Statement of the 

National Grain and Feed Association 

to the 

Commodity Futures Trading Commission 

April 22, 2008 

The National Grain and Feed Association (NGFA) appreciates the opportunity to 

submit recommendations to the Commodity Futures Trading Commission (CFTC) 

concerning the performance of agricultural futures markets and impacts on commercial 

grain hedgers. We applaud the CFTC for holding this roundtable discussion to examine 

whether the futures markets are properly performing their risk management and price 

discovery roles. The NGFA’s findings and recommendations are as follows: 

• The NGFA strongly recommends a moratorium on all hedge exemptions for 

passively-managed, long-only investment capital entering agricultural futures 

markets. For funds already approved for hedge exemptions, the NGFA strongly 

recommends against expansion of hedge exemptions beyond levels already 

approved by the CFTC. The NGFA also recommends that all passively-managed, 

long-only investment capital participate in futures on a dollar-for-dollar, 

unleveraged basis, with all investment capital fully margined. This is consistent 

with rules proposed by CFTC late last year in its proposal to establish a hedge 

exemption for pension and index funds, and with rules governing the two funds 

that currently have hedge exemptions. 

• The changes instituted by CFTC in its Commitments of Traders (CoT) report in 

early 2007 to identify “Index” participants was a very positive step, and the report 

has become a useful tool for market participants. The NGFA respectfully 

requests that CFTC analyze the report to assure that all long-only, passivelymanaged investment capital entering agricultural futures markets is correctly 

reported to the Commission and properly categorized and reported in the CoT 

report’s “Index” category. The NGFA further requests that the Commission fully 

and clearly define futures market activity reported in each existing category of the 

report; and consider whether any additional detail/categories added to the report 

would provide additional clarity for market participants. 

• The NGFA does not believe the pending storage rate (premium charge) changes 

for the CBOT corn, soybean and wheat contracts accurately reflect the real costs 

and value of storage capacity. The NGFA will ask the CME Group to poll the 

grain handling industry immediately to determine accurate commercial storage 

values. If warranted under current conditions, the NGFA will ask the CME 
Group to implement those rates, with CFTC approval, in lieu of currently pending 

storage rate increases for corn and soybean contracts, and also for the wheat 

contract, as soon as possible to enhance cash/futures convergence. 

• The NGFA generally supports the concept of exchange-cleared swaps as a 

mechanism that creates the opportunity to spur innovation and new risk 

management products. 

• The NGFA is supportive of repealing restrictive CFTC regulations on agricultural 

trade options. In their place, the NGFA supports rules allowing commercial 

participants (elevators, producers, processors) to engage in ATOs in the course of 

their businesses. 

Convergence and Basis Issues

The NGFA’s member companies are elevators and processors, many of them

first-purchasers of grains and oilseeds from producers. These NGFA-member firms rely 

on well-functioning futures markets for price discovery and to help hedge price and 

inventory risk. One of the bedrock fundamentals on which hedging strategies are 

predicated is consistent and reliable convergence between cash and futures prices. 

Today, that previously reliable relationship between cash and futures has 

deteriorated to a point where many commercial grain hedgers are questioning the 

effectiveness of hedging using exchange-traded futures. Genuine convergence occurs 

less often and only for short periods of time. The band, or range, of convergence has 

widened due to several factors, including: 1) higher and more volatile transportation 

costs; 2) demand for storage created by biofuels growth; and 3) the futures market 

running ahead of cash values due to passively managed, long-only investment capital. 

The following charts illustrate that basis has become more volatile and “weaker” than 

demonstrated historically – corn, to some extent, and soybeans and wheat more 

dramatically – thus, convergence has deteriorated: 

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BASIS

Ottawa Corn Basis

Ottawa Corn Basis

Ottawa, IL Corn Basis

 Source: Advance Trading Inc.
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70

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Ottawa, IL Soybean Basis

 Source: Advance Trading Inc.

 Source: Advance Trading Inc.

Note: This chart represents river values in the St. Louis area; wheat mills in the St. Louis area are 

paying higher values (e.g., +5 Chicago on one recent day) for appropriate-quality wheat. 

