._,. 

Received CFrC . ·· ), 7 . rd Sectlon 

Jlall•al Brain •d Feed ASSacllf.IID 

Mr. David Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 2181 Street, NW 

Washington, DC 20581 

January 21, 2008 

RE: Revision of Federal Speculative Position Limits 

Dear Mr. Secretary: 

COMMENT 

This letter transmits the position of the National Grain and Feed Association 

(NGF A) on the Commodity Futures Trading Commission (CFTC) proposal to increase 

federal speculative position limits, published November21, 2007 in the Federal Register. \ 

The NGF A is the national trade association representing the grain, feed and 

processing industry. About 900 companies nationwide comprise the NGFA's 

membership, including grain elevators, feed manufacturers, grain and oilseed processing 

companies, futures commission merchants, introducing brokers, biofuels producers and 

marketers, flour millers, integrated animal operations and related commercial businesses. 

We estimate these companies operate upwards of6,000 facilities nationwide. The 

NGFA's member firms are traditional hedgers who rely on efficient and predictable 

performance of U.S. futures markets and contracts to manage inventory and price risk 

and to assist their farmer-customers to market their production. 

We appreciate the opportunity to provide comments to the CFTC on this matter. 

However, before offering specific responses, we first want to make the agency aware of 

how serious the business outlook is for many in our industry, and the ripple effect that 

current poor market performance is having on many businesses in our industry. 

The lack of convergence between cash and futures markets during the delivery 

period, in conjunction with rapidly rising commodity values, has created huge borrowing 

needs and fmancial risks and exposure for the grain buying industry. At the same time 
Mr. David Stawick 

January 21,2008 

Page2 

that the predictability of convergence, hedging and pricing efficiency all have declined in 

performance, the requirements to finance traditional short hedges and grain purchases in 

an uptrend market are now at several multiples of normal borrowing needs. As banks 

have begun to question hedgi.tig performance in futures positions, borrowing lines have 

been stretched to the limit or beyond. Banks are beginning to restrict fmancing to some 

companies. Elevators and other grain buyers have been forced by market conditions to 

liquidate inventories. Cash basis levels are widening in reflection of much higher 

financing costs that now are being forced mto the system- if, indeed, fmancing remains 

available at all. In some cases companies have eliminated deferred cash bids altogether. 

If commodity prices continue to rise and market performance does not improve, 

our industry is facing the potential of a real crisis situation. Just in the last few weeks, 

there have been reports of cash grain firms that cannot obtain adequate fmancing 

attempting to sell physical assets. There is a genuine risk of "fire sales" if grain elevators 

run out of margin money. We are talking about grain elevators that do not speculate in 

futures price movement, but simply hedge purchases from farmers as prudent operators. 

While we recognize that the CFTC is not responsible for the overall economic 

health of an industry, we submit that the agency does have influence over some 

fundamental factors that influence hedging performance. We strongly urge the .CFTC to 

consider the serious impact on convergence and hedging efficiency that its decisions 

likely could have. We submit that both the overall confidence in the market and the 

livelihood and business structure of the cash grain industry are at stake. 

For these reasons, the NGF A believes it is inappropriate to increase federal 

speculative position limits at this time. We respectfully request that the CFTC hold this 

proposal in abeyance for the next six to twelve months to allow commercial grain hedgers 

time to adjust to market disruptions currently roiling the industry. Further, the NGFA 

recommends that specific analysis be done on potential impacts of spec limit increases, 

especially related to futures volatility and impacts on cash/futures convergence (see 

below). The NGFA will continue to work with the CME Group to identify ways to 

enhance convergence and restore hedging reliability. 

Risk Management Exemption for Index and Pension Funds 

We also are aware that the CFTC is considering institutionalizing the criteria for 

granting hedge exemptions to certain funds. We will offer separate comments on that 

proposal, but we would like to offer some preliminary thinking. We understand that the 

agency wants to be consistent and eliminate bureaucracy, but we also believe that the 

poor market performance we are experiencing is influenced by new investors targeting 

agriculture with the aid of the hedge exemption. 

