[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]



 
  HEARING TO REVIEW THE SOURCE OF DRAMATIC MOVEMENTS IN THE COMMODITY
  MARKETS (AGRICULTURE AND ENERGY): A CHANGE IN MARKET FUNDAMENTALS OR
                 INFLUENCE OF INSTITUTIONAL INVESTORS?

=======================================================================


                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                        GENERAL FARM COMMODITIES
                          AND RISK MANAGEMENT

                                 OF THE

                        COMMITTEE ON AGRICULTURE
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              MAY 15, 2008

                               __________

                           Serial No. 110-37


          Printed for the use of the Committee on Agriculture
                         agriculture.house.gov



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                        COMMITTEE ON AGRICULTURE

                COLLIN C. PETERSON, Minnesota, Chairman

TIM HOLDEN, Pennsylvania,            BOB GOODLATTE, Virginia, Ranking 
    Vice Chairman                    Minority Member
MIKE McINTYRE, North Carolina        TERRY EVERETT, Alabama
BOB ETHERIDGE, North Carolina        FRANK D. LUCAS, Oklahoma
LEONARD L. BOSWELL, Iowa             JERRY MORAN, Kansas
JOE BACA, California                 ROBIN HAYES, North Carolina
DENNIS A. CARDOZA, California        TIMOTHY V. JOHNSON, Illinois
DAVID SCOTT, Georgia                 SAM GRAVES, Missouri
JIM MARSHALL, Georgia                MIKE ROGERS, Alabama
STEPHANIE HERSETH SANDLIN, South     STEVE KING, Iowa
Dakota                               MARILYN N. MUSGRAVE, Colorado
HENRY CUELLAR, Texas                 RANDY NEUGEBAUER, Texas
JIM COSTA, California                CHARLES W. BOUSTANY, Jr., 
JOHN T. SALAZAR, Colorado            Louisiana
BRAD ELLSWORTH, Indiana              JOHN R. ``RANDY'' KUHL, Jr., New 
NANCY E. BOYDA, Kansas               York
ZACHARY T. SPACE, Ohio               VIRGINIA FOXX, North Carolina
TIMOTHY J. WALZ, Minnesota           K. MICHAEL CONAWAY, Texas
KIRSTEN E. GILLIBRAND, New York      JEFF FORTENBERRY, Nebraska
STEVE KAGEN, Wisconsin               JEAN SCHMIDT, Ohio
EARL POMEROY, North Dakota           ADRIAN SMITH, Nebraska
LINCOLN DAVIS, Tennessee             TIM WALBERG, Michigan
JOHN BARROW, Georgia                 BOB LATTA, Ohio
NICK LAMPSON, Texas
JOE DONNELLY, Indiana
TIM MAHONEY, Florida

                                 ______

                           Professional Staff

                    Robert L. Larew, Chief of Staff

                     Andrew W. Baker, Chief Counsel

                 April Slayton, Communications Director

           William E. O'Conner, Jr., Minority Staff Director

                                 ______

      Subcommittee on General Farm Commodities and Risk Management

                BOB ETHERIDGE, North Carolina, Chairman

DAVID SCOTT, Georgia                 JERRY MORAN, Kansas, Ranking 
JIM MARSHALL, Georgia                Minority Member
JOHN T. SALAZAR, Colorado            TIMOTHY V. JOHNSON, Illinois
NANCY E. BOYDA, Kansas               SAM GRAVES, Missouri
STEPHANIE HERSETH SANDLIN, South     CHARLES W. BOUSTANY, Jr., 
Dakota                               Louisiana
BRAD ELLSWORTH, Indiana              K. MICHAEL CONAWAY, Texas
ZACHARY T. SPACE, Ohio               FRANK D. LUCAS, Oklahoma
TIMOTHY J. WALZ, Minnesota           RANDY NEUGEBAUER, Texas
EARL POMEROY, North Dakota           BOB LATTA, Ohio

               Clark Ogilvie, Subcommittee Staff Director

                                  (ii)


                             C O N T E N T S

                              ----------                              
                                                                   Page
Etheridge, Hon. Bob, a Representative in Congress from North 
  Carolina, opening statement....................................     1
Moran, Hon. Jerry, a Representative in Congress from Kansas, 
  opening statement..............................................     2
Peterson, Hon. Collin C., a Representative in Congress from 
  Minnesota, prepared statement..................................     3

                               Witnesses

Harris, Jeffrey, Chief Economist, Commodity Futures Trading 
  Commission, Washington, D.C.; accompanied by John Fenton, 
  Director of Market Surveillance, Commodity Futures Trading 
  Commission.....................................................     4
    Prepared statement...........................................     7
Stallman, Bob, President, American Farm Bureau Federation; Rice 
  and Cattle Producer, Columbus, TX..............................    42
    Prepared statement...........................................    44
Duffy, Terrence A., Executive Chairman, Chicago Mercantile 
  Exchange Group, Inc., Chicago, IL..............................    49
    Prepared statement...........................................    52
Ramm, Gerry, President, Inland Oil Company, Ephrata, WA; on 
  behalf of Petroleum Marketers Association of America...........    61
    Prepared statement...........................................    63
Newsome, Ph.D., James E., President and CEO, New York Mercantile 
  Exchange, Inc., New York, NY...................................    69
    Prepared statement...........................................    72
Campbell, Laura, Assistant Manager of Energy Resources, Memphis 
  Light, Gas & Water, Memphis, TN; on behalf of American Public 
  Gas Association................................................    88
    Prepared statement...........................................    90
Niemeyer, Garry, Corn and Soybean Producer, Auburn, IL; on behalf 
  of National Corn Growers Association...........................   113
    Prepared statement...........................................   115
Carlson, Layne G., Corporate Secretary and Treasurer, Minneapolis 
  Grain Exchange, Minneapolis, MN................................   123
    Prepared statement...........................................   125
Clark, Rodney, Vice President, CGB/Diversified Services; 
  Chairman, Risk Management Committee, National Grain and Feed 
  Association, Mt. Vernon, IN....................................   129
    Prepared statement...........................................   131
Farley, Thomas, President and COO, ICE Futures U.S., New York, NY   138
    Prepared statement...........................................   140
Weil III, Adolph ``Andy,'' President, American Cotton Shippers 
  Association; Member, Executive Committee, National Cotton 
  Council, Montgomery, AL........................................   144
    Prepared statement...........................................   147

                           Submitted Material

Eastland, Woods, President and CEO, Staplcotn, Greenwood, MI; on 
  behalf of Amcot, submitted statement...........................   169
Farley, Thomas, President and COO, ICE Futures U.S., New York, 
  NY, response to submitted questions............................   203
Lukken, Hon. Walter, Acting Chairman, Commodity Futures Trading 
  Commission, Washington, D.C., response to submitted questions..   190
National Cotton Council, submitted statement.....................   167
Paul, Eugene, Policy Analyst, National Farmers Organization, 
  Ames, IA, submitted statement..................................   186


                    HEARING TO REVIEW THE SOURCE OF



                    DRAMATIC MOVEMENTS IN COMMODITY



  MARKETS (AGRICULTURE AND ENERGY): A CHANGE IN MARKET FUNDAMENTALS OR



                 INFLUENCE OF INSTITUTIONAL INVESTORS?

                              ----------                              


                         THURSDAY, MAY 15, 2008

                  House of Representatives,
 Subcommittee on General Farm Commodities and Risk 
                                        Management,
                                  Committee on Agriculture,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to call, at 10:03 a.m., in 
Room 1300 of the Longworth House Office Building, Hon. Bob 
Etheridge [Chairman of the Subcommittee] presiding.
    Members present: Representatives Etheridge, Scott, 
Marshall, Salazar, Boyda, Herseth Sandlin, Ellsworth, Pomeroy, 
Moran, Boustany, Conaway, Lucas, Neugebauer, and Latta.
    Staff present: Andy Baker, Adam Durand, Alejandra Gonzalez-
Arias, Scott Kuschmider, Merrick Munday, Clark Ogilvie, John 
Riley, Bryan Dierlam, Kevin Kramp, and Jamie Weyer.

 OPENING STATEMENT OF HON. BOB ETHERIDGE, A REPRESENTATIVE IN 
                  CONGRESS FROM NORTH CAROLINA

    The Chairman. This hearing of the Subcommittee on General 
Farm Commodities and Risk Management to review the source of 
dramatic movement in commodity markets (agriculture and 
energy): a change in market fundamentals or influence of 
institutional investors, will come to order. Let me thank all 
of you for being here. Let me thank the witnesses for coming 
today. We have a pretty full calendar, and we will try to 
accommodate everyone. You know the order in this Committee. 
Normally Members will be coming back and forth, but I can 
assure you the Chairman and Ranking Member are going to be here 
the whole time except when we have to go vote. We will put a 
chain on his legs, so both of us will be here.
    Let me thank each one of you for coming today. And as all 
of you know, the Agriculture Committee has been a little busy 
the last several months working on a small piece of 
legislation. It is normally called the farm bill. This year it 
is called the Nutrition and Energy Title, and the House passed 
it yesterday. Now that we have finished the work on this piece 
of legislation, I think it is appropriate that we turn our 
attention to other issues affecting American agriculture. 
Today's hearing is on a subject for which I have been hearing a 
great deal of consternation, not only from farmers but from a 
lot of average people in my district, and really across the 
country.
    And here are a few facts over the past year on futures 
process of how they have increased: 47 percent for cotton, 66 
percent for corn, 83 percent for soybeans, 95 percent for 
wheat, and 122 percent for rice. Normally you would find that 
farmers would be dancing in the fields, wherever they find a 
place to dance, to see price increases of this magnitude. But 
these higher prices have come with increased volatility in 
commodity trading and with consequences. The financial demands 
associated with using the futures market, particularly rising 
margin requirements, have made it difficult for market 
participants to continue using futures for price discovery and 
price hedging and forced some out of the market entirely. This 
in turn has led commodity buyers to refrain from offering 
contracts to producers, one of the key risk management 
practices that farmers have utilized for a long time.
    While agriculture commodity markets are not used to these 
levels of prices, or the largest swings in prices that we have 
been seeing recently, other commodity markets, particularly oil 
and natural gas, have been experiencing these conditions for 
some time. Gold futures are 37 percent higher from the past 
year, and crude oil futures have increased almost 82 percent in 
the last year. This Subcommittee has specifically looked at 
these energy markets last year and in previous Congresses. As 
you know, the farm bill includes additional authority for the 
Commodity Futures Trading Commission to police contracts of 
some of the more lightly regulated markets.
    Support for this additional authority came out of our 
hearing on energy trading. Last month, the CFTC held a hearing 
to look into whether futures markets are properly performing 
their risk management and price discovery roles for 
agriculture. With this hearing, we are building upon that work 
and expanding it to include energy because not only does energy 
trading affect industrial users of energy products and 
consumers, it affects agriculture producers as well. While 
everyone agrees on the facts, there is no consensus on the 
theory behind the recent run up in commodity prices or 
increased volatility. The CFTC hearing covered a wide range of 
viewpoints as to factors behind these market changes.
    Understandably, not all of those reports agree nor was a 
consensus reached, but I don't think we will definitively 
answer that question today. It is important for Members to hear 
the arguments and the debate. Again, I want to thank the 
witnesses for participating. Now I will turn to my partner and 
the gentleman from Kansas, Mr. Moran, for his opening 
statement.

