each year's transition from an initial oversupply to final scarcity by 

transparently rationalizing the always-changing supply-and-demand reality of the moment. 

The mechanism, which keeps "paper" futures connected to cash prices, is convergence of the 

two, to the same price, during each successive futures contract's expiration. As a result, all 

participants are supposed to be able to view the nearby futures contract and know that its price 

will be precisely that of a well-defined grade of cash grain at the delivery point during that 

month. When that does not happen - or, worse, the current situation in which it structurally 

cannot happen - the futures markets revert back toward the boom-and-bust agricultural chaos 

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that it was invented to solve. The less that futures serve as an accurate proxy for cash, the greater 

the risk for elevators and others involved in the grain business, having as one effect that elevators 

are forced to lower their bids to farmers to force wider margins for themselves - they have no 

choice. 

The current situation is severe enough, for structural reasons, that volatility is being forced into 

the cash markets, which the futures are unable to reflect. Specifically, basis levels are much 

lower than they would be if futures markets were functioning normally, which they cannot due to 

inflexibility in the current rules. 

In a normal market, if basis levels were out-of-sync-low to futures, a hedger could rely on 

relationships between futures widening to signal elevators to hold grain back - providing an 

incentive to reduce their shipping volume - which makes cash-basis levels climb back to the 

intended closer relationship with futures. That is how the futures-market mechanism keeps cash 

grain and "paper" futures properly related. Regardless of what grain prices are, whether 

government biofuels subsidy sharply boosts price or huge hedge-fund speculation adds volatility, 

this cash-vs-futures connection must continue to function·or the "real" grain business, and the 

futures prices themselves, are at risk of dysfunction. 

If additional futures-buying is introduced by increased speculative position limits while spreads 

are prevented from widening further to account for greater borrowing costs, etc. - because 

they're already up against the artificial maximums in current rules- the divergence between cash 

and nearby futures ("cash basis') will be forced even lower. This doesn't just create loss and 

uncertainty for grain elevators, but also for farmers, industrial and livestock users, and everyone 

even peripherally involved. 

The National Grain and Feed Association's Country Elevator Committee made the following 

three comments: 

1. Increased volatility is being forced into the cash market, where country elevators 

continue to lose origination of farmer grain to long hedgers and organizations with large 

basis trading networks that can accomplish in cash that which cannot be accomplished in 

futures. In this environment, country elevators are unable to merchandise competitively 

without the confidence that convergence will occur. As such, the country elevator's role 

as the first hedger of price risk in the market is in peril. Removing the country elevator 

from the merchandising chain potentially removes its vital function of price discovery 

from the marketplace. 

2. Increased volatility in the cash market has decreased the agricultural producer's ability to 

utilize futures for price discovery and risk transfer. 

3 . Actions by traditional short hedgers to avoid the real or perceived risk due to the lack of 

consistent convergence are reducing utilization of futures. This is occurring· at a time 

when the CFTC's proposals would increase the demand for liquidity to balance the 

demand by the index and hedge funds. 
Without futures-exchange rules which allow sufficient flexibility for successful convergence 

under all price conditions, the resultant cash-futures divergence which the rules are aimed at 

preventing places the natural hedged short (the farmer and the country elevator) under so much 

pressure that he can be forced to withdraw from the futures market- a throwback to pre-futuresexchange days. That has already begun to happen. Essentially, while futures prices soar, the short 

futures hedger loses because his cash grain ownership becomes worth less relative to his hedge. 

Conversely, the long hedger profits by the artificial premium that the current rules confer on 

futures relative to the lower cash, when of course the two are supposed to be the same. · 

The volatility of short hedgers' cash grain position is increased, while the volatility of long 

hedgers' position is reduced. Lack of convergence due to inflexible contract rules means that by 

design the longs are advantaged relative to the shorts. 

"Convergence" is the primary regulator of futures markets, which are of course free markets 

open to all. But how can CFTC enact position-limit expansion for speculators when that will 

exacerbate an already-severe, quantifiable problem with the grain futures contracts' basic 

functioning? Futures prices are already outrunning the delivery rules' ability to link them to 

actual cash grain prices. 

For these reasons, we think adding more speculative interest to a futures market that already is 

demonstrably unable to converge, therefore not functioning well, is imprudent. Until the 

exchanges adequately address the lack of convergence with changes in contract design, we 

oppose increasing speculative limits. 

Respectfully, 

Roseanne Meyer 

Grain Merchandiser 

roseanne@agriservices.com