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Mr. David Stawick 

January 21, 2008 

Page3 

Regardless of the type of fund and its stated purpose, the original invested equity 

moving into funds is always invested as speculative money. When that money moves 

into the hands ofa fund, whether traded actively or passively, we understand the CFTC's 

position that the stake in futures can be viewed as a hedge -a hedge of the invested 

capital by the middleman. However, it does not negate the fact that the original money 

and purpose for that money was, indeed, speculative. 

There is, apparently, a virtually endless supply of such investment capital, and 

that capital already is dominating the agricultural futures markets today. There are 

agricultural markets where the entire U.S. crop is traded almost on a daily basis, and such 

volumes are having a negative impact on performance and adding unnecessarily to 

volatility, which does impact both pricing and hedging performance of markets. The 

ultimate value of hedging is to allow grain to move from producers to ultimate 

consumption at a lower risk and maximum efficiency, thereby creating better returns for 

·producers and lower prices for consumers. Recent dramatic increases in volatility and 

growing investment by large, nontraditional market participants have dramatically raised 

the risk and cost of moving grain through the system. 

Because of borrowing limitations, many companies -large and small- are 

significantly reducing bids, or eliminating bids altogether, on deferred grain purchases. If 

this trend continues, it defeats the fundamental purpose of futures coupled with the cash 

forward exclusion to provide producers access to deferred cash sales to manage price 

risks; 

With this in mind, we recommend that CFTC reconsider the stance it has taken 

with the hedge exemption for funds; with the understanding that agricultural futUres 

markets were established with an economic purpose to serve as efficient, central public 

pricing and hedging vehicles for grain and oilseeds. That purpose is not being fulfilled as 

well as it should be under today' s conditions, and the current broadened definition of 

hedging has contributed to this situation. 

Recommendations for Analysis 

The six-month to twelve-month period recommended above would provide a 

valuable opportunity for industry, the exchanges, and the CFTC to collaborate on needed 

analysis that could lead to a greater understanding of the potential iinpacts of higher 

speculative position limits. This waiting period also would allow time for the 

development of alternative risk management and fmancing tools, as well as time for the. 

industry to become familiar with them. We believe that the market can and will develop 

such tools, but it takes additional time. In addition, waiting would allow time for 

implementation of changes to existing exchange-traded contracts (e.g., pending changes 

to the CBOT wheat contract, potential revisions to the CBOT com and soybean contracts) 

and to evaluate their impacts. 

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Mr. David Stawick 

. January 21,2008 

Page4 

The NGF A suggests that analysis needs to be done on the following questions 

before re-opening consideration of spec limit increases: 

1) What would be the impacts of increased speculative position limits on futures 

volatility in agricultural futures markets? 

·2) What would be the impacts of increased speculative position limits on cash/futures 

convergence in agricultural futures markets? 

3) What would be the impacts of increased speculative position limits on capital needs of 

the grain, feed and processing industry? 

4) Are there other regulatory changes or contract changes that should be considered to 

enhance cash/futures convergence and improve hedging efficiency? 

5) Are there other risk management tools available now or potentially in development to 

help traditional hedgers manage their risks? For example, might the concept of 

exchange-cleared swaps be effectively implemented for grains and oilseeds? 

In conclusion, we urge the CFTC to give all stakeholders - commercial grain 

hedgers, exchanges, and other market participants- a period of time to adjust to major 

change in the marketplace before considering an increase in spec limits. While it may be 

a positive sign for the overall health of U.S. agriculture that investment capital views the 

sector as a "buy," serious damage will be done if future capital inflows are not handled 

properly. As noted above, there is the potential for serious financial exposure to grain 

handling companies, and the market simply isn't ready to efficiently absorb more 

investment capital today. Answers to the questions posted above are critical to managing 

this process correctly and avoiding major damage to commercial grain hedgers. 

The NGF A deeply appreciates its strong working relationship with the CFTC and 

the role the Commission plays in oversight of futures markets. We look fmward to 

working with the CFTC, the exchanges and others to help ensure that agricultural futures 

markets remain an effective tool for commercial grain hedgers. 

Sincerely, 

Rod Clark 

Chair, Risk Management Committee 

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