  OPENING STATEMENT OF HON. JERRY MORAN, A REPRESENTATIVE IN 
                      CONGRESS FROM KANSAS

    Mr. Moran. Mr. Chairman, thank you very much. I am happy to 
be here with you and serve as your partner as we explore a very 
important topic that farmers across the country care about. 
Today's agriculture is experiencing some of the most favorable 
market conditions in nearly a decade. In the last year, 
agriculture commodity markets, we have seen a tremendous 
appreciation price, and for the most part farmers welcome this 
news. With increased prices, however, as you say, come new 
challenges. As prices increase, the ability to utilize futures 
market as risk management tools become more challenging, as 
prices fluctuate and capital requirements increase to maintain 
market positions.
    While commodity prices have increased, the volume of 
trading and the number of participants in the commodity markets 
have also experienced record growth. The growth in the 
commodity markets is by no means a negative development. 
Increased market participation leads to additional equity and 
more opportunities for commercial market participants to 
utilize futures markets. The role of this Subcommittee is to 
insure that the Commodity Futures Trading Commission is doing 
its job to ensure that markets are functioning and that price 
discovery is occurring in an efficient manner.
    Today we will hear from a variety of witnesses that include 
the CFTC, futures exchanges, and market participants. I hope 
this Subcommittee can learn about the new challenges that 
market participants are experiencing. In addition, I look 
forward to seeing the data and market conditions that CFTC is 
monitoring, and if necessary determine whether there is 
something that can be done to better ensure that the markets 
are functioning properly. One thing I think we should not do is 
simply out of hand conclude that certain classes of market 
participants are to blame for the challenges we are 
experiencing in the prevailing market. Increased market 
participation can be a good thing, and additional participants 
can provide the equity necessary for more efficient conduct of 
price discovery.
    For every commercial market participant, there is another 
non-commercial participant that offsets the commercial traders 
position. The job of this Subcommittee today is to listen to 
the findings of the agency that we have tasked with market 
surveillance. I hope the CFTC experts will provide an 
explanation of market data that they are currently monitoring 
whether the data demonstrates the existence of issues that need 
to be addressed and whether additional data is needed to draw 
more sound conclusions. They will tell us if there are ways 
that regulatory structure can be adjusted to assure market 
access for willing participants without unnecessarily 
disrupting the function of the markets. I thank you for holding 
this hearing. I am glad to be back in 1300 and at work on 
behalf of farmers of America. I thank the Chairman.
    The Chairman. I thank the gentleman. The chair would 
request that other Members submit their opening statements for 
the record so that witnesses may begin their testimony and 
ensure that we have ample time for questioning.
    [The prepared statement of Mr. Peterson follows:]

  Prepared Statement of Hon. Collin C. Peterson, a Representative in 
                        Congress From Minnesota
    Thank you, Mr. Etheridge, for holding this hearing this morning. 
We've all had a busy last few weeks, to say the very least, but I'm 
glad we are here today to discuss what has been happening in the 
agricultural and energy markets over the last several months.
    I think anyone who has any sort of historical perspective following 
these markets had a hard time believing the kind of prices we have seen 
in recent months.
     I don't know too many people, for example, who ever envisioned $12 
wheat futures, much less $24 wheat futures, like we saw on the March 
2008 Minneapolis contract.
    And prices are not just trending upward, they are moving rapidly in 
shorter periods of time. Daily trading limits on exchanges have been 
triggered on a regular basis, sometimes on consecutive days for the 
same contract. These wild swings call into question the role of futures 
markets as mechanisms for price discovery and risk management that work 
to benefit producers, processors and consumers.
    Furthermore, in many cases, farmers are not the ones seeing the 
benefits of these high prices.
    Farmers have been unable to enter into forward contracts with grain 
elevators because elevators have run up against their credit limits due 
to rapid price swings in a short amount of time. Some elevators have 
had to triple, quadruple, even go up to eight times their normal credit 
line just to finance margin calls on their positions. These are not 
speculators. These are people involved in production agriculture who 
depend on the markets for stability and solvency.
    Many of these issues were brought up last month when the Commodity 
Futures Trading Commission hosted an all-day hearing on commodity 
prices and the rise of large speculative positions. CFTC took testimony 
from more than 30 participants, some of whom are here before this 
Committee today.
    A lot of opinions were offered and a lot of ideas were exchanged at 
that hearing. Unfortunately, I heard a lot of disappointment expressed 
from many sectors of agriculture coming out of that hearing about 
CFTC's apparent lack of interest in acting on the increasing lack of 
convergence in cash and futures prices.
    In my opinion, there are some real problems in the run-up we are 
seeing in these prices. I believe commodity contracts have become more 
popular as investment vehicles instead of the price discovery function 
for which the contracts were created. And this group of traders is 
growing larger and more influential given the size of some of their 
positions.
    A commodity futures market needs to have some semblance of 
stability to have any value to its participants. The issue of traders 
and hedgers getting caught up in the flood of speculators and hedge 
funds is of concern to this Committee and I think in time it will 
require some form of action. I look forward to hearing from today's 
witnesses for their perspective and I welcome back my time.

    The Chairman. We would like to welcome our first panel to 
the table, Mr. Jeff Harris, Chief Economist, Commodity Futures 
Trading Commission, Washington, D.C. He is accompanied by Mr. 
John Fenton, Deputy Director, Market Surveillance Section, 
Commodity Futures Trading Commission, Washington, D.C. Mr. 
Harris, please begin when you are ready, and I would ask that 
you summarize your statement in 5 minutes, and your full 
statement without objection will be entered into the record.

         STATEMENT OF JEFFREY HARRIS, CHIEF ECONOMIST,
             COMMODITY FUTURES TRADING COMMISSION,
         WASHINGTON, D.C.; ACCOMPANIED BY JOHN FENTON,
           DIRECTOR OF MARKET SURVEILLANCE, COMMODITY
                   FUTURES TRADING COMMISSION

    Mr. Harris. Thank you, Mr. Chairman, and Members of the 
Committee. I am Jeffrey Harris, Chief Economist of the 
Commodity Futures Trading Commission, testifying along with my 
colleague, John Fenton, who is our Director of Market 
Surveillance. We appreciate the opportunity to discuss the 
CFTC's role with respect to futures trading and our current 
view of market trends that the government is charged with 
overseeing. These are extraordinary times in our markets. Many 
commodity futures prices have hit unprecedented levels. In the 
last 3 months, the agricultural staples of wheat, corn, 
soybeans, rice and oats have hit all-time highs, as you can see 
from our Chart 1 here.
    We are also witnessing record prices in crude oil and 
natural gas, and other energy-related products. Adding to these 
trends, the emergence of the subprime crisis last summer and 
weak returns in equity and debt markets have led investors to 
increasingly seek portfolio exposure in commodities as an asset 
class. We are continually doing new analysis on our detailed 
market data, applying new research methods, building bridges to 
outside researchers and government agencies all to increase our 
view of futures markets. And separately our Division of 
Enforcement investigates any specific information of 
potentially manipulative conduct on a case-by-case basis.
    In line with these efforts, the agency convened an 
agriculture forum 3 weeks ago, in which we brought together a 
diverse group of market participants to air full views and 
opinions on the driving forces in these markets. The agency 
allowed a 2 week comment period following the hearing which 
just closed last Wednesday. Currently the Commission and staff 
are reviewing the comments received, and the Commission plans 
to have announcements of several initiatives in the very near 
future. The CFTC also recently announced the creation of the 
Energy Markets Advisory Committee and named the public members 
of the committee. That first meeting will be held on June 10 to 
look at issues related to energy markets and the CFTC's role in 
those markets under the Commodity Exchange Act.
    Clearly, the commodity futures markets are experiencing 
robust growth across commodities particularly with the recent 
influx of institutional investors. There are two basic types of 
institutional activities that tend to be referred to as funds 
in our markets. Each is identified to some degree of accuracy 
within our large trader reporting system. The first group of 
funds represents monies that enter into futures markets through 
various form of managed money like hedge funds, commodity 
pools, and the like. Managed money funds can either be long or 
short in our markets depending on their speculative beliefs 
about future prices. The second type of fund, known as index 
funds, or commodity index traders, have become more important 
in recent years. These funds seek commodity exposure as an 
asset class like stocks, bonds, or real estate, and aggregated, 
index fund positions are relatively large. They are 
predominantly long and passively positioned, that is, they 
simply buy exposure to commodities in futures markets, maintain 
their exposure through pre-specified rolling strategies before 
the futures enter delivery months.
    It is equivalent to a ``buy and hold'' strategy in the 
stock market. In response to the growing activity by commodity 
index traders, in fact, the Commission has increased 
transparency in 12 agricultural markets by publishing weekly 
data on positions held by these index traders since January of 
2007. Some observers have suggested that higher crude oil 
futures prices and agricultural commodity futures prices are 
being driven by speculators in the futures markets and have 
suggested steps to reduce or limit their actions in these 
markets. The CFTC has been actively engaged with the industry 
participants during this time of extraordinary price increases, 
and the data demonstrates the influence of fundamental factors 
in commodity prices.
    First, we note that prices have risen sharply for many 
commodities that have neither developed futures markets like 
durum wheat and steel, nor institutional fund investments like 
the Minneapolis wheat contract and Chicago rice. Second, in 
some markets where index trading is greatest as a percentage of 
open interest, such as the live cattle and hog futures markets, 
they have actually suffered from falling prices during the past 
year. Beyond these fundamentals, we have utilized our 
comprehensive data to rigorously analyze the role of hedgers 
and speculators to both energy and agricultural futures 
markets. All the data modeling and testing and analysis that we 
have done to date indicates there is little economic evidence 
to demonstrate that futures prices are systematically driven by 
speculators in these markets.
    The next chart highlights data on speculative positions. 
Here we highlight managed money trader positions in crude oil, 
for example. Generally, this chart shows that during the past 
year as crude oil futures prices have increased as denoted by 
the black line there the level of speculative positions have 
remained relatively constant in percentage terms. As the chart 
shows, managed money traders are both long, represented by the 
green bars, and short, represented by the orange bars, in these 
markets. Although not depicted directly in this picture, our 
studies in agriculture and crude oil markets have found that 
speculators tend to be trend followers in these markets, that 
is, speculators generally tend to buy the day after prices 
increase.
    Simply put, the economic data shows that the overall 
commodity price levels including agriculture commodities and 
energy futures prices are being driven by powerful economic 
forces and the laws of supply and demand. These fundamental 
economic factors include increased demand from emerging 
markets, decreased supply through weather or geopolitical 
events and the weakened dollar. Together these fundamental 
economic factors have formed the perfect storm that is causing 
significant upward price pressure on futures prices across the 
board. Given the widespread impact of the higher futures 
prices, the CFTC will continue to collect and analyze data 
closely. The agency prides itself on a robust surveillance and 
enforcement program complemented by rigorous economic analysis 
that we use to oversee U.S. futures and options markets.
    At the Commission, we are devoting and we will continue to 
devote an extraordinary amount of resources to ensure that 
futures markets are responding to fundamentals and are serving 
the role of hedging and price discovery. Thank you for the 
opportunity testify today, and we look forward to answering 
your questions.