This lack of convergence – or “divergence” as some are calling it – is evident in 

wider basis levels between cash and futures. Cash bids to producers at any given location 

and time still reflect the true value of commodities, but rapid advances in futures price 

levels have widened basis to levels not historically expected. This wider basis can 

sometimes make commodity prices appear “too cheap” at the local grain elevator. 

As mentioned above, many factors are at work to influence price levels and basis: 

transportation and fuel costs; changes in supply/demand fundamentals; carry-over 

inventory levels; farmer selling; storage rates; and more. Changes in any of these factors 

can result in significant changes to basis levels, and today we are seeing many changes 

occurring simultaneously. However, we believe that one new factor – the entry of large 
amounts of long-only, passively-managed investment capital into agricultural futures 

markets – is causing a disruption in markets. 

Financial Liquidity Issues

Decreased hedging efficiency due to deteriorating convergence and unpredictable 

basis patterns are not the only concerns for commercial grain hedgers today. As a result 

of significantly higher futures prices, driven in part by investment capital, elevators who 

purchase cash grain from farmers for deferred delivery have been hit with extremely 

large margin calls on their hedge accounts. Long-only investment funds account for a 

significant share of open interest in the CBOT grains and oilseeds contracts. These 

passively-managed, long-only contracts are not for sale at any price for extended periods 

of time, resulting in elevated prices not reflective of demand, increased speculative 

interest in the market, increased volatility, and pressure on banking resources to fund 

margins.

The following charts show the increased volatility for corn, soybean and wheat 

futures in recent months: 

Nearby Corn Daily Price Range

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Source: CME Group 
Nearby Soybean Daily Price Range

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Source: CME Group 

Nearby Wheat Daily Price Range

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Source: CME Group 

To finance inventory purchases and make margin calls, commercial grain hedgers’ 

borrowing needs today are several times normal levels. Elevators have reached their 

borrowing limits and some lenders have reached the limit of amounts they can lend to the 

commercial grain sector. Additional futures price advances – due to supply/demand 

shocks, bad weather, or ever-larger amounts of investment capital – could lead to severe 

financial stress. Even today, some elevators lack the capital to finance additional hedges, 

so they have been forced to restrict or eliminate deferred purchase bids to producers. If 
the situation continues, producers who lack access to cash forward contracts they have 

come to expect will increasingly be frustrated in efforts to optimize their marketing 

opportunities at a time when cash prices are very attractive. 

Moratorium on Hedge Exemptions

For the reasons detailed above, the NGFA opposed CFTC proposals issued late 

last year to increase federal speculative position limits and to create a new hedge 

exemption for index and pension funds. Today, we believe action is urgently needed to 

allow agricultural markets to “take a break” and adjust before additional large amounts of 

investment capital find their way into agricultural futures. 

We are recommending a moratorium on all hedge exemptions for long-only, 

passively-managed investment capital entering agricultural futures markets. For 

funds already approved for hedge exemptions, the NGFA strongly recommends against 

expansion of hedge exemptions beyond levels already approved by the CFTC. The 

NGFA recommends that long-only investment capital participate in futures on dollar-fordollar, unleveraged basis, with all investment capital fully margined, consistent with rules 

suggested by the CFTC late last year in its proposal to establish a new hedge exemption 

for pension and index funds, and with rules for those funds already possessing hedge 

exemptions. 

Commitments of Traders Report

Early last year, the CFTC began publication of a supplemental Commitments of 

Traders report with a new “Index” category to report investment capital. The NGFA’s 

member companies were extremely pleased with that new category, believing that 

transparency in the marketplace is of benefit to all participants. In particular, the new 

“Index” category was helpful in assisting commercial grain hedgers to develop their risk 

management strategies based on supply/demand fundamentals, rather than on speculative 

investment capital. 

We believe that today’s market environment calls for a re-examination of the CoT 

report. While some suggest that investment capital’s share of open interest in agricultural 

futures contracts has not increased in recent years, we are skeptical of that claim. We 

suspect that some activity that rightly belongs in the “Index” category could now be 

showing up in other CoT report categories. For that reason, we respectfully request that 

the CFTC analyze in detail the reporting it receives from market participants to 

determine if all long-only investment capital is reflected in the “Index” category. 

