~FI~ COMMENT 

AMERICAN FEED INDUSTRY ASSOCIATION 

February 9, 2009 

Mr. David Stawick 

Secretary of the Commission 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW. 

Washington, DC 20581 

.-:·:..) 

Re: Significant Price Discovery Contracts on Exempt Commercial 

Markets; Proposed Rule 

Dear Secretary Stawick: 

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

Industry Association's (AFIA) regarding the Commodity Futures Trading Commission 

(CFTC) Significant Price Discovery Contracts on Exempt Commercial Markets Proposed 

Rule. 

AFIA members represent over 70% of the commercial feed and pet food manufactured in 

the United States each year, and is devoted exclusively to representing the business, 

legislative, regulatory and educational interests of the animal feed industry and its 

suppliers. 

AFIA membership includes 560 domestic and international companies, as well as state, 

national and regional agribusiness associations. Membership includes feed and pet food 

manufacturers, livestock and poultry integrators, animal health companies, ingredient 

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

and supplies to feed manufacturers. 

The feed industry makes a critical and significant contribution to food safety, nutrition 

and the environment. Given feed represents approximately 70% of the on-farm cost of 

raising livestock and poultry, our industry plays a critical role in the safe and affordable 

production of meat, milk and eggs. 

AFIA strongly supports the expanded CFTC regulatory authority over exempt 

commercial markets (ECMs) which had previously largely been outside the 

Commissions' regulatory reach. As defined in the proposed rule, ECMs that meet the 

criteria of significant price discovery contracts (SPDCs) must be subject to the same 

oversight, including reporting and speculative position limits, as designated contract 

markets (DCMs) to ensure the markets operate efficiently for both end users and 

speculators. AFIA applauds you for your aggressive action to enhance commodities 

market oversight and to mitigate any future disruptions speculator activity may have on 

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

Tel.: 703/524-0810 FAX: 703/524-1921 E-mail: afia@afia.org _ www.afia.org 

\,_.,.. 
~FI~ AMERICAN FEED INDUSTRY ASSOCIATION 

energy and agriculture commodity prices. This rule fulfills three of our previous 

recommendations and we appreciate your consideration to these. 

The U.S. feed industry is the single largest purchaser and user of com and soybeans, as 

well as their processed meals and byproducts. It is critical the grain, oilseed and 

ingredient commodity markets accurately reflect true supply and demand situations for 

these commodities. 

As you are aware, the agriculture industry experienced unprecedented volatility in 

commodity markets in 2008, which significantly affected the viability of many livestock 

and poultry farms and feed industry businesses. For example, com markets rose $3.92 

per bushel between January 1, 2008, and its peak on July 8, 2008, (an increase of 106 %), 

but then went into freefall, with prices dropping to $3.89 per bushel by December 31, 

2008. This resulted in significant feed cost increases for poultry and livestock producers, 

as well as cash flow challenges for the feed industry. 

During this extreme fluctuation, the physical commodity customer was unable to attain 

convergence between its hedge position and the cash market. Many physical purchasers 

were forced to borrow significant funds to cover margin calls and/or sell commoditiesusually at an inopportune time -to cover these hedge costs. Thus, hedging as a risk 

management tool was no longer effective for its intended users. As a result ofthe higher 

capital costs required by the increased volatility, several end-user firms reduced their use 

of these markets. This defeated the fundamental purpose of the futures markets. 

The ensuing commodity price declines did not provide immediate relief, as many of the 

producers and industry companies had attempted to protect themselves during price 

escalation, resulting in much of the industry today paying $6.00 per bushel for com as 

they work through these contracts. This entire scenario was a contributing factor to the 

bankruptcy filing of Pilgrims Pride. 

While it was not specifically included in the CFTC Reauthorization Act of2008, AFIA 

strongly requests that the CFTC also remove the exemption for position limits that has 

been given to Index Speculator funds, as part ofthis final rule. Per the Commission's 

own comments (page 75985 and from Core PrincipalS for designated markets) 

"Speculatative position limits are necessary to reduce the potential for market 

manipulation". We believe this is within the authority of the CFTC. 

The magnitude of Index Speculator funds in commodity markets during this significant 

market increase was well documented in our July, 2008 letter to the House Committee on 

Agriculture, as well as through several other sources. Commodities futures prices are the 

benchmark for the prices of actual physical commodities, so when Index Speculators 

drive futures prices higher, the effects are felt immediately in spot prices and the real 

economy. 

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

Tel.: 703/524-0810 FAX: 703/524-1921 E-mail: afia@afia.org www.afia.org 
~FI~ AMERICAN FEED INDUSTRY ASSOCIATION 

When Congress enacted the Commodity Exchange Act in 1936, it did so with the 

understanding speculators should not be allowed to dominate futures markets. This 

market functioned effectively and efficiently for both physical commodity users and 

speculators between 1936 and 2000. However, when the CFTC granted Wall Street 

banks an exemption from speculative position limits, hedging as a risk management tool 

became ineffective for its intended users. 

This problem can be relatively easily corrected through your inclusion of the following 

tow actions in your rule: 

1. CFTC should require all speculators to operate under the established position 

limits, without exception, as the original Commodity Exchange Act required. 

2. AFIA applauds the House Committee on Agriculture's proposed establishment of 

a Position Limit Agriculture Advisory Group. We recommend that this also be 

included in the final rule, with the specification that this advisory group include 

representatives ofboth physical producers and consumers of these agricultural 

commodities, including the commercial feed industry. 

Regulated agriculture commodity markets were established to provide an efficient, price 

discovery mechanism and a hedging/risk control vehicle for the grains and ingredients 

markets. If the CFTC includes the actions we propose in the final rule, in addition to the 

steps you are taking to provide oversight for ECMs that are also SPDCs, the structural 

integrity of the futures markets will be restored. 

AFIA 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. 

AFIA looks forward to working with the CFTC to ensure markets remain an effective 

tool for the end-users. 

Respectfully submitted, 

v/)_~ I 

· G. Newman 

es1dent & CEO 

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

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