    [The prepared statement of Mr. Harris follows:]

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    The Chairman. Thank you, Mr. Harris. And the chair will now 
recognize himself for 5 minutes for questions. Mr. Harris, much 
of the CFTC's analysis regarding index fund activity and 
commodity markets has led the Commission, as you said, to 
believe that index funds are not the cause of price increases 
we have seen in the commodity markets recently. I don't have 
any evidence to challenge that assertion. However, I wonder if 
there is still not subtle but distinct influence the funds do 
have on the market, and this leads to this question. Given that 
these funds are generally taking long positions, big dollars, 
generally are passively managed and generally are putting a 
great deal of money into the markets, while they may not be 
directly causing commodity prices to increase, could they not 
be preventing prices from following their natural order of 
moving up and down or following the supply and demand curve?
    Mr. Harris. Actually that is one possibility that we are 
trying to assess here. What we have been doing in our analysis 
is looking at, from day to day, what the price changes are and 
what the position changes are by various groups of traders. Our 
public data groups traders broadly in terms of non-commercial 
and commercial traders. We can look at, and particularly in 
agricultural markets, the group of traders called index 
traders, and what we do as a simple analysis is this: we look 
at days the price goes up, and look who is buying on those 
days. And, in fact, that is one of the reasons we come to the 
conclusions we do. Usually when prices are going up, it is in 
response to trading by commercial dealers, whether it be 
manufacturers, producers, or dealers within the commercial 
space.
    The Chairman. Well, I raise this question because I think 
it raises a question whether or not these long positions by not 
moving, just staying there, are really establishing the floor 
that we traditionally think the speculators, people who are in 
the market for the right reasons, are moving in and out. If you 
aren't going to move in, you have established, and you are 
assuming these two will keep moving, and obviously as long as 
the market keeps moving, you keep that floor up where it can't 
go up and down. So, it is automatically a moving market, and 
that raises a question does it really put more money in the 
market when you are doing that.
    Mr. Harris. Well, that gets at the fundamental notion of 
what futures markets do, and one of the things I am not sure we 
have a great handle on is the psychological factor. The one 
thing that is true about futures markets, they are not like 
stock markets where we have a finite amount of stock 
outstanding, and so when people come and want to buy stock they 
have to bid it out of somebody else's hand. The futures markets 
exist such that people can write new contracts on open 
interest. In fact, what we are seeing in our markets is if 
these commodity index traders come to the market to buy, it is 
not necessarily information driven trading that they are doing. 
In fact, they don't necessarily have to go to the market and 
bid up prices. We could all write new contracts to those people 
and add liquidity into the market that way.
    The Chairman. Okay. Let me get one more question before my 
time runs out because we get a little concerned. We had the 
bubble of tech stocks in the 1990s and housing at the turn of 
this century, and the last thing we want to do is see the 
farmers back in the dust bowl. One piece of legislation 
introduced in the Senate is the Consumer-First Energy Act of 
2008. One piece of this bill would require the CFTC to increase 
margin requirements for those trading in crude oil. And I 
believe you have been quoted as saying about such a proposal 
what it would do to impact--it would really force small market 
participants out leaving the market to only the very large 
hedgers or big speculators. I invite you to comment a little 
bit more on that before the Committee, if you would.
    Mr. Harris. Yes, I think my viewpoint there actually comes 
from in the agricultural markets where we saw problems with 
meeting margin calls this past year when wheat was going up and 
limit up on a number of days in a row. We saw a bunch of small 
grain elevators actually having issues with financing, 
establishing lines of credit, and that is sort of the parallel 
position. It wasn't the big traders that had the issues with 
margins and margin costs because they were well capitalized. I 
think if we apply higher margins across the board to any 
market, it has the natural effect of adding a fixed cost of 
being in that market, and the fixed cost has to be borne 
obviously disproportionately by smaller participants.
    The Chairman. Then my question comes to this very quickly 
as we close, is there a way the big traders can push the little 
folks totally out no matter what the margin call is if they 
want to drive it up to a point?
    Mr. Harris. Well, in fact, yes, that is one of the things 
we do is to monitor these things, and, John, I think can speak 
to that in the market surveillance context.
    Mr. Fenton. Yes. If a trader or a group of traders were 
colluding to drive prices up, that is the job of Surveillance 
to detect it and prevent. It is the job of our Enforcement 
Division to take action afterwards if we find that somebody has 
done that, so we are looking for that all the time. With regard 
to the margin question, I think from our point of view you 
first have to establish that there is a reason to do something 
different than what has been done for 100 years in margins; 
which is to set them to protect the financial integrity of the 
system; which they have worked brilliantly well to do, and 
there has been a great history of security in futures 
clearinghouses. So since we really don't think that the case 
has been made that speculation is driving prices, you are 
running the risk of unintended consequences to increase margins 
to a level that is beyond--a super margin level--that is beyond 
what is needed to protect the financial integrity of the 
system.
    The Chairman. I would like to pursue that longer, but I 
have run out of time. I will yield to the gentleman from 
Kansas.
    Mr. Moran. Well, Mr. Chairman, thank you very much. On that 
point, when you say, Mr. Fenton, that speculation is not 
driving the prices, you may want to rephrase what I just said, 
but just a moment ago that was something similar to your words. 
Would you repeat that?
    Mr. Fenton. I think that we haven't found evidence that 
speculation is driving prices in the agricultural market and in 
the energy markets.
    Mr. Moran. When you say that, what does that mean, that the 
price that is established in the market is based upon the laws 
of supply and demand, the so-called fundamentals that 
speculation is--when you say it is not driving the price, what 
is the consequence of that? What does that mean?
    Mr. Fenton. Well, I think it means that we think the market 
is reflecting fundamentals, that the----
    Mr. Moran. That is a desired outcome. That is what the 
market should--is that what the market should reflect in your 
mind, the fundamentals?
    Mr. Fenton. Absolutely. That is the purpose of the market 
to discover the price based on fundamentals, but I would add to 
that it is not just current fundamentals but all futures 
markets are anticipatory. It is basically looking down the road 
and putting a probability estimate on things that may happen, 
and it incorporates that into the price, and that is again a 
very important benefit of futures market that it does do that.
    Mr. Moran. One of the oil company executives said within 
the last few weeks about oil prices based upon the laws of 
supply and demand oil should be priced at $55 a barrel, I think 
is what was said. What does that mean?
    Mr. Fenton. Well, frankly, in my opinion that is living in 
a dream world. The price of crude oil has been going up 
persistently for 5 years, and there have been people who said 
that the futures market was getting it wrong, that prices 
should be at $40 or at $60 or at $80, and that each time it 
incorporated some level of speculative premium, $20 or 
something like that. And now looking back at price charts, you 
kind of think that the market really did get it right. You 
know, people would say, ``Well, okay, back then when it was $60 
maybe that was justified.'' So I think the evidence over time 
is that the market has been more correct than the critics of 
the market.
    Mr. Moran. Let me bring our conversation back to the 
agricultural commodities. I suppose there is a greater belief 
that wheat and corn reflect the so-called fundamentals in their 
price on the futures. But cotton, it seems to me, to be much 
more difficult to reach that conclusion, and we have had some 
what appears to be anomalies in the cotton market. Is there an 
explanation for what is going on there?
    Mr. Fenton. I agree. I think cotton is an exception to what 
I have said. I think we have not found--the fundamentals in 
cotton are very different from the grains, and there was an 
episode, I would say, dating to mid-February through March 
where cotton prices went up sharply and chaotically, and really 
there was no current change in demand and supply. The market 
may have decided to look at expectations about coming year 
plantings and that there would be changes in supply down the 
road. But, we are currently carrying a very high level of 
stocks in cotton, so that is something that we are looking 
into. The Commission is pursuing a regulatory inquiry into what 
happened in cotton and why it happened.
    Mr. Moran. Do you have a list of what the possible 
explanations might be?
    Mr. Fenton. Well, I think that in mid-February there was 
buying by both managed money traders--that is a sub-group of 
the non-commercial traders--and the large professionally 
managed money traders. They did buying during the middle days 
in February, and the index fund traders also were buying at 
around the same time. There was buying pressure from financial 
money, but prior to the real explosion of price which occurred 
on March 3, there had been no significant buying by those two 
groups for about a week prior to that. And, in fact, on March 3 
and 4 and subsequent days when prices were high and volatile 
the two groups that I mentioned, the managed money traders and 
the index traders, were not only not buyers but they were 
sellers.
    Mr. Moran. Mr. Harris or Mr. Fenton, if we didn't have the 
futures market, if we didn't have the speculators 
participating, would the price of commodities be less today 
than what we see in the market? Would the price of oil be 
something different, the price of corn be lower?
    Mr. Harris. Well, I guess from my testimony, I think that 
is one thing we point out. There are commodities out there that 
have no futures contracts, and they are going up as much or 
more than the current commodities that have listed futures. And 
in fact there are commodities that have very little 
institutional money that are going up. The rice contract, for 
instance, is the record increase for the past year, and there 
is very little institutional money in rice.
    Mr. Moran. Thank you very much for answering me. Mr. 
Chairman, thank you.
    The Chairman. I thank the gentleman. And I yield 5 minutes 
to the lady from Kansas, Mrs. Boyda.
    Mrs. Boyda. This is just fascinating. I have some 
questions, and I am not sure, they are not very well stated 
here. I am just trying to learn some stuff. On the sweet oil 
futures here that you had, do you have graphs? I know you were 
using this as an example. Do you have any graphs that are out 
there for the commodities?
    Mr. Harris. Well, yes, I guess John presented an entire set 
of graphs at our agriculture forum, and we, I believe, have 
that.
    Mrs. Boyda. And we are talking about long and short 
contracts out here. Do you have the equivalent of this for 
sweet oil futures?
    Mr. Fenton. The data that we have used to create this for 
crude oil, we have for all commodity markets, so we could do a 
similar graph writing for other commodity markets.
    Mrs. Boyda. And do they look similar?
    Mr. Fenton. There is, I think----
    Mrs. Boyda. My question is we are not the oil committee, we 
are the Agriculture Committee, so I am wondering why are we--it 
is interesting, but why are we looking at crude oil?
    Mr. Fenton. Well, I think because we have thought and think 
that crude oil is certainly on everybody's mind, and it is also 
an important component of agriculture input costs.
    Mrs. Boyda. In the interest of time, could you just get 
those to us?
    Mr. Fenton. Sure.
    Mrs. Boyda. Okay. This is fascinating. I would like to 
learn.
    Mr. Fenton. You asked if the similar chart for some of the 
agriculture markets would look similar. There is more spread 
trading in the crude oil markets. Spread trading is trading by 
a trader that takes a long position in 1 month and a short 
position in another. It is trading in differential. And that is 
the predominant trading activity of non-commercial traders in 
crude oil markets. There is that in the other markets as well, 
but I think it is less in terms of the real world trading.
    Mrs. Boyda. Most are going still long, is that what you 
were saying earlier? It is all right because I only have 5 
minutes. Do you have any way of knowing--I did 58 Congress On 
Your Corner events, it is fascinating, and you get to talk to 
everyone, and I have asked, ``Has anybody seen $12 a bushel 
wheat, anybody paid $12 in my neck of the woods.'' Nobody that 
I have talked to in Kansas is getting these prices. So where 
are the differences going? I guess my question is do you have 
any sense of what percentage of the actual prices or what 
percentage of the money, the whole money, that is being 
invested spent, everything? What percentage of it is going to 
hedge fund managers as opposed to the farmer, any sense of 
that?
    Mr. Fenton. Well, the amount of money going to hedge funds 
