Statement of 

Charlie Carey, Vice Chairman, CME Group 

for the 

CFTC Agriculture Roundtable 

Challenges In Global Agricultural Markets

It is clear that agricultural markets are both worldwide in scope and subject to 

myriad worldwide economic forces. No market or asset class is unaffected by the 

developments in the others. 

Traditional production or supply issues affect agricultural markets; however, there 

are significant developments that are occurring in a variety of areas that are 

creating new and powerful influences. These factors are forcing our markets to 

creatively adopt new solutions at a pace never before experienced. To characterize 

the environment we are in, David Hightower, author of the Hightower report 

summed up the supply/demand situation in corn last year with the following; “ We 

have experienced three consecutive years of record corn production... and three 

consecutive years of declining ending reserves.” This clearly demonstrates the 

tremendous growth in demand. 

CME Group has identified six significant factors that are influencing the supply 

and demand for grains and oilseeds; each is important. 

1. Weather/Disease 

2. Increasing per capita consumption in the emerging markets; 

3. The dramatic impact of biofuels upon the grain and oil seed markets; 

4. Reactionary governmental trade policies; 

5. Financial Market turmoil and its growing impact upon the agricultural 

sector; and 

6. Commodities have become another asset class for investors. 

These factors have interacted in a manner that has led to volatile markets with high 

prices. The last five listed factors are doing more; they are driving structural 

change of unprecedented scope in the commodity markets. 
1. Weather/Disease

This is a traditional factor in the grain markets. Wheat recently attained all-time 

record prices, coincident with 60 year lows in world stockpiles. In the past two 

years there have been production shortfalls in Australia, Argentina, Europe, North 

America, and the Ukraine due to a combination of drought in some places, 

untimely rains in others. 

2. Per Capita Consumption in Emerging Markets: While some projections imply a 

slowing population growth in this century, global population is still growing and 

from an ever increasing base. In the short-run, GNP and personal income levels in 

the large emerging market countries such as India, China, Russia and Brazil are 

creating unprecedented per capita demand growth for animal protein. As is 

common in human history, as a society grows richer, its diet expands to include 

additional animal protein in the form of meat and dairy. Already in just the past 12 

years, China has gone from a net exporter of soybeans to the world’s largest 

importer of soybeans with soybean imports projected to easily exceed 30 million 

tons in 2007. Never before in history have we witnessed the impact of 2 billion 

people asking for a higher standard of living at the same time. 

3. Growth in Biofuels: The expansion in biofuels has created additional market 

stress. The expectation is for continued growth in biofuel use/demand, which will 

result in continued demand growth for feed grains and vegetable oils. The USDA 

recently reported that corn based ethanol production will continue to rise placing 

additional demands on the crop: “driven by continued expansion in ethanol 

production capacity, corn use for ethanol is projected at 4.1 billion bushels 2008-9, 

up 28% from the current year projection. Ethanol corn will now account for 31% 

of total corn use, up from a projected 25% for 2007-8.” The amount of corn used 

in ethanol production just 5 years ago was approximately 10%. 

The China Daily reported just over a year ago that grain prices were rising there 

not due to a poor harvest but rather to feed the nations appetite for energy from 

biofuel, expanding at up to 15% a year, fuelled by higher crude oil prices. Add the 

potential for a poor season due to weather in China and demand increases more. 

As we can see from this discussion, it is not just the supply side of the equation 
driving volatility in commodity markets any longer but unprecedented demand is 

starting to play a much larger role. 

4. Reactionary Government Trade Policies

During the last 3 months, there has been an ever expanding pattern of increasing 

export tariffs and decreasing import tariffs on grains and oilseeds by foreign 

governments. Russia extended a grain export tariff from April 30 to July 1. In 

addition, they have placed an export ban upon their grain to the four CIS 

(Commonwealth of Independent States) states members designed to prevent reexport of Russian grain to third countries. Argentina extended their wheat export 

closure and announced a new, higher soy export tax that will rise by 7-9 percentage 

points based upon current prices. India increased its grain export tariffs while 

lowering import tariffs on edible oils. China has announced a further increase in 

edible oil imports in 2007-8 with projections currently up an additional 14%. South 

Korea announced the emergency lifting of import tariffs on 70 price sensitive 

products, including wheat and corn in an effort to confront rising inflation. The 

pattern we are witnessing is one of keeping domestic production off the global 

market while lowering barriers for the acquisition of grains and oils from the 

global market resulting in increased demand for U.S. grain and Oil Seed products. 

5. Financial Market Turmoil

The events that began in the sub-prime sector of the financial markets are now 

spreading out with very serious and negative consequences throughout the nation’s 

banking sector. Restrictive lending policies are having deleterious effects within 

our market place. High volatility leads to higher margins, large directional price 

moves require significant continuing variation deposits and all of this comes at a 

time when money is difficult to obtain. 

