TO THE 

COMMODITY FUTURES TRADING COMMISSION 

PUBLIC MEETING TO DISCUSS RECENT EVENTS AFFECTING 

THE AGRICULTURAL COMMODITY MARKETS 

 

BOB STALLMAN, PRESIDENT 

April 22, 2008
The American Farm Bureau Federation (AFBF) respectfully submits its views to the commission 

as it reviews the turbulent conditions in the futures market. As the nation’s largest general farm 

organization and the representative of millions of farmers and ranchers in every state in the 

nation, AFBF has a vital interest in how commodity marketing issues affecting our members are 

perceived, examined and decided. We are seriously concerned about the effective performance 

of futures exchanges as mechanisms for price discovery and risk management. 

Over the past months, we have witnessed extreme price volatility, expanding and volatile 

cash/futures basis relationships, and the difficulty of hedgers to meet margin calls. In addition, 

the role of speculative and commodity-index-related trading in agriculture futures markets, while 

growing for some time, has reached historic levels and added to the uncertainty in these markets. 

The basic purpose of the Commodity Futures Trading Commission (CFTC) is to ensure that 

futures and options offered by the designated contract markets under its jurisdiction manage 

price risk and discover cash prices. 

However, the futures market mechanism is, at least, bent at this point in time, and the fact that 

several major grain and oilseed marketers are only offering firm crop price bids 60 days into the 

future is a rather ominous sign the breaking point might not be far away. 

 

Lack of Convergence Between the Futures and Cash Prices 

Convergence is the idea that futures prices by the close of the contract eventually equate to what 

is occurring in the cash market. It varies by commodity and geography, but historically the 

relationship between the cash and futures markets has been fairly constant with predictable 

seasonal variation. Certainly local market conditions might move the basis level around a few 

cents on any given day, but the underlying basis figures – predicated on the futures and cash 

markets coming together at the end of the contract – allowed all involved to function in a wellinformed manner. 

Today neither the convergence of futures to cash nor reasonable expectations of basis levels 

applies for a number of contracts. This is significantly increasing the risk faced by producers 

and will likely induce major structural change in the grain/oilseed/fiber handling sector over the 

next few months. 

These developments challenge producers’ abilities to develop and implement risk management 

programs for marketing their products. The problem is compounded by the fact that many 

producers are being asked to make firm price commitments for inputs. In some instances, they 

are even being asked to pre-pay for inputs they will not utilize until next crop year. This results 

in the uncomfortable position of producers locking in future input costs without similar 

opportunities in future crop prices. 

Possible technical solutions to these issues could be implemented by the exchanges either 

voluntarily or via order of the CFTC. For example, one reason futures prices may not be making 

an orderly convergence to cash prices is part of the process established in 2000 when the river 

system delivery process was instituted by the Chicago Board of Trade. This system introduced 
the concept of a certificate of delivery that does not have to be redeemed by any certain date. 

Consequently, there is little incentive for the taker to move the grain into the physical market and 

force convergence. There also has been much discussion regarding the exchanges’ increasing 

the cost of carrying these certificates by boosting the cost of grain storage. 

Some possible solutions to the convergence problem may be: 

1. We encourage the CFTC to require additional delivery points to prevent market manipulation 

and assure an adequate delivery system. We note the Kansas City Board of Trade is currently in 

the process of increasing its wheat contract delivery points from two to four. We would 

encourage other exchanges to consider similar changes. 

2. End the certificate of delivery and return to the notice process originally used for delivery 

against the futures contract. This should not cause any major disruption to futures trading. Once 

the change is made and traders realize delivery means actual physical acceptance of the 

commodity or that there will be some monetary penalty for re-tender, then we should see the 

orderly liquidation of open interest going into a contract delivery period and moving toward 

contract expiration and a more orderly convergence. 

3. An option which merits examination is cash settlement. There are cash-settled grain and 

oilseed contracts today; however, the volume for those contracts is probably too small to test this 

in practice. Moving to cash settlement should not be undertaken lightly, but it should be studied 

as a way to improve convergence. 

Impact of Higher Margin Requirements and Expansion of Daily Trading Limits 

Volatility is at a record high in the agricultural markets. With already high trading limits and 

high margin requirements, the average farmer has a difficult time using futures and options for 

price protection. Even larger commercial hedgers are having problems with financial liquidity. 

Daily trading limits are of great interest to our members. While the rationale behind the 

increased limits is to let the markets clear and resume trading, in practicality, margin calls have 

become prohibitive. In fact, many hedgers simply do not have sufficient lines of credit to cover 

these high margin calls. 