is obviously a function of the position they take and whether 
they are right about prices. The differential between a futures 
price and some cash prices, it depends where the cash price is, 
the location of the cash price. There is going to be a basis 
relationship between a cash market and a futures market that 
reflects both the time element and also the locational element. 
That is, it costs money to get a commodity from one place to 
another so----
    Mrs. Boyda. I don't have a lot of time. I apologize. But 
the perception is in my neck of the woods that our farmers 
aren't making the money. The hedge fund managers are making the 
money.
    Mr. Harris. If I could make a comment on that.
    Mrs. Boyda. Yes.
    Mr. Harris. One of the issues I think is the consternation 
among the farm community is that they looked at the futures 
prices going say from $6 to $8 and thought this is a good--``I 
can go out and hedge my crop and lock in a nice little profit 
here,'' and then prices continue to go up to $9, $10. We are 
then facing actually these margin costs so it costs them a 
little bit more in financing costs than they thought it would 
be. There is a common belief that there are methods of hedging 
and selling not your entire crop. These are extraordinary 
times, and I think that is true probably that the farmer didn't 
have perfect foresight for the most part and couldn't predict 
it. They probably wouldn't have hedged their commodity if they 
knew it was going to $10 and $12.
    Mrs. Boyda. And I guess that is what we are going back to, 
is there any manipulation there of saying it is our small 
farmers and ranchers, and clearly I have small farmers and 
ranchers. I have large farmers and ranchers in my district that 
are the ones that are being caught in the middle here. How much 
time do I have? Do you know, there are these rumors out there 
that these hedge fund managers sit at their computers and they 
basically bet and gamble on what is going on in Kansas. That 
there are basically formulae that are written that support 
these decisions. There are not people making decisions, that 
there are all these formulae, is there?
    Mr. Harris. Well, it is certainly true that hedge funds 
both go long and short so they do take----
    Mrs. Boyda. Are there formulae out there?
    Mr. Harris. Generally, yes, most hedge funds have some sort 
of program or they determine what the price should be. So if 
they say the price is too high or too low, they try to take a 
position both long and short in the market. One thing we do 
know is that they don't change positions all that often, so 
they tend to hold positions more than maybe the street lore 
would have it. Their trading activity is actually lower than 
the average in the markets.
    Mrs. Boyda. Thank you.
    The Chairman. Thank you. The gentleman from Texas, Mr. 
Conaway, for 5 minutes.
    Mr. Conaway. Thank you, Mr. Chairman. Getting back to the 
differential between cash market and futures market, do you 
guys watch that in terms of trying to analyze? I mean if it is 
just transportation cost or location, that is pretty easily 
done but is there--to expand on what Mrs. Boyda was saying, 
those differences in the cash market versus the future market, 
is that a trigger or a red flag for you in any way?
    Mr. Fenton. Yes. It is a very important price relationship 
that we look at.
    Mr. Harris. In fact, we have been monitoring that. In fact, 
being in touch with some of the University of Illinois 
researchers, we did a report on the Chicago Board of Trade 2 
years ago on that particular issue, so we invited them to our 
ag forum. And we monitor these things and have been monitoring 
every contract and expiration for the last few years.
    Mr. Conaway. What was your finding? Anything untoward 
involved or just the normal----
    Mr. Harris. Well, one regularity actually in the basis risk 
is that the basis is actually--the futures prices--are lagging 
above the spot price during the expiration month up the 
Illinois River into Mississippi. At the Gulf Coast it is 
actually the opposite way so to us at the first glance or the 
first explanation would be that is a transportation cost issue. 
We have also collected information on barge rates and fuel, and 
we know that those costs have tripled or doubled in the last 
year alone. There does seem to be some fundamental explanation 
for some of that basis problem.
    Mr. Conaway. Looking at this chart on the Minneapolis 
Exchange of wheat in over a relatively short period of time, 
what were you guys doing during that time frame from a 
regulatory standpoint to say, ``It is okay to be happening like 
that, it is wrong, somebody is manipulating the system.'' Mr. 
Fenton, what were you doing on that wheat?
    Mr. Fenton. We were intensively monitoring the trading. We 
were watching who was doing the buying and selling, and it is 
in a way illustrative of the fact that we have had high price 
movements and volatility--having in this case, very little to 
do with speculative trading. Speculators were not buying in 
this market during this period in a significant way, and index 
funds or index traders don't trade in the Minneapolis wheat 
market at all so----
    Mr. Conaway. But who was buying at those prices?
    Mr. Fenton. It was commercial firms.
    Mr. Conaway. Firms that were trying to lock in the price 
for deliveries at that level?
    Mr. Fenton. Or buying back short positions, and it is 
interesting that----
    Mr. Conaway. You can tell that. You can tell if they are 
just trying to cover short positions.
    Mr. Fenton. Absolutely.
    Mr. Conaway. Okay.
    Mr. Fenton. The cash price during this time period was at 
or above the futures price, and one of the features here was 
for a long period of time this market was locked. It reached 
the daily permissible price move and it was locked, and it was 
locked 15 out of 16 consecutive days, and so a lot of the 
pricing signals were coming out of the cash market.
    Mr. Conaway. Any sense that the actual supply of wheat was 
driving this? In other words, was there a fundamental that 
said, ``We are going to be short this particular type of 
wheat?''
    Mr. Fenton. I think it is primarily being driven by demand, 
demand for--and maybe even panic demand to cover----
    Mr. Conaway. You said panic demand?
    Mr. Fenton. Covered needs. We know that millers and 
exporters or export buyers were bidding high prices to get 
wheat during this period.
    Mr. Conaway. Why were they short wheat this year versus 
last year? There were people living this year but not doable.
    Mr. Fenton. Well, I think in the case of--there is strong 
world demand for wheat and so it may well have been as people 
saw prices going higher, and they thought, ``Well, it is high 
but I better buy it now, it may be higher later.''
    Mr. Harris. The difference, I think, between this wheat, 
this is the high protein hard red wheat so this is a unique 
commodity that is in high demand. There has been some evidence 
in Australia, for instance, that their wheat was probably short 
the last 2 years in a row.
    Mr. Conaway. And you said in the rice market that is just 
insiders who--there are not other speculators in that market, 
you said?
    Mr. Harris. It is not quite as clean as the wheat market 
where there is no index trading in wheat in the Minneapolis 
wheat but there is very little index trading in the rice 
market.
    Mr. Conaway. And again rice market, you mean rice 
production around the world is down, up, sideways?
    Mr. Harris. Yes.
    Mr. Conaway. I gave you three choices. I said down, up, 
sideways.
    Mr. Harris. Oh, it is down.
    Mr. Conaway. Okay. I yield back. Thank you.
    The Chairman. I thank the gentleman. The gentleman from 
Georgia, Mr. Scott, for 5 minutes.
    Mr. Scott. Thank you very much, Mr. Chairman, for holding 
this important hearing, and the fact that we are holding this 
hearing just less than 24 hours after completing the farm bill, 
which indeed was an arduous journey, is testimony to the 
importance of this issue and also the dedication of you, 
Chairman Etheridge, to this work. With the rapid increases and 
volatility in commodity prices, I think we have to take a 
careful look not only at the causes but as well as the 
consequences. I would like for each of you to very quickly, if 
you could, in order of priority give me your opinion for the 
causes of this volatility, and then also in order of priority 
the consequences of these rapid increases in price.
    Mr. Harris. Well, I think from an economic standpoint one 
of the things we see in all commodity markets is tremendous 
uncertainty about the future. We have two political events now 
of countries cutting off exports of food commodities in 
particular. We have seen a tremendous growth in the open 
interest from the hedging crowd so commercial traders who are 
on the buying end of these commodities in grains have bought 
more than ever. There is more shorting and locking in of 
futures prices by the farm community. We have record volumes in 
all of our markets. I should note that one of the exercises of 
margin calls in Kansas City, we did have a Kansas City Board of 
Trade member sell their seat to finance one of their positions, 
so that is an indication that the markets are booming as far as 
volume goes.
    What is driving that demand, I think is just tremendous 
uncertainty about what is coming up. We see oil markets 
developing out now into 8 year contracts. We didn't have oil 
market contracts beyond 5 years just 5 years ago, and so there 
is some inherent hedging of demand or hedging of uncertainty in 
the future of trying to lock in prices using the futures 
markets.
    Mr. Fenton. If I can add, there is of course more than one 
thing causing volatility, and it varies by market, but if I had 
to pick one thing that sort of spans many commodity markets, it 
is tremendous world demand for commodities especially coming 
out of emerging countries. China principally, in copper, in 
oil, in cotton although cotton is not a market that has strong 
fundamentals. If it wasn't for cotton and Chinese buying, 
cotton prices would be lower. So it is tremendously demand 
driven, and the consequence of these high prices, I would say, 
is it has made trading very difficult and short hedging very 
difficult. To have a short hedge on and to have done the right 
thing to hedge your risk and then face margin calls day after 
day is a very difficult position to be in.
    Mr. Scott. Let me ask you both, what about the role of the 
institutional investors in the market? There seems to be quite 
a bit of blame that is geared their way. I would like for you 
to give your opinions on that, and also to comment on what I 
think are probably other more profound factors; which are the 
increased demand as you mentioned in developing countries, the 
weakening of the dollar, crop shortfalls, and this recent 
downward pressure on corn in terms of the production of 
ethanol. If we look at those, what would be your fair opinion, 
is it accurate as many in the community are doing to use the 
institutional investors as a scapegoat in light of these other 
causes?
    Mr. Fenton. Well, I think there has been a growth of 
institutional money in the market. It has been, I think, mostly 
coincidental with the bull market and commodities. I think the 
things that you cited are powerful fundamental factors driving 
prices that demand for commodities around the world, the dollar 
weakness, and many crops of wheat in particular with the 
Australian drought, so many commodities are in short supply. 
And ethanol has really fundamentally changed the picture. 
Thirty million acres of American farmland now is devoted to 
producing energy really rather than food, and so it has direct 
effects and indirect ripple effects throughout the ag economy.
    Mr. Scott. Did you say 30 million acres?
    Mr. Fenton. I am just basing it approximately a third of 
the corn crop is going to ethanol, and we use around 90 million 
acres to grow corn.
    Mr. Scott. Is that new acres?
    Mr. Fenton. No. Well, there has been some new acreage moved 
into corn from other crops, but it is acreage mostly that has 
been growing other things.
    Mr. Scott. My time has expired. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman. The gentleman from 
Texas, Mr. Neugebauer, for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman. I have a number of 
questions. I think the first question is that when you look at 
these graphs and the markets were edging upward, but then we 
had some very erratic behavior during a period of time there. 
If you look at these now some of these processes have come back 
down and seem to be a little bit more stable in their nature. 
And so I guess the question I have beginning with is was this 
some kind of a perfect storm that was going on where we were 
having some issues in other financial markets, people looking 
at moving liquidity around, looking for places to go, seeing 
the trend in the commodity process and say, ``Hey, maybe that 
is the place for us to take money out of one place and go put 
it into another,'' and so all of that pressure kind of hitting 
the marketplace at one time. Mr. Harris, Mr. Fenton.
    Mr. Fenton. They don't with some of that, and it does--many 
markets, certainly the wheat and soybean markets have come down 
quite a bit from their high of February and March. There 
probably was some of that money moving into commodity markets, 
but again we did not see, and looking at the data, do not see a 
massive in-flow of financial money into the commodity markets 
during this period that would explain these price rises.
    Mr. Neugebauer. The other question is I wish we could have 
seen here also over the same period of time what has happened 
to the dollar. American agriculture is a bargain when you look 
at other currencies around the world. In fact, everything is a 
bargain if you are buying American products because people are 
paying about $75 a barrel for oil in other countries. We are 
paying $110 a barrel just because of the differentiation of the 
dollar and the fact that oil is traded in dollars and some of 