Additionally, we request that CFTC fully and clearly define futures market activity 

reported in each existing category of the report; and consider whether any additional 

detail/categories added to the report would provide additional clarity for market 

participants. 
Storage Rates

 While a number of changes to CBOT contracts have been suggested that might 

enhance convergence, we believe that one of the most readily available and effective 

tools is adjustments to storage rates (premium charges). As the result of findings of its 

Futures Market Performance Task Force last fall, the NGFA recommended at that time an 

increase in monthly storage rates for corn and soybean contracts from 4.5 cents per 

bushel to approximately 5 cents per bushel – the same increase already had been adopted 

by the CME Group for the wheat contract. The CME Group subsequently agreed with 

this finding and is proceeding to increase its corn and soybean storage rates, with CFTC 

approval just recently received. 

 We believe the market situation now has changed, and that additional action to 

increase storage rates is needed to enhance convergence. We believe that neither the 

current nor the pending storage rates reflect the true value of commercial space. To help 

remedy the situation, the NGFA would like to work cooperatively with the CME Group 

to determine what increased storage rate is most appropriate to ensure an efficiently 

functioning contract and to enhance convergence. 

 From time to time, the CME Group has surveyed industry for prevailing storage 

rates to help establish rates for the grain and oilseed contracts. The most recent such 

survey was conducted in early fall of 2006. Now that commodity prices have risen 

significantly, the NGFA recommends that the CME Group poll the grain handling 

industry immediately to determine commercial storage rates. The NGFA will ask the 

CME Group to implement higher storage rates if supported by the updated poll, with 

CFTC approval, in lieu of currently pending storage rate increases for corn and soybean 

contracts, and also for the wheat contract, as soon as possible to enhance cash/futures 

convergence. 

Exchange-Cleared Swaps 

 The NGFA, in principle, is supportive of the concept of allowing agricultural 

commodity swaps to be cleared on-exchange. We believe that granting exchanges this 

regulatory flexibility could be a catalyst for development of new risk management 

products of benefit to commercial grain hedgers. In a changed market environment, 

innovative ideas like this may help ease the market’s transition during a time of broad 

change and may enhance short-term market balance. 

Agricultural Trade Options

 In November of 1999, the CFTC published rules governing agricultural trade 

options. Since that time, just one entity registered as an agricultural trade options 

merchant, and that registrant now has withdrawn. Clearly, the net worth requirements 

and the burdensome reporting requirements contributed to making ATOs unworkable for 

potential participants. 
In today’s marketplace, we believe access to a workable ATO program could give 

producers additional marketing opportunities, spur new-product innovation and help ease 

financial liquidity concerns. For example, an ATO contract between a producer and a 

country elevator could be beneficial if the producer has weather-related production 

problems, or if he wants to maintain flexibility on delivery locations. ATOs also could 

help ease financial liquidity concerns of elevators by attracting new capital into 

agricultural markets without burdensome margining requirements. 

We understand that CFTC staff may be considering a proposal that would rescind 

the burdensome regulations published in 1999 in favor of a more flexible regulatory 

approach under which commercial participants such as elevators, producers and 

processors could enter into ATOs in the course of their businesses. In today’s market 

environment, we believe that approach makes sense. We would support the Commission 

moving to ease the ATO regulations. 

Summary

Ultimately, the solution to recent market upheaval may simply be time. In time, 

the market may respond to new realities. The market likely will create new ways to 

deploy capital in agriculture. In time, industry may expand storage, the CME Group may 

implement enhancements to their contracts. Without a doubt, market participants will 

create new products for risk management that reflect the broad changes in the agricultural 

landscape – transportation, biofuels, major acreage shifts, to name a few. The NGFA will 

continue its work to identify additional potential responses to assist commercial grain 

hedgers dealing with the volatility and financial stresses of today’s markets, whether they 

be changes to futures contracts, regulatory action or some other course. 

 In the shorter term, there are real disconnects and real stresses, in particular on the 

commercial grain hedging sector. We believe these stresses call for action along the lines 

outlined above that will help build a bridge to new market realities. Failing to do so 

could have serious consequences for all sectors of agriculture, including producers and 

the elevators who work with them to facilitate efficient marketing and risk management 

for the grain sector.