We request the CFTC analyze the possible effects on market participants of lowering the daily 

trading limits. We are not necessarily seeking to lower price limits, but we believe a study of the 

potential effects on margin requirements, risk, volatility, and financing charges could be 

instructive for the exchanges and market participants, as well as the commission. A thorough 

economic review should examine adjustments that could reduce volatility while still allowing the 

markets to clear. 

Role of Speculators and Commodity Index Traders 

As hedgers, our members understand that speculative interest is an important component of any 

commodity market by facilitating its primary function of price discovery and providing market 
liquidity. Though speculators – including small investors – have always been integral to market 

function, they are now playing an exponentially greater role than ever before. Market analysts 

report a continued, massive inflow of capital into the grain pits, much of it by long-only, 

passively managed index funds that buy futures and roll them forward according to a set 

schedule. 

According to Chicago-based agricultural research firm AgResource Co., total index-fund 

investment in corn, soybeans, wheat, cattle and hogs has increased to $42 billion, up from just 

over $10 billion in 2006 – more than quadrupling in less than two years. That number doesn’t 

even include the flood of index funds that have moved into other agricultural markets, primarily 

cotton, during the same period. Barron’s estimated in its March 31, 2008, cover story that “index 

funds right now account for 40% of all bullish bets on commodities.” 

The recent level of long positions translates to the funds actually “owning” significant amounts 

of the entire U.S. corn, soybean and wheat crops. Independent analyst Steve Briese calculated at 

the end of March that index funds had effectively bought 36.6 percent and 62.3 percent of the 

2007 domestic soybean and wheat crops, respectively. 

Trading activity by funds is certainly one of the contributing factors generating high futures 

prices for commodities. Ordinarily, this would appear to be positive for agriculture. But if the 

futures markets do not converge with cash markets, there is little information on what real price 

levels should be either for producers or consumers of the commodity in question. With 

convergence, even if futures market prices fall precipitously in the delivery month, there are still 

economic signals being sent that producers can respond to. Without convergence, these trades 

become just so much froth. 

In mid-March, index funds represented approximately 42 percent of the open interest in Chicago 

wheat, meaning that roughly two out of every five outstanding contracts were held by funds with 

limited need to trade on supply and demand fundamentals – they simply buy and hold. The 

result was a disconnect of the cash price (traditionally based on futures as a means of price 

discovery) from the high of the futures market. Forward contracting virtually ceased. 

Historically, AFBF has supported open market participation and encouraged interest from 

speculators as well as hedgers, and we continue to support market involvement. However, our 

policy also supports CFTC oversight to ensure that market integrity is maintained and to curb 

practices that result in artificial price swings. In essence, it is up to the CFTC to ensure that 

participants do not prevent the futures markets from serving their roles as price discovery tools. 

AFBF policy opposes restricting speculative funds from the commodity markets because they do 

provide pricing opportunities and liquidity that might not otherwise be available. We do not 

want to end speculative participation, nor do we believe the CFTC has that authority. Even if 

CFTC could restrict index fund investment activity, such an action could result in less liquidity 

and lower prices in the markets. 

However, we do have some concern that from time to time fundamental price movements may 

be overwhelmed by extreme levels of financial speculation. It is critical for hedgers trying to 
manage price risk of the physical commodity to fully understand who is in the market and, 

perhaps more importantly, why. Therefore, additional transparency about the funds involved in 

the futures market should be required so that the markets can fulfill their primary functions of 

price discovery and risk management. 

The CFTC is charged by Congress with ensuring the commodity markets do not become solely a 

speculative trading arena, rather than a price discovery/marketing tool for the agriculture 

industry. To that end, it must restore marketplace integrity with appropriate transparency. 

Conclusion 

We reiterate that we continue to support the CFTC’s regulation of the commodity futures 

business. While there has been discussion of merging the CFTC and the Securities Exchange 

Commission in response to the volatile trading environment, we vigorously oppose efforts to 

weaken the CFTC by transferring or reducing its authorities, or by combining it with the SEC. 

Finally, we thank CFTC officials for arranging this public meeting to better understand recent 

market happenings, and for allowing us to share producers’ views of current issues. We hope 

this discussion will inform the commission’s future actions where it has regulatory authority to 

correct market situations. If additional authorities from Congress are needed in order to ensure 

future market functionality, we stand ready to work with the CFTC and legislators.