these commodities. What would that chart look like as the 
dollar is going down, would it have been pretty much an inverse 
relationship in many cases?
    Mr. Fenton. Yes. A while ago we looked at what oil prices 
would be if denominated in Euros compared to what it is 
denominated in dollars. It was about 25 percent less so we are 
judging using that back of envelope type analysis. That dollar 
weakness explains about a quarter of the increase in oil prices 
and probably similarly it would explain some of the increases 
in the ag markets.
    Mr. Neugebauer. Maybe we should send that message over to 
Chairman Bernanke and let him know that maybe he could help us 
with some of these oil prices and help strengthen our dollar. I 
think the other question I have is when I view these markets, 
particularly the commodity markets, I find them an extremely 
important tool for our producers around the country. When I 
think about what is their primary purpose, I have to think it 
is the commercial movement of commodities and the ability to do 
that in this country. Obviously, we need a certain amount of 
speculative activity in those markets to provide some 
liquidity. So if things are changing and we have this perfect 
storm, I think the question that all of us want to know today 
is, is this some kind of systemic change in these markets? Is 
it a time for reflection to make sure that these markets 
continue to provide that as an effective tool as we move 
forward?
    Do we need to look at these structures and make sure that 
it is in place to be a tool? What I hear today from a lot of 
folks is that it is difficult to forward contracts for the 
little guy out there that is actually growing these 
commodities. I think sometimes we forget those folks. Those are 
the folks who are the most important. Are the tools in place 
for them? And I think some people are saying today that, ``No, 
those tools are not in place because some of the things that 
have happened in the market have caused huge swings, 
volatility, margin calls that almost freeze up lines of credits 
for some of these folks.'' Do we need to stop and pause and 
reflect here and see if we are doing it right, or do you think 
we are doing it right?
    Mr. Fenton. Well, first, I absolutely agree that the 
primary purpose of the futures markets is for price discovery 
and hedging. It is for people who are producing, consuming, or 
marketing commodities. And it has traditionally served that 
role very well. There is new trading in the market, index 
trading in particular is trading, that didn't occur in any 
significant way 10 years ago or even 5 years ago, so it is a 
new part of the market. And we are, and have been studying it, 
and we encourage others to--we do publish data on index 
trading. We started doing it last year in January. There are 3 
years almost of data now available.
    We encourage people to use it, to study it, to see if they 
see some impact of index trading on our markets. And 
unfortunately we don't get to stop the market. The market has 
to go on. But you are absolutely right that it calls for 
continued study to better understand these new types of trading 
in the market.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman. Let me follow up as a 
prerogative of the chair for just a minute because I remember 
we had in the financial markets some of these things we didn't 
understand that we were trading in. Are you telling this 
Committee that some of this index stuff that we are trading in, 
you are trying to figure out what it is, and what we ought to 
be paying attention to? Are we not in a position to be able to 
have some regulatory authority over that, that is, trading that 
may be influencing some of the other stuff?
    Mr. Fenton. I think this trading is not really complex. It 
is not an exotic engineered product. It is pretty 
straightforward. It is new though, and it is relatively new. It 
is in the past 4 or 5 years that it has been a significant 
factor in the market. And we think we have a pretty good handle 
on it, but have we completely answered does it have any impact 
in the market? Probably not. But our best sense now is that we 
don't think that it explains the high level commodity prices.
    The Chairman. We might want to come back to it. The 
gentleman from Georgia, Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Chairman. Thank you for 
holding this hearing. We, Members of Congress, find ourselves 
sort of in between all of you all and the folks that we 
represent. In a district like mine what people see is increased 
gas prices, diesel prices, food prices general commodity 
prices. For an awful lot of the folks that I represent an 
increase of 10, 20, 30 percent in 30, 40, 50 percent, 60 
percent, of a family budget is devastating, just devastating. 
And so naturally we are being assailed with all kinds of 
questions about what is going on. None of the answers seem 
particularly convincing to anybody because this has happened so 
suddenly.
    I see on page two, your summary of the macro, micro 
economic forces at work here, that is basically the letter that 
I send out when people ask me about this. It doesn't satisfy 
folks. That is not surprising that it doesn't satisfy folks. I 
also see right after that, again on page two, your caution that 
you don't necessarily have the answers. That certainly doesn't 
comfort people. It doesn't comfort somebody like me. It is 
understandable. I accept that. But it is very difficult to send 
a letter back in response to somebody who is really hurting and 
not understanding this, saying, ``Here are the forces 
generally, but we don't really understand what is going on.'' 
That is a very difficult position to take, and we are just 
looking for help up here.
    And I got to tell you, it would be very helpful if I sensed 
a little bit more alarm than I sense. You know, for the 
families that are affected by this, this is a huge alarming 
phenomena that if the experts are saying we don't know, and it 
could go on for quite some time with sort of calm measured 
voices, that is not comforting at all. If you could flip to 
Chart 9, a quick question here. A lot of people have worried 
that the movement of money out of different asset classes and 
into other asset classes away from subprime mortgages, whatever 
it is, into this area is somehow causing all prices to move up. 
This is just a lot of capital in the world and capital looking 
around for security for investment opportunities, that sort of 
thing, perceived by ordinary folks not to be real, just rich 
people making money off a bad situation. That is how it is 
perceived.
    And if you take a look at this, if I understood your 
testimony correctly, the idea here is that this chart suggests 
that people are taking short positions, long positions about 
equally, and so you shouldn't be too concerned. Yet I see the 
green is a lot more than the brown, and then on top of that, 
and we have seen this in the cotton business for sure, people 
taking short hedges worrying about having to make margin calls. 
I am going to have to sell my seat in the exchange to stay in 
the game. It seems to me that market would generally under 
these circumstances be saying, ``Oh, my God, all this money is 
going to flow in here, prices are generally going to be driven 
high whether you call it,'' as somebody just said, ``panic 
demand or not.'' Prices are going to go up so we better not be 
taking short positions here. There are a lot of investors out 
there that are just going to park their money. It is going to 
be long. And that is a large part of the phenomena.
    You know, there are just general consumption trends 
worldwide. You described that as well. That is something that 
we probably have to live with and adjust to. But to what extent 
can you safely say--well, what percentage? You estimated maybe 
25 percent is a weak dollar. What percentage of this is just a 
whole bunch of money flooding into these different commodities?
    Mr. Fenton. Well, before I answer that, could I just say 
that if my voice sounded calm or if our voices sound calm, it 
is not from a lack of concern. We are really busting our butts 
to be following these markets, and we take it very seriously. 
We completely understand the importance of this too.
    Mr. Marshall. If I could just briefly interrupt. I think 
you guys do a great job of watching for market manipulation, 
conscious efforts, that are improper under our rules, criminal 
in some instances to manipulate the market for financial 
advantage. That is not what we are talking about here. I think 
we are talking about general trends that are very problematic 
for a huge hunk of our population, so, what percent?
    Mr. Fenton. Well, I would say in my opinion the safe 
assumption in crude oil, which is the graph we are looking at, 
is that it is zero, that the market is reflecting--now 
obviously from day to day there may be days when particular 
trading, not by any means manipulative, but speculative trading 
may create a liquidity effect that moves prices but that would 
quickly abate over time. So I think the safe assumption is that 
the futures market is reflecting the fundamental reality of 
demand and supply for crude oil.
    Mr. Marshall. And, Mr. Harris, you agree. My time is up 
so----
    Mr. Harris. I think I would reiterate that we have the most 
detailed data in these markets than almost any market in the 
world. And I would agree. I think we see that the market seems 
to be functioning appropriately in reacting to demand and 
supply.
    Mr. Marshall. Yes, we are all ears if you got some good 
ideas how we address this for these ordinary Americans who are 
really struggling as a result of this. And it is happening too 
soon to say that this is just sort of normal stuff. It is not. 
Thank you. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman. The gentleman from 
Louisiana, Mr. Boustany, for 5 minutes.
    Mr. Boustany. Thank you, Mr. Chairman. This is a very 
important hearing. I agree, a lot of American families are 
feeling tremendous anxiety, business owners are feeling 
anxiety, farmers, and so forth. And I think the importance of 
this hearing and the information we are getting is very 
valuable because we are getting some facts out there that we 
can all kind of get our arms around. And just to kind of review 
some of the things that came out in testimony and from further 
questioning, Mr. Harris, you said earlier little evidence that 
futures prices are driven by speculation, and then we kind of 
repeatedly heard that in other committees. And I think that 
should give some sense of comfort that we don't have this 
wizardry going on out there, that the markets are really being 
driven by fundamentals of tight supply and demand.
    We know there is a linkage between energy and the other 
commodities. Clearly, the ethanol bridge and other things, the 
cost of inputs which largely related to petroleum products is 
also driving commodity prices. As well as problems such as what 
we have seen with rice in Thailand and other countries that 
have cut off exports. So basically the message that I am 
getting is that we have tight supply and demand. The 
fundamentals are driving the prices in this market. We know 
that the nature of the futures market is anticipatory. We know 
that hedging is a very important tool and that without 
arbitrage you can't really effectively hedge, so I think that 
the alarm that my colleague, Mr. Marshall, raises should not be 
something that Mr. Scott talked about, which would be 
``scapegoating'', but really good policy that is going to 
address the tight supply and demand, and that is sort of where 
we are at an impasse here.
    I can't help but think about the oil industry which I know 
a little bit about since I come from southwest Louisiana, and 
you mentioned the oil markets are looking at futures 8 years 
out. I know planning is a multi-year process with a lot of 
geopolitical risk, geologic risk, and so forth. I can't help 
but think that when the House voted four or five times in this 
past year or so to possibly impose $18 billion in new taxes on 
U.S. oil and gas companies, that can't be a good thing. It 
certainly has to have a detrimental impact on the planning 
process. And in a sense that is a type of speculation as well 
or a ``speculatory'' issue that could potentially create price 
increases down the line. Windfall profits tax, we have heard 
that kind of discussion as well with the oil and gas industry. 
We know what that did. We know what it did to us in the 1970s, 
and I would submit that if that sort of tax were imposed today 
the impact would be even worse because of the tight supply and 
demand situation that we are faced with.
    So I guess I am pleased to hear the two of you today once 
again reiterate that fundamentals are driving this tight supply 
and demand, and that what we really need to do is look at 
ourselves, Democrats and Republicans, and face the fact that 
these are the facts here. We need to come up with good policies 
that, particularly in the energy industry, are going to help us 
increase supply as we transition to alternative fuels, which we 
know is going to be a lengthy process. I would submit we need 
to strategically manage our interdependence on fossil fuels 
today with good policy that emphasizes supply as well as future 
investment as we transition to hopefully alternative forms of 
energy.
    So more of a speech than a question, but again I appreciate 
you again reiterating the facts about tight supply and demand. 
I don't know if you want to comment on that.
    Mr. Harris. Well, if I could comment actually. One of the 
things that I want to make a point of is that we do have 
detailed trading data every day on who is buying and who is 
selling in these markets. We are rigorously analyzing these 
things, and on a weekly basis updating. In fact, we have most 
of this up through last Monday now sort of fully engaged in 
determining when does a psychological factor take over, does a 
psychological factor take over, what are we seeing on a day-to-
day basis. The pattern that we saw actually in Minneapolis 
Grain isn't all that unusual for a market that goes limit up. 
