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April 22, 2008   Email to Friend 

Mace Thornton
(202) 406-3641
April 22, 2008

WASHINGTON, D.C. -- Highly volatile conditions have affected the cash and futures markets where farmers and ranchers sell their grains, oilseeds, cotton and livestock. Federal regulators must keep a close eye on the situation, engage as needed and be ready to consider reform measures, according to American Farm Bureau Federation President Bob Stallman.

Stallman presented the views of farmers and ranchers nationwide when he addressed the Commodity Futures Trading Commission (CFTC) today in a forum designed to hear from a range of individuals representing organizations interested in the success and stability of agricultural markets.

Sky-high futures prices at the Chicago Mercantile Exchange and other trading hotspots are at the center of media attention these days, and Americans may think all farmers are bringing home the proverbial bacon, but that's not necessarily the case, according to Stallman.

The futures price and the actual spot, or cash, price paid for a commodity usually come close to each other at the end of a futures contract. Historically, this gap has amounted to a few cents per bushel or pound, but lately for some products that gap has been measured in dollars per bushel.

"We have witnessed extreme price volatility, expanding and volatile cash/futures basis relationships, and the difficulty of hedgers to meet margin calls," Stallman said. "In addition, the role of speculative and commodity-index-related trading in agriculture futures markets, while growing for some time, has reached historic levels and added to the uncertainty in these markets."

Stallman went on, "For the futures markets to fill their role in helping everyone discover the appropriate value of commodities, the cash and futures markets need to come together at the end of the day in some consistent fashion. Otherwise, the futures markets are no different than Las Vegas and, frankly, don't serve a role for agriculture."

"The futures market mechanism is, at least, bent at this point in time, and the fact that several major grain and oilseed marketers are only offering firm crop price bids 60 days into the future is a rather ominous sign the breaking point might not be far away," he said.

Stallman also told commissioners the situation "is compounded by the fact that many producers are being asked to make firm price commitments for inputs. In some instances, they are even being asked to pre-pay for inputs they will not utilize until next crop year." As a result, producers are urged to lock in future input costs without similar opportunities in future crop prices.

In addition, Stallman suggested commissioners study three possible reforms that may encourage order in the futures market, particularly as the lack of price convergence festers. The measures relate to (1) establishing additional delivery points for futures contracts; (2) ending the certificate of delivery system and returning to the original notice process; and (3) examining the use of cash-settled contracts.

The CFTC also should look at daily trading limits, Stallman said. "We request the CFTC analyze the possible effects on market participants of lowering the daily trading limits. We are not necessarily seeking to lower price limits, but we believe a study of the potential effects on margin requirements, risk, volatility, and financing charges could be instructive for the exchanges and market participants, as well as the commission."

The rapid entry of speculators, especially those with little or no understanding of the traditional role of the agricultural markets, is another cause of concern. "As hedgers, our members understand that speculative interest is an important component of any commodity market by facilitating its primary function of price discovery and providing market liquidity," Stallman said. "Though speculators -- including small investors -- have always been integral to market function, they are now playing an exponentially greater role than ever before."

Stallman emphasized that speculators are an integral component of an open market, and they must remain involved. However, the CFTC must ensure that market integrity is maintained and curb practices that result in artificial price swings. "In essence, it is up to the CFTC to ensure that participants do not prevent the futures markets from serving their roles as price discovery tools," he said.

Further, additional transparency about the funds involved in the futures market should be required so that the markets can fulfill their primary functions of price discovery and risk management.

Stallman concluded his statement by expressing opposition to attempts to merge the CFTC with the Securities Exchange Commission.

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