allen berg cotton co. 

P. 0. BOX 3254, CORDOVA, TN 38088-3254 • 7255 GOODLETI FARMS PARKWAY, CORDOVA, TN 38016 

June 16, 2009 

David Stawick, Secretary 

Received CFTC 

s Section 

~1(09 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

Re: 17 CFR Part 150 

COMMENT 

Whether to Eliminate the Bona Fl.de Hedge Exemption 

For Certain Swap Dealers and Create a New Limited 

Risk Management Exemption from Speculative 

Position Limits 

Dear Mr. Stawick: 

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Allenberg Cotton Co. is a division of Louis Dreyfus Commodities. It is the largest 

merchandiser of physical baled lint cotton in the world. Its uses the futures market to 

hedge its purchases and sales of cotton. 

We welcome the opportunity to comment on the appropriate regulatory treatment of swap 

dealers with respect to existing bona fide hedge exemptions and the concept for a 

potential conditional risk management exemption. 

The Commission has requested comments on fifteen specific questions in its concept 

release. The American Cotton Shippers Association has submitted a comment with its 

response on each question that was asked. We endorse ACSA's responses on each and 

every question. 

In response to the Commission's invitation we would like to supply herein our general 

view in this matter, and elaborate on how it applies to certain questions the Commission 

asked. 

A Division of the Louis Dreyfus Corporation 

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allenberg cotton co. 

We believe that the only type of risk that should qualify for an exemption from position 

limits in commodity futures markets is the risk associated with ownership of the 

underlying physical commodity. This is the vital concept at the core of the 

Commission's existing enforcement policy on contract manipulation. Allowing other 

types of risk to qualify for exemptions creates a dichotomy where the physical 

commodity becomes divorced from ownership of futures and the Commission therefore 

cannot identify manipulative practices and perform its enforcement responsibilities. 

Position limits exist to control the ability of speculative interests to unduly influence 

futures price movements. The only way that it is possible to isolate and identify 

manipulative practices is through observation of ownership of futures in relationship to 

ownership of underlying physicals. It therefore follows that the only entity that can 

possibly be entitled to a hedge exemption is someone with a commercial interest in the 

physical commodity. 

Last year large flows of money into and out of the cotton futures market resulted in 

enormous swings in basis levels such that ownership of futures did not provide a viable 

hedge on physical cotton. This situation fell squarely within the meaning of excessive 

speculation "causing sudden or unreasonable fluctuations or unwarranted changes" in the 

price ofthe commodity under the Commodity Exchange Act. In March of2008 the 

options equivalent futures price for cotton reached in excess of a dollar per pound 

notwithstanding the existence of a carryout in excess of 1 0 million bales, the highest 

stock level since the 1960's. 

Open interest ballooned as the price peak was reached, and then collapsed as futures fell 

back to physical levels. Some firms were unable to maintain their hedges due to 

extremely large margin demands. This was highly detrimental to cotton firms, some of 

which are no longer in business as a result. Even today some firms prefer to remain 

unhedged rather than risk exposure to such a situation again. 

The Act says that the Commission shall fix position limits to "diminish, eliminate, or 

prevent" such a burden on interstate commerce. The existing hedge exemption for 

certain swap dealers was a major contributing factor to the sudden fluctuation and 

unwarranted changes that occurred in the price of cotton last year. 

Allowing the hedge exemption for swaps dealers in effect created a giant loophole 

whereby their counter-parties were able to circumvent the limits that apply to speculative 

positions. 

The result was that by March 4, 2008, the open interest in cotton options and futures 

combined reached 546,650 contracts. According to the Commitments of Traders report 

non-commercial and index traders held net long positions on that day of 189,387 

contracts. The entire US cotton crop in the 2007/08 season was equal to only 187,120 

contracts. The accumulated position of these entities with no commercial interest in 

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allenberg cotton co. 

physical cotton was so large that it was able to cause a divorce in the traditional 

cash/futures relationship in cotton. 

The Commission's Question 1 asks, "Should swap dealers no longer be allowed to 

qualify for exemption under the existing bona fide hedge definition?" 

In response, it is clear from this experience that swap dealers should no longer be 

qualified for exemption under the existing bona fide hedge definition. 

The Commission's Question 2 asks, "If so, should the Commission create a limited riskmanagement exemption for swap dealers based upon the nature oftheir clients (e.g., 

being allowed an exemption to the extent a client is a traditional commercial hedger)?" 

In response, any limited risk management exemption for a swap dealer should only be 

allowed to the extent that the client is a traditional commercial hedger, and it should be 

subjected to reporting requirements identifying the activity of the client so that the 

Commission can ascertain whether speculative limits are being exceeded. 

The Commission's Question 8 contemplates the establishment of an exemption for risk 

taken on against index fund clients. Allowing index funds to qualify as hedgers 

contributed greatly to the divorce between cash and futures that occurred in cotton last 

year. On Mar 4, 2008, index funds held net long positions in options and futures 

combined of 111,288 contracts. This amount exceeded the entire US cotton carryout that 

year. The ownership had nothing to do with physical cotton. 

Entities with no commercial interest in physical cotton have been allowed to distinguish 

themselves as hedgers as they claim to use commodity futures to mitigate inflation risk. 

There are other markets such as TIPS that are bona fide venues to offset inflation risk. 

Allowing the commodity futures markets to be used for this purpose creates the potential 

for the futures market to become disconnected from the underlying cash commodity 

market. 

Any attempt to use the rationale that a hedge exemption is needed to manage inflation 

risk should be flatly rejected. Hedge exemptions should not be provided simply due to 

the fact that a person or entity wants financial exposure to commodities. That is just 

speculation presented in a masked form. 

To allow an entity to qualify for a hedge exemption on the basis of inflation risk or 

financial risk creates a situation whereby the Commission's anti-manipulation policies 

become unenforceable. The Commission does not consider financial risks when it 

considers enforcement proceedings against those actually engaged in the physical trade of 

cotton. Why should it consider such risks for other entities which have nothing 

whatsoever to do with cotton? 

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allenberg cotton co. 

As a commercial firm in cotton we have all kinds of financial risks associated with cotton 

that the Commission does not consider valid when it contemplates position limits or 

whether manipulation has occurred. The Commission looks only to our physical bales of 

inventory and purchase and sale commitments when considering whether we have 

stepped outside of our hedge exemption and entered into a speculative trade. It does not 

look, for example, to our millions of square feet of cotton warehouse space that we would 

like to keep filled. We have considerable financial risk associated with this and other 

cotton infrastructure we own. The Commission's policy is that it does not apply in 

determining hedge exemptions. 

This policy has served the Commission very well over many years. When risks not 

associated with the physical commodity carne to qualify entities other than commercial 

hedgers for exemption from position limits the result was unbridled speculation. 

Entities which do not have a commercial interest in physical commodities are by 

definition speculators in futures on those commodities, and speculative position limits 

should apply to those entities. 

Many investors want to hold commodities as part their portfolio. This is fine as long as 

everyone who does not have a commercial interest in the underlying physical commodity 

abides by speculative position limits on any futures market positions. 

Sincerely, 

Thomas F. Malone 

Chief Operating Officer 

Allenberg Cotton Co. 

Louis Dreyfus Commodities 

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