There is quite a bit of market behavior research that shows 
that when you stop trading in a market, you get more volatility 
when you start trading again. I think that is part of what 
might have happened in Minneapolis back in early March. But I 
do want to emphasize that we have information on who is buying 
and who is selling every day in these markets.
    Mr. Boustany. And I suppose it is safe to say that in a 
very tight supply and demand situation, you certainly are going 
to see more hedging going on, and so that creates the 
opportunity for more arbitrage. Is that an accurate statement?
    Mr. Harris. Well, it is true that if prices were 
artificially driven high typically what you would see is a 
build up in inventory because nobody would want to buy those 
artificially high prices. In the grains that we highlighted in 
the written testimony here, we have historically low storage 
grain so there is a real reason that there is just not product 
out there to be able to buy so that seems to be driving the 
prices up.
    Mr. Boustany. Thank you.
    The Chairman. I thank the gentleman. His time has expired. 
The gentleman from North Dakota, Mr. Pomeroy, for 5 minutes.
    Mr. Pomeroy. Thank you, Mr. Chairman. I commend you----
    The Chairman. Excuse me, just a minute before you start. It 
looks like we are going to have a vote somewhere between 11:30 
and quarter of, so we are going to try to stick to our time so 
we can try to get through with this panel and hopefully get the 
next group, get their testimony. The gentleman is recognized 
for 5 minutes.
    Mr. Pomeroy. Well, Mr. Chairman, it is a very important 
matter before us, but I am still a bit in afterglow on this 
farm bill vote. I commend you and especially the staff for the 
tremendous work we did on that. I agree with the comment made, 
I think it was by Congressman Scott, that the fact that we are 
moving directly immediately right into business shows the level 
of Committee concern about this whole range of issues. One of 
the things that I am worried about is the activity occurring in 
unregulated markets and whether or not CFTC has a handle on 
things the way they used to. The farm bill closed up the Enron 
loophole but still points to things we know and there are 
things we don't know. How do you try to get a handle on market 
activity at large, understanding that a lot of movement now is 
in the OTC unregulated area?
    Mr. Fenton. Well, I think there it is by commodity. In the 
agricultural commodities, the OTC market is still pretty 
undeveloped, and in fact that was one of the reasons why we 
felt like we could put out accurate data for index trading in 
commodity markets. The swap dealers who do trading in the ag 
markets are predominantly almost overwhelmingly index trading, 
and we get to see that in the form of the swap dealer taking 
the position in the futures market. So I don't think that there 
is a significant chunk of activity in the ag space that is 
happening in OTC.
    Mr. Pomeroy. What about other areas under your regulatory 
control?
    Mr. Fenton. I think in energy obviously the OTC market is a 
much bigger developed market, and there are OTC products traded 
on exempt commercial markets like ICE, and in the----
    Mr. Pomeroy. This whole thing has grown up since we 
addressed the Commodity Futures Modernization Act or whatever 
the name of it was, the Reauthorization Act. Go a year or 2 and 
have another hearing, and the whole marketplace will be 
different than the one I just studied about the last time we 
enacted, so this has been really--I am an old insurance 
regulator. You don't have anything moving like this in 
insurance regulation. I mean this is pretty phenomenal what has 
occurred in terms of the new activity occurring on these 
unregulated exchanges, correct?
    Mr. Fenton. There is a big growth in the OTC.
    Mr. Pomeroy. Have you ever seen anything like that happen 
in your regulatory career?
    Mr. Fenton. I would say there has been more growth in the 
last few years in the OTC market than have been in any 
previous----
    Mr. Pomeroy. The President's regulatory working group 
seemed to point to that we need to do something. We don't have 
a comprehensive handle on all this. I am just wondering, for 
example, it is not just within the country either. It is 
global. The global marketplace really is undifferentiated 
whether the trading is occurring in England or Georgia or 
wherever.
    Mr. Harris. Well, if I could comment on that. I think one 
of the reasons I think the Enron loophole that we just 
hopefully will be closing soon is that development of a market. 
I can't speak specifically to the intent because I wasn't 
involved in the drafting of the legislation, but one of the 
issues in that legislation was to provide competition from 
electronic trading that we were seeing growing in the stock 
markets and other places in the United States. And ICE Futures 
in particular grew----
    Mr. Pomeroy. But my issue, do we have a handle----
    Mr. Harris. I will get there. This is related because what 
happened then in ICE Futures was not reporting any of their 
trading to anybody, and the fix that we have in front of 
Congress right now is to have them report directly to us. That 
is not a directly parallel comparison to what we had----
    Mr. Pomeroy. That is good. What about England?
    Mr. Harris. Exactly. So in the oil and crude markets right 
now ICE Futures UK trades a commodity related to our 
commodities traded here. We get weekly reports from ICE Futures 
from the FSA every week so that John's staff----
    Mr. Pomeroy. Is the report sufficient? They have kind of a 
different philosophy about regulation over there, it seems to 
me. Are you getting what you need to do to basically look at 
whether there is activity occurring in these other areas that 
might be of concern?
    Mr. Fenton. I think the reports are sufficient to monitor 
for manipulation of the expiring futures. That was the purpose 
when we negotiated with the FSA and developed a pretty 
comprehensive information sharing and cooperative agreement 
with them.
    Mr. Pomeroy. I urge you--my time is rapidly expiring. I 
have one more question to get in the next 15 seconds. So I urge 
you to do more on that. I am interested in learning that, and I 
hope we will have a chance to further inquire on that. The last 
question, sovereign wealth funds. You look at speculator 
activity. Are you looking at a significant market presence 
coming in by another development sovereign wealth funds and 
whether or not that is affecting market function?
    Mr. Fenton. There is a very limited amount of trading 
activity by sovereign wealth funds directly. There is a 
likelihood that some trading going through managed money 
traders, commodity trading advisors, may be sovereign wealth 
funds money. But direct trading by sovereign wealth funds is 
pretty limited.
    Mr. Pomeroy. I would like to pursue that but another time. 
I yield back.
    The Chairman. I thank the gentleman. The gentlelady from 
South Dakota, Ms. Herseth Sandlin, for 5 minutes.
    Ms. Herseth Sandlin. Thank you, Mr. Chairman. Thank you for 
the hearing today. Thank you, gentlemen, for your testimony, 
and I would just like to build on the line of questioning that 
Mr. Pomeroy and Mr. Marshall were pursuing. If I am a cattle 
seller and I am going to the cattle auction, I am going to be a 
lot happier if there are about 15 bidders at the auction that 
day than if there are three. Prices for me if I am selling 
cattle that day are probably going to be significantly higher 
if there are far more bidders at the auction that day. It would 
seem to me that the same would hold if you are talking about 
expanding that to the oil futures market or the futures market 
for agricultural commodities.
    So my question for you is how certain are you that the 
aggregate number of speculators in the market isn't driving up 
the price of oil which in turn drives up the price for the 
producers we represent?
    Mr. Harris. Well, we are very confident. In fact, we can 
break out different types of speculators as well. We can break 
out the managed money traders from the index traders. We can 
aggregate as a whole, and that is exactly the analysis we are 
doing. I think an important point there is exactly that, that 
in the futures market there is an ability to write a new 
contract--so it is not like there is a single cow that we are 
all bidding on.
    If you come to the market, and I come to the market at the 
same time, someone could write two contracts and give them to 
both of us so you can sort of split--you can get double the 
number of available supply in that case, so it is a little bit 
different than actual physical market in that sense.
    Ms. Herseth Sandlin. I understand, and generally look for 
the marketplace to work effectively for our producers, we would 
rather have more bidders. This is sort of getting at what Mr. 
Pomeroy and Mr. Marshall are trying to get at in terms of: 
while the index trading may not be that complex; it is 
relatively new; and how we are breaking out the information. 
How the trading data in the futures market is being analyzed is 
raising a lot of questions. Particularly, when I think even 
your own examination has shown that there has been no visible 
evidence that any hedging operations are declining as a result 
of the rising financial obligations associated with hedging. 
Yet, we have had an increase in the aggregate number of 
speculators. I think it has tripled in the last number of 
years, and so I guess you are saying that you feel that the 
sophistication of your analysis suggests that there is 
absolutely no impact at all of that aggregate number of 
speculators in the market on prices.
    Mr. Harris. I think the last graph in my written testimony, 
we have natural gas broken out in looking at, and that is 
exactly what we are looking at, the mix of traders. Even though 
speculative activity has tripled perhaps in some different 
markets, it is almost entirely mirrored by people on the other 
side hedging. So I think the speculator allows some liquidity 
in the market to afford that hedging activity to be executed on 
the market. I do think one good thing about the oil markets in 
general and sort of the explosion of volume in our markets 
suggests that a lot more of the over-the-counter market that 
used to exist that we never saw is actually being executed on 
exchange now. I think this credit crunch that we hit last 
summer is actually driving more of that trading onto the 
exchange. I am actually fairly confident that we are seeing 
more of the market now than we actually were in the past 
because of the fundamental soundness of the markets that we 
regulate.
    Ms. Herseth Sandlin. Mr. Fenton, did you want to elaborate 
at all?
    Mr. Fenton. Well, I think that in your analogy if you were 
at a cattle auction and you were a seller, you would like there 
to be multiple bidders. I think that certainly it is the case. 
It has always been true that one of the advantages of the 
speculator is that they provide liquidity so when you are 
offering to sell there is a bid there to buy. But as Jeff said, 
it is different in that there is a limited number of cattle to 
sell at an auction and there is an unlimited number of 
contracts that can be sold if something seems that the buying 
activity of an index fund is pushing prices to what seems like 
too high a level.
    Ms. Herseth Sandlin. I appreciate your responses. Thank 
you, Mr. Chairman. I yield back.
    The Chairman. I thank the gentlelady. Let me thank both of 
you for being here. One question I would ask, and then each 
Member may have some questions they want to submit in writing. 
I do, but I would ask you to respond back to that within a week 
if at all possible. But I would like to know in following up 
what Mr. Pomeroy said with sovereign wealth funds and other 
things coming in the market, do you have the tools you need to 
do the job you need to do?
    Mr. Fenton. Well, we are----
    The Chairman. Yes or no. If you want to give me a written 
explanation, that is fine, but we want to get to the next one.
    Mr. Fenton. We can do the job. We could use more tools.
    The Chairman. You could use more tools?
    Mr. Fenton. We need--I think it is a well-known fact that 
we are under severe budget constraints.
    The Chairman. Okay. If you would share that with us in 
writing, I would appreciate that. Let me thank you for coming 
and we appreciate very much your testimony this morning.
    Mr. Boustany. Mr. Chairman, I am glad you asked that 
question. I would hope you get details as to what you would 
need to accomplish those goals.
    The Chairman. He said he would within a week.
    Mr. Boustany. Thank you.
    The Chairman. Thank you, gentlemen. And I will ask the 
second panel if they would join us. First will be Mr. Bob 
Stallman, President, American Farm Bureau Federation; Mr. 
Terrence Duffy, Executive Chairman, Chicago Mercantile Exchange 
Group; Mr. Gerry Ramm, President, Inland Oil Company, on behalf 
of Petroleum Marketers Association of America; Dr. James 
Newsome, President and CEO, New York Mercantile Exchange; and 
Ms. Laura Campbell, Assistant Manager of Energy Resources, 
Memphis Light, Gas & Water, on behalf of the American Public 
Gas Association.
    And I am going to ask each one of you, if you will, we are 
going to try to get your testimony in before we have a vote 
that is upcoming. And if you would be kind enough, I know you 
have tried to get your statement to 5 minutes, we would ask 
you, if you can, to try to condense it to 4 if that is 
possible. We will be a little bit flexible on you, but if we 
can do that, I think we can get all of your testimony in, 
opening testimony, before we have to go vote. When we come 
back, we are going to have five votes so it will take a good 
while to get those votes in. You have been kind enough to sit 
through all this morning. I appreciate it. We have another 
panel following you in an attempt to get all of this in today, 
so thank you. We appreciate that. And with that, Mr. Stallman, 
you are welcome to start when you are ready.

