The Commodity Futures Trading Commission (CFTC) is proposing to double the specula... Page 1 of 4 

secretary 

From: 

Sent: 

Rick Anderson [ricka@agpartners.net] 

Monday, January 21, 2008 3:22 PM 

To: secretary 

Subject: ATI response to CFTC spec limit proposal.doc 

Mr. David Stawick, Secretary 

Commodity Futures Trading Commission 

Three Lafayette Center 

1155 21st Street NW. 

Washington, DC 20581 

Fax 202-418-5521 

Email secretary@cftc.gov 

Re: Revision of Federal Speculative Position Limits 

Dear Mr. Stawick; 

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COMMENT 

Ag Partners Coop is a full service cooperative with headquarters located in Goodhue, MN. We are an 

active grain merchandising firm representing producers in southeastern Minnesota and western 

Wisconsin. We have been feeling the effects ofthegrowing non-agricultural interests involved in the 

grain trade and are very concerned about their influence over CME contracts. Advance Trading is the 

trading company we work with. I'm including the letter written by Mr. Jeffrey Hainline of Advance 

Trading which expresses our sentiments on this matter. 

Thank you for your consideration. 

Sincerely, 

Richard L. Anderson 

Ag Partners Coop 

Goodhue, MN 55027 

877-923-4494 

Our company- Advance Trading, Inc., Bloomington, Illinois - is involved in the trading of grain in the 

U.S. Over the last 2.5 years we have experienced an abrupt decrease in the "convergence" of cash grain 

prices with the futures-market prices in Chicago, Kansas City, and Minneapolis. In each of the seven 

agricultural and processed commodities traded on those exchanges, cash prices have increasingly failed 

to "converge," i.e., to reach an exact equivalence with futures, as is the primary function of futures 

markets, during each successive period when contracts expire. 

Agriculture is unique in that the entire year's supply is "manufactured" in one lump, at harvest time, 

creating a natural warehousing function in the industry: A huge quantity must be stored at harvest, to be 

allocated out as needed through the following summer. That is why there are forward futures contracts: 

To reflect a different future price relative to the spot contract, accurately representing carrying charges 

(i.e., warehousing profits) which signal the warehouseman (grain elevators) whether the market needs 

him to ship or store grain. Accurately reflecting cash-market carrying charges is the sole reason why 

1/22/2008 
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The Commodity Futures Trading Commission (CFTC) is proposing to double the specula... Page 2 of 4 

futures markets were created, to avoid the boom-and-bust of each year's transition from an initial 

oversupply to fmal scarcity by transparently rationalizing the always-changing supply-and-demand 

reality of the moment. 

The mechanism, which keeps "paper" futures connected to cash prices, is convergence of the two, to the 

same price, during each successive futures contract's expiration. As a result, all participants are 

supposed to be able to view the nearby futures contract and know that its price will be precisely that of a 

well-defined grade of cash grain at the delivery point during that month. When that does not happen -or, 

worse, the current situation in which it structurally cannot happen - the futures markets revert back 

toward the boom-and-bust agricultural chaos that it was invented to solve. The less that futures serve as 

an accurate proxy for cash, the greater the risk for elevators and others involved in the grain business, 

having as one effect that elevators are forced to lower their bids to farmers to force wider margins for 

themselves - they have no choice. 

The current situation is severe enough, for structural reasons, that volatility is being forced into the cash 

markets, which the futures are unable to reflect. Specifically, basis levels are much lower than they 

would be if futures markets were functioning normally, which they cannot due to inflexibility in the 

current rules. 

In a normal market, ifbasis levels were out-of-sync-low to futures, a hedger could rely on relationships 

between futures widening to signal elevators to hold grain back - providing an incentive to reduce their 

shipping volume - which makes cash-basis levels climb back to the intended closer relationship with 

futures. That is how the futures-market mechanism keeps cash grain and "paper" futures properly 

related. Regardless of what grain prices are, whether government biofuels subsidy sharply boosts price 

or huge hedge-fund speculation adds volatility, this cash-vs-futures connection must continue to 

function or the "real" grain business, and the futures prices themselves, are at risk of dysfunction. 