From Calendar year 2000 through calendar year 2007 wheat prices have increased 

147 percent, Corn is 79 percent higher and Soybeans are 72 percent higher. One of 

the factors contributing to these price increases is the declining value of the U.S. 

dollar relative to the currencies of major importing countries. Since 2000, the 

dollar has depreciated by 28% as measured by the U.S. Dollar Index, which is 

comprised of six major currencies (Euro, Japanese Yen, British Pound, Canadian 

Dollar, Swedish Krona, and Swiss Franc). This decline in the value of the dollar, 
which is the currency in which international grain trade is conducted, means that 

commodity prices are, on average, 28% lower for these importers than they would 

be if the value of the dollar had remained constant during this period. 

CBOT daily price limits for grains and oilseeds were last adjusted in 2000. Then, 

initial price limits were 9.5 percent of average corn prices, 11.5 percent of average 

wheat prices, and 10 percent of average soybean prices. Due to requests from 

market participants on March 28, the CBOT implemented initial price limits that 

are 5.7 percent of current corn prices, 6 percent of current wheat prices, and 5.5 

percent of current soybean prices. CBOT’s new price limits are very conservative 

relative to the last time these limits were changed. 

The exchange is also committed to redoubling our efforts to educate the banking 

community on hedging, and we have held discussions with the National Grain and 

Feed Association (NGFA) on jointly devising and implementing this new program. 

Too often we have discovered that many in the banking community do not fully 

understand hedging and as a result, are reluctant to extend credit when markets are 

volatile. We believe better understanding of hedging by bankers, while not likely 

to solve the credit crisis in agriculture, will certainly help the situation. 

We will continue to review ways in which we may deliver some form of relief in 

this regard. We believe that more creative product development in Exchange 

cleared OTC products may be one of many creative solutions that should be 

allowed to address today’s challenges. 

6. Commodities as an Asset Class- We have looked at a variety of factors that are 

having an impact upon the markets. Many are concerned about the involvement 

and impact of non-traditional users of futures markets who are increasing their 

investment in commodities. Included in these non-traditional categories are index 

funds, hedge funds, ETF/ETC product developers and others. Because investors 

are looking to diversify their portfolios, index fund participation has increased 

significantly in our markets. That said, data published by the CFTC indicates the 

percentage of the open interest held by index funds has remained relatively 

constant since 2006 when this data was first published in CFTC’s Supplemental 

Commitments of Traders Report. Thus, while index positions are growing, 
positions by commercial and non-commercial participants have been growing as 

fast if not faster than the index funds resulting in a market composition that has 

been remarkably consistent over the years. 

While the composition of our markets has not changed significantly over the years, 

we are still cognizant of the need to ensure that our markets are performing well 

for our traditional market participants. As such, we want to proceed with prudence 

before deciding upon any changes to contract design or policies that may affect the 

current profiles of market users. The CFTC requires that any changes we make to 

our contracts that could affect prices or price relationships be implemented beyond 

open interest or at the beginning of new crop years. Thus, we cannot make snap 

changes to our contracts. This is actually a positive rule as even a well functioning 

market will occasionally react unexpectedly to some market events. Our task, to 

provide a liquid and orderly market, requires that we do no harm to a market by 

reacting too quickly, in effect, the prudent man rule. That said, when we gain solid 

evidence that a contract is not performing, we react quickly and decisively. Recall, 

as an example, the river delivery terms for corn and soybeans implemented in 

1999. 

We have worked with a broad spectrum of our customers to establish several 

contract changes that will soon be taking affect that will, we believe, improve 

market performance. Storage charges will increase for wheat beginning with the 

July 08 contract; storage charges will increase for corn, beginning with the 

December 08 contract; and storage charges will increase for soybeans, beginning 

with the November 08 contract. Also in July of this year the wheat delivery 

instrument be changed from a warehouse receipt to a shipping certificate, which 

will expand the effective storage capacity of the wheat contract and improve 

convergence in the wheat market. We have also proposed increases to the corn 

and soybean load-out charges to better reflect the increased cost of elevation in the 

cash markets. All of these changes have been established within close working 

relationships with our customers. 

We have made the following recommendations to the CFTC regarding 

participation in the grain and oilseed markets by non-traditional investors: 
• We’ve requested that the CFTC defer consideration of increases in Federal 

Speculative position limits until additional analysis is completed looking at 

the impact of increased limits on futures market performance. 

• We also recommend that consideration by the CFTC of a new risk 

management exemption for passive investors be delayed for a period of 6-9 

months while additional analysis of these proposed new regulations is 

conducted. 

• We call on CFTC to act as soon as possible to lift the prohibition on clearing 

of agricultural swaps products traded in the OTC market. We believe that 

lifting these restrictions will stimulate innovation in this sector that could 

help commercial firms better manage their price risk in the current 

challenging market environment. 

We need to be very aware of the global events, whether natural or government 

induced, that affect the supply/demand balance in our local markets. The United 

States serves as the principal provider of grain and oilseeds to the world and, as 

such, represents the primary market for price discovery and risk management for 

the global grain and oil seed marketplace. The CME Group, working in close 

coordination with our customers and the CFTC is committed to ensuring that our 

grain and oilseed markets continue to function effectively as we build for the 

future.