  STATEMENT OF BOB STALLMAN, PRESIDENT, AMERICAN FARM BUREAU 
       FEDERATION; RICE AND CATTLE PRODUCER, COLUMBUS, TX

    Mr. Stallman. Thank you, Mr. Chairman, and Members of the 
Subcommittee. I am Bob Stallman, a rice and cattle producer 
from Texas, and President of the American Farm Bureau 
Federation, and we are pleased to be here today to present some 
producer perspectives on what we are facing in the market. We 
are seriously concerned about the effective performance of the 
futures exchanges as mechanisms for price discovery and risk 
management. Over the past month, as has already been 
referenced, we have witnessed extreme price volatility, 
expanding and volatile cash/futures basis relationships, and 
hedgers difficulties in meeting margin calls.
    The basic purpose of the Commodity Futures Trading 
Commission is to ensure that these markets under its 
jurisdiction operate in a way that allows us to manage price 
risk and discover cash prices. However, we believe that the 
market mechanism at this point is bent, if not broken, and the 
fact that several major grain and oil seed marketers are only 
offering firm crop price bids 60 days into the future is a 
rather ominous sign for the future. We have three main areas of 
concern. First, is lack of convergence between futures and cash 
prices. Convergence is the idea that futures prices by the 
close of the contract eventually equate to what is occurring in 
the cash market, also known as the law of one price.
    Today, neither the convergence of futures to cash nor 
reasonable expectations of basis levels applies for a number of 
contracts. These developments challenge producers abilities to 
develop and implement risk management programs for marketing 
their products. The problem is compounded by the fact that many 
producers are being asked to make firm commitments for inputs 
far in advance of them using them and not being able to 
establish the price for the crop for which those inputs are 
applying. One reason we believe futures prices may not be 
making an orderly convergence is part of the process 
established in 2000 when the river system delivery process was 
instituted by the Chicago Board of Trade. This system 
introduced the concept of a certificate of delivery that does 
not have to be redeemed by any certain date. Therefore, it 
provides little incentive for the actual physical commodity to 
move into the market.
    Some possible solutions to the convergence may be: one, 
encourage the CFTC to require additional delivery points to 
prevent potential market manipulation and assure an adequate 
delivery system. Some of that is being done. Two, end the 
certificate of delivery and return to the notice process 
originally used for delivery. Three, examine the merits of cash 
settlement. Moving to a cash settlement contract should not be 
undertaken lightly, but we believe it merits further study. The 
second area of concern, the impact of higher margin 
requirements and expansion of daily trading limits. Volatility 
is at a record high and with already high trading limits and 
high margin requirements the average farmer has a very 
difficult time using the futures and options for price 
protection.
    Last month we requested that CFTC analyze the possible 
effects on market participants of lowering the daily trading 
limits. We are not necessarily seeking to lower the price 
limits, but we believe a study would benefit participants by 
understanding: what the potential effects of margin 
requirements are; what the risk factors are; volatility; and 
what financing charges are coming in to play. Our third and 
last area of concern is the role of speculators and commodity 
index traders. As hedgers, we understand the importance of 
having speculative interest in the commodities markets. Market 
analysts report a continued though massive inflow of capital. 
It far exceeds what we have experienced in the past primarily 
by the long-only, passively managed index.
    Trading activity by funds is certainly one of the 
contributing factors we believe to higher futures prices, and 
this ordinarily would appear to be positive, but if you don't 
get convergence with cash markets at the end of the contract 
there is little real information as to what the price level 
should be either for producers or consumers. Our AFBF policy 
opposes restricting speculative funds from the commodity 
markets because we do believe that they provide pricing 
opportunities and liquidity that might not otherwise be there.
    We do have some concerns though that the volume may 
overwhelm the system at least to some extent with extreme 
levels of speculation. It is critical for hedgers to manage the 
price risk if they are going to do that to fully understand who 
is in the market, and perhaps more importantly, why. We are 
asking that 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. In conclusion, let me just say we continue to 
support the CFTC's regulation of the commodity futures 
business. We vigorously oppose efforts to weaken the CFTC by 
transferring or reducing its authority or by combining it with 
the SEC as some have called for. Thank you for arranging this 
hearing, and we look forward to questions.
    [The prepared statement of Mr. Stallman follows:]
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    The Chairman. Thank you, sir. Mr. Duffy.

  STATEMENT OF TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN, CHICAGO 
          MERCANTILE EXCHANGE GROUP, INC., CHICAGO, IL

    Mr. Duffy. Thank you, Chairman Etheridge, Ranking Member 
Moran, and Members of the Subcommittee for holding this hearing 
and inviting me to appear before you today. CME Group is the 
world's largest and most diverse commodities market. Our 
products have served as leading global benchmarks for commodity 
prices for more than 150 years. We provide an important public 
service precisely because we operate a free market that permits 
risk transfer from hedgers to speculators in an open, 
transparent, and well-regulated marketplace. CME Group is a 
neutral facilitator of transactions, and does not profit from 
higher food or energy prices, increased volatility or 
speculation. Our core philosophy is to operate free markets 
that foster price discovery and the hedging of economic risks 
in a transparent and regulated environment.
    Let me be clear that our markets are working. The Commodity 
Futures Trading Commission and most economists that have been 
surveyed agree that our markets are working and current price 
levels in energy and commodity markets are related to 
fundamental, macro-economic factors, not excessive speculation. 
One, biofuels are increasing commodity prices. As a result of 
U.S. legislation requiring 36 billion gallons of renewable 
fuels by 2022 approximately \1/4\ of the U.S. corn crop will be 
used to produce ethanol. Two, increased acreage for biofuels is 
limiting acreage for food crops. Farmers are economically 
rational. Last year they dedicated the most land to corn since 
1944 as the demand for the ethanol sector boosted prices.
    This diminished acreage devoted to wheat contributed to 
higher wheat prices. Three, the weak U.S. dollar has increased 
energy and commodity prices. The dollar's weakness against 
major foreign currencies has increased U.S. grain exports 
reducing domestic stocks and increasing prices. Additionally, 
our weaker dollar purchases less foreign oil than it did 1 year 
ago. Four, future projected demand exceeds future projected 
supply. The average annual growth rate and the production of 
grain and oil seeds has slowed from 2.2 percent per year in the 
1970s and 1980s to only 1.3 percent since 1990. USDA projects 
further declines in the next 10 years. Five, greater affluence 
and changing dietary habits is driving higher meat consumption 
and further straining grain feedstocks.
    As the demand for meat rises in China, India, and other 
developing countries, the demand for grain grows at an even 
faster rate. Six, droughts are limiting supplies. Multi and 
single year droughts in Australia, the Black Sea states, Canada 
and Russia have resulted in lower crop yields. Seven, export 
curbs and tariffs are limiting global supplies. Argentina, 
China, India, Pakistan, Russia, the Ukraine, and Vietnam have 
all suspended or cancelled wheat or other commodity exports or 
implemented prohibitive export tariffs in order to combat 
inflation or stabilize prices in their own home countries. 
Eight, inventories are low. U.S. wheat supply stocks are 
forecast by the USDA to be the lowest in 60 years and global 
wheat stocks are forecast to be the lowest in 30 years.
    In summary, there is strong evidence that commodity prices 
are being impacted by fundamental factors. In contrast, there 
is absolutely no objective evidence that futures market 
speculators are driving higher prices. In fact, CFTC data 
demonstrates that index fund participation has remained 
relatively constant since 2006. Despite these facts and despite 
considered opinion of most economists, some have suggested 
limiting speculative activity in futures markets by 
artificially raising margin requirements for speculators. 
Government-mandated artificial margin requirements in futures 
markets will not limit speculative participation and will 
significantly disrupt the value of hedging and risk transfer 
services we provide.
    We strongly believe that any proposal to artificially raise 
margin requirements will increase costs for speculators on both 
sides of the market, including the sellers; driving liquidity 
providers from regulated and transparent U.S. futures markets 
to unregulated dark pools in the OTC market or less regulated 
foreign markets. This is a net loss to the objective of fair, 
efficient, and well functioning commodity and energy markets. 
Interfere with the prudent risk management practices of central 
counterparty clearinghouses, performance bonds are designed to 
ensure the safeness and soundness of our clearing and 
settlement systems, not to create incentives or disincentives 
for trading decisions.
    Rather than pursuing a flawed and harmful strategy of 
imposing artificial margin requirements on speculators and 
commodity or futures markets, we propose two useful steps for 
you to consider. First, we again recommend that the CFTC 
exercise its existing authority to eliminate exempt commercial 
markets originally authorized as part of the so-called Enron 
loophole. Under this trading loophole futures contracts based 
on energy, metals, and other non-enumerated commodities are 
traded in so-called dark pools without regulation. That means 
that speculators and commercial players can trade economically 
identical products in energy and commodities without position 
limits, position reporting, large trader reporting or 
transparency. CME Group strongly agrees with the recommendation 
of the President's working group which expressly found that 
unregulated trading in commodity and energy markets that are 
susceptible to manipulation is not appropriate.
    Eliminating the Enron loophole would produce more effective 
regulation oversight without any adverse implications for 
innovation, competition, or market flexibility. More important, 
it would provide a better means of understanding, detecting, 
and deterring manipulative activity in exempt commodity and 
energy markets. Second, CME Group recommends the establishment 
of a joint task force by the CFTC and both U.S. Department of 
Agriculture and Energy. The task force should evaluate current 
cash market practices involving storage, delivery of 
commodities, as well as crude oil and gasoline and the impact 
of such practices on both cash and futures markets. Doing so 
will ensure that improper or undesirable activity is not 
falling in between the cracks of cash and futures market 
jurisdiction of these different Federal agencies. Thank you for 
your time today, and we look forward to working with you and 
your colleagues in Congress to insure our markets remain the 
envy of the world.
    [The prepared statement of Mr. Duffy follows:]
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    The Chairman. Thank you. Mr. Ramm.

         STATEMENT OF GERRY RAMM, PRESIDENT, INLAND OIL
          COMPANY, EPHRATA, WA; ON BEHALF OF PETROLEUM
                MARKETERS ASSOCIATION OF AMERICA