If additional futures-buying is introduced by increased speculative position limits while spreads are 

prevented from widening further to account for greater borrowing costs, etc. -because they're already 

up against the artificial maximums in current rules -the divergence between cash and nearby futures 

("cash basis') will be forced even lower. This doesn't just create loss and uncertainty for grain elevators, 

but also for farmers, industrial and livestock users, and everyone even peripherally involved. (' 

The National Grain and Feed Association's Country Elevator Committee made the following three 

comments: 

I. Increased volatility is being forced into the cash market, where country elevators continue to lose 

origination of farmer grain to long hedgers and organizations with large basis trading networks 

that can accomplish in cash that which cannot be accomplished in futures. In this environment, 

country elevators are unable to merchandise competitively without the confidence that 

convergence will occur. As such, the country elevator' s role as the first hedger of price risk in 

the market is in peril. Removing the country elevator from the merchandising chain potentially 

removes its vital function of price discovery from the marketplace. 

2. Increased volatility in the cash market has decreased the agricultural producer's ability to utilize 

futures for price discovery and risk transfer. 

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The Commodity Futures Trading Commission (CFTC) is proposing to double the specula... Page 3 of 4 

3. Actions by traditional short hedgers to avoid the real or perceived risk due to the lack of consistent 

convergence are reducing utilization of futures. This is occurring at a time when the CFTC's 

proposals would increase the demand for liquidity to balance the demand by the index and hedge 

funds. 

The current market is unbalanced. A graphic expression of this is shown below. 

% Full Carry on 181 Notice Day 

%. Full Carry on 1stNottce Day. 

110% 

100'/a 

90% 

80% 

10% 

60% 

50% 

40% 

30% 

20% 

CD 

q. I I 

A CD .. ... ~ 

This chart depicts the percentage of "full carry" - the arbitrary maximum specified in each futures 

contract's design- on "first notice day" for the last ten years in each of the three major grain-futures 

contracts at the Chicago Board of Trade. In all of them, the futures "carry" changed distinctly beginning 

in August 2005, to a far wider relationship, which has predominantly verged on the maximum allowed 

under the CBOT rules. Com averaged around 60% prior to Aug 2005, but 90% since. Soybeans 

averaged a negative 36% before, positive 88% after. Wheat has other contract problems pertaining to 

grade, which had kept it at an extraordinarily wide 81% before, but it also widened further, to 92%, 

after. 

What does it mean when the futures spreads in all three, through situations of relative oversupply and 

scarcity which are supposed to widen and narrow them to regulate those situations, are almost 

unchangingly at the limit allowed under CBT rules? It says that that limit is restricting movement in the 

fUtures market so that it cannot reflect changes in, nor converge with, the cash grain market. So over the 

last 2.5 years, the basis has been forced to do the work that, due to contract design, the futures market 

cannot. Thus, especially with ever-larger speculative limits, the futures market price is, by definition, not 

very accurate relative to cash price a high percentage of the time. 

Without futures-exchange rules which allow sufficient flexibility for successful convergence under all 

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The Commodity Futures Trading Commission (CFTC) is proposing to double the specula... Page 4 of 4 

price conditions, the resultant cash-futures divergence which the rules are aimed at preventing places the 

natural hedged short (the farmer and the country elevator) under so much pressure that he can be forced 

to withdraw from the futures market - a throwback to pre-futures-exchange days. That has already 

begun to happen. Essentially, while futures prices soar, the short futures hedger loses because his cash 

grain ownership becomes worth less relative to his hedge. Conversely, the long hedger profits by the 

artificial premium that the current rules confer on futures relative to the lower cash, when of course the 

two are supposed to be the same. 

The volatility of short hedgers' cash grain position is increased, while the volatility of long hedgers' 

position is reduced. Lack of convergence due to inflexible contract rules means that by design the longs 

are advantaged relative to the shorts. 

"Convergence" is the primary regulator of futures markets, which are of course free markets open to all. 

But how can CFTC enact position-limit expansion for speculators when that will exacerbate an alreadysevere, quantifiable problem with the grain futures contracts' basic functioning? Futures prices are 

already outrunning the delivery rules' ability to link them to actual cash grain prices. 

For these reasons, we think adding more speculative interest to a futures market that already is 

demonstrably unable to converge, therefore not functioning well, is imprudent. Until the exchanges 

adequately address the lack of convergence with changes in contract design, we oppose increasing 

speculative limits. 

Respectfully, 

Jeffrey W. Hainline 

1/22/2008