    Mr. Ramm. Honorable Chairman Etheridge, Ranking Member 
Moran, and distinguished Members of the Committee, thank you 
for the invitation to testify today. I really appreciate the 
opportunity to provide some insight on the extreme volatility 
and record setting prices seen in recent months on the energy 
commodity markets. I am an officer of the Petroleum Marketers 
Association of America. We represent over 8,000 independent 
fuel oil dealers and almost all of the heating oil dealers in 
the United States. Excessive speculation on energy trading 
facilities is the fuel that is driving this runaway train in 
crude oil prices. Last month Stephen Simon of ExxonMobil 
Corporation who testified before the House Select Committee for 
Energy Independence and Global Warming agreed that speculation 
is part of the problem stating, ``When you look at the 
fundamentals, the price should be $50-$55 a barrel.''
    If you are a large party like a hedge fund or a sovereign 
wealth fund because of your balance sheet you can purchase high 
leveraged, unregulated bilateral energy trades. If this entity 
speculates with $1 million, they could get a 100 to 1 margin 
account for energy trades. If on May 13, 2008, where there was 
a 13 cents increase in heating oil, they could have netted a 
return of $3.6 million or 364 percent on that day of trading. 
The rise in crude oil prices in recent weeks have reached $127 
on Tuesday, has dragged with it every single petroleum refined 
product, especially heating oil. In May, heating oil has gone 
up over 60 cents per gallon. This price spike occurred while 
heating oil inventories remained at or near a 5 year average.
    While energy commodities continue to skyrocket petroleum 
marketers and consumers are forced to pay excessively high 
energy prices. We have come to the conclusion that excessive 
speculation on energy commodity markets has driven up the price 
of crude oil and consequently all refined petroleum products 
without supply and demand fundamentals to justify the recent 
run up. Large purchases of crude oil contracts by speculators 
have in consequence created additional demand for oil for which 
drives up the price of future delivery of oil. We have now 
moved beyond the previous inflation adjusted high of $104 in 
1979, but without an equivalent disruption to oil availability 
that was experienced in those decades.
    U.S.-destined crude oil and heating oil contracts are 
trading daily at the rate for multiple times the annual 
consumption of crude oil in the United States. We must have 
full market transparency. Speculators who have no direct 
contact with physical commodities are trading in the over-the-
counter markets and the foreign boards of trade, which due to a 
series of legal and administrative loopholes, are virtually 
opaque. We want to thank you for passing the farm bill. That 
will help bring transparency to some of these energy markets. 
However, the farm bill is just the first step. The CFTC 
provided a No Action letter to a London-based International 
Petroleum Exchange, IPE, because it was regulated by the United 
Kingdom Financial Services Authority. Subsequently, IPE was 
bought by the IntercontinentalExchange, ICE, located in 
Atlanta, Georgia.
    ICE is the exchange most often utilized by those who 
exploit the Enron loophole. ICE is a publicly traded exchange 
whose shareholders are primarily investment funds. In recent 
years, ICE's trading volume has exploded at the expense of the 
regulated NYMEX. ICE purchased IPE and will continue to claim 
exemptions on various contracts whether or not the farm bill 
becomes law since they effectively get a ``get out of jail free 
card.'' Closing the Administrative Foreign Boards-of-Trade 
Loophole via review or elimination of the CFTC No Action 
letters to overseas trading would be something that you may 
consider. Raising margins or necessary collateral for non-
commercial entities or so-called non-physical players, 
requiring non-commercial traders to have the ability to take 
physical delivery of at least some of the products, imposing 
new transaction fees for non-commercial or non-physical traders 
are others.
    PME strongly supports the free exchange of commodity 
futures in the open market, that we want well-regulated and 
transparent exchanges that are subject to the rules of law and 
accountability. Reliable futures markets are crucial to the 
entire petroleum industry. Let us make sure that these markets 
are competitively driven by supply and demand fundamentals. We 
and our customers need our public officials, including those in 
Congress and the CFTC to take the stand against the loopholes 
that are artificially inflating our energy prices. One other 
point I would like to raise is the pass through of the ethanol 
credit where now with oil companies at terminals doing 
injection blending they are not passing through the ethanol 
credit to their marketers or to their end-users.
    So what we would like to see, we used to be able to splash 
blend but now we are not able to do that anymore, so we would 
like to see something on that too. Thank you very much for your 
time. I will answer any questions.
    [The prepared statement of Mr. Ramm follows:]
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    Mr. Marshall. Mr. Chairman, why don't you suggest that Dr. 
Newsome vary from his prepared testimony and just respond to 
Mr. Ramm.
    The Chairman. Dr. Newsome for 5 minutes, and then we may 
have to stop after that because we are running short of time 
that we got to vote on.

 STATEMENT OF JAMES E. NEWSOME, Ph.D., PRESIDENT AND CEO, NEW 
          YORK MERCANTILE EXCHANGE, INC., NEW YORK, NY

    Dr. Newsome. Thank you, Mr. Chairman. It is a honor to 
speak in front of this Subcommittee again. In a highly 
transparent, regulated, and competitive market, prices are 
affected primarily by fundamental market forces. The demand and 
supply fundamentals in the oil markets continue to be the 
driving factors in oil prices. The latest EIA Short-Term Energy 
Outlook summarized the demand and supply situation as follows, 
``The oil supply system continues to operate at near capacity 
and remains vulnerable to both actual and perceived supply 
disruptions. The combination of rising global demand, fairly 
normal seasonal inventory patterns, slow gains in non-OPEC 
supply, and low levels of available surplus production capacity 
is providing firm support for prices.''
    I wish to highlight this finding; growth in consumption has 
outstripped growth in non-OPEC production by over one million 
barrels per day. With projected demand exceeding one million 
barrels per day, the only way a market with highly inelastic 
demand will equilibrate is through a substantive rise in price. 
The upward price pressure has been there, and according to 
projections will continue to be there. It is key to realize 
that the market tightness and the market struggle to discern 
actual demand in growing and developing economies are both 
fundamental influences in the world oil market. The most 
visible signs of these conditions are the transparent market 
mechanisms that reside in the world today such as NYMEX's 
futures and options markets, where prices are discovered and 
risk is managed.
    On the supply side, global production of crude oil was 
relatively flat in 2007 despite rising demand and rising prices 
which did not provoke a significant supply response. Further, 
the geopolitical risk provided added uncertainty to supply 
outlook. Moreover, various state-owned oil companies have not 
been investing adequately in oil production. Venezuela 
nationalized assets owned by U.S. oil companies and has 
generally proved to be an unreliable partner. Mexico's major 
oil field has been depleted and will not allow U.S. companies 
to engage in deep water drilling. Colombian rebels have been 
blowing up pipelines with frequency, and are being financially 
backed by the Venezuelan Government. Nigerian rebel forces 
routinely shut down oil fields, either through strikes, 
terrorism or sabotage.
    Russia has suffered a decline in production. And, finally, 
U.S. production has declined dramatically in the past 20 years, 
and promising new drilling areas are generally not being opened 
up due to environmental considerations. The role of speculators 
in NYMEX markets is widely exaggerated and misunderstood. Our 
data shows that the percentage of open interest in NYMEX crude 
oil futures held by non-commercial participants actually 
decreased over the last year even at the same time that prices 
were increasing. The chart that you have on the screen overhead 
displays the percentage of open interest in the NYMEX crude oil 
futures contract held by non-commercial longs and shorts 
relative to that held by commercial longs and shorts.
    As you can see, during the last year commercial longs and 
shorts consistently have comprised between 60 and 70 percent of 
all open interest. On the other hand, non-commercial longs and 
shorts consistently have been in the range of 25 to 30 percent 
of open interest. Therefore, non-commercials holding long or 
buy positions have not been participating in the market to the 
extent that they could have a significant impact on market 
price. Moreover, the extent of non-commercial participation in 
the crude oil energy futures contract has actually declined 
since last summer. Additionally, non-commercial participants 
are not providing disproportionate pressure on the long or buy 
side of the crude oil futures market. Instead, non-commercials 
are relatively balanced between buy and sell open positions for 
NYMEX crude.
    It has been widely, yet inaccurately, theorized that 
speculators can drive up prices. With hundreds of commercial 
participants and instantaneous price dissemination, any spike 
in price would be met with an equally strong commercial 
reaction. If markets move in a direction inconsistent with 
actual market factors a vast number of participants, including 
energy producers, wholesalers, and retailers have comparable 
access to information. These participants will respond to 
ensure that prices rapidly return to where the industry 
consensus believes they should be. Speculators do exist, and 
they play an important role in the market. They add liquidity 
to the market and enable commercial traders to get in and out 
of the market when necessary. Speculation traders seek to 
participate in price trends that are already underway, but 
because they lack the capacity to make or take delivery, they 
will never be in a position to hold a market position through 
delivery. Therefore, they create virtually no impact on daily 
settlement prices which is the primary benchmark used by the 
marketplace.
    In futures markets, margins function as financial 
performance bonds and are employed to manage financial risk and 
to ensure financial integrity. Some have suggested that the 
answer to high crude oil prices is to impose substantially 
greater margins on energy futures markets regulated by the 
CFTC. We believe that this approach is very misguided. 
Furthermore, given the reality of global competition and energy 
to revenues, increasing crude oil margins on futures markets 
regulated by the CFTC invariably will force trading volume away 
from regulated and transparent U.S. exchanges. Prices in the 
NYMEX markets are determined by fundamental market forces. 
However, uncertainty about the availability of supply due to 
political and security factors, uncertainty about the actual 
levels of continuing growth and demand in developing parts of 
the world, and uncertainty about currency fluctuations 
materially weigh in to the fundamental analysis.
    There is no evidence to date that the trading by non-
commercials has impaired the price discovery function of the 
markets nor the raising margins would have an impact on 
lowering prices. Thank you, Mr. Chairman.
    [The prepared statement of Dr. Newsome follows:]
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    The Chairman. I thank the gentleman. We are going to have 
to recess until we get through voting. I thought we would get 
everybody in, but the clock has run out on us. It will be about 
30 minutes. If you want to just stretch a little bit, we will 
be back.
    [Recess.]
    The Chairman. Begin your testimony, please, ma'am, 5 
minutes. Four minutes would be better.

   STATEMENT OF LAURA CAMPBELL, ASSISTANT MANAGER OF ENERGY 
             RESOURCES, MEMPHIS LIGHT, GAS & WATER,
         MEMPHIS, TN; ON BEHALF OF AMERICAN PUBLIC GAS
                          ASSOCIATION

    Ms. Campbell. Fair enough. Chairman Etheridge, Members of 
the Subcommittee, I appreciate this opportunity to testify 
before you today, and I thank the Subcommittee for calling this 
hearing on the important subject of trading activities. My name 
is Laura Campbell, and I am the Assistant Manager of Energy 
Resources from Memphis Light, Gas & Water. MLGW is the nation's 
largest three service municipal utility. I testify today on 
behalf of the American Public Gas Association or APGA. APGA is 
the national association for publicly-owned natural gas 
distribution systems. There are approximately 1,000 public gas 
systems in 36 states, and almost 700 of these systems are APGA 
members.
    Publicly-owned gas systems are not-for-profit retail 
distribution entities owned by and accountable to the citizens 
they serve. APGA's number one priority is the safe and reliable 
delivery of affordable natural gas. To bring natural gas prices 
back to long-term affordable level, we ultimately need to 
increase the supply of natural gas. However, equally critical 
is to restore public confidence in the pricing of natural gas. 
This requires a level of transparency in natural gas markets 
which assures consumers that market prices are a result of 
fundamental supply and demand forces and not the result of 
manipulation or other abusive market conduct. APGA believes 
that the increased regulatory reporting and self-regulatory 
provisions relating to the unregulated energy trading platforms 
contained in legislation that reauthorizes the Commodity 
Futures Trading Commission is a critically important step in 
addressing our concerns. Those provisions are contained in 
Title XIII of the farm bill, which was passed yesterday by the 
House of Representatives.
    We commend this Committee for its work on the CFTC 
reauthorization bill. We also believe that under Acting 
Chairman Lukken's leadership the CFTC has taken important first 
steps in addressing our concerns by forming an Energy Markets 
Advisory Committee. We, along with other consumer groups, have 
watched with alarm certain pricing anomalies in the markets for 
natural gas. More recently, we have noted a run-up in the price 
of energy and other physical commodities. One of the topics of 
today's hearing is whether the price behavior reflects market 
fundamentals or results from other factors in the market, such 
as a change in the level or nature of speculative trading in 
the market. We simply do not know the answer to that question.
    As hedgers, we depend on liquid and deep markets in which 
to lay off our risks. Speculators are the grease that provides 
the liquidity and depth to the markets, and we value the role 
that they play in the markets. However, some trading strategies 
such as those pursued by Amaranth Advisors have had an adverse 
effect on the price of natural gas. We believe that in order to 
restore confidence in the pricing of these energy markets and 
in order to answer the questions raised by this Committee with 
respect to the effect of speculative trading interests in the 
current environment a greater level of market transparency is 
needed. In response to the failures that Amaranth's market 
abuse has brought to light, APGA over the last several years 
has pushed for a level of market transparency in financial 
contracts in natural gas that would routinely and perspectively 
permit the CFTC to assemble a complete picture of the overall 
size and potential impact of a trader's positions, irrespective 
of whether the positions are entered into on the NYMEX, on an 
OTC multi-lateral electronic trading facility, which is exempt 
from regulation, or through bilateral OTC contracts.
    APGA is optimistic that the enhanced authorities provided 
to the CFTC and the provisions of the CFTC reauthorization bill 
will help address the concerns that we have raised. 
Nonetheless, APGA also supports proposals to further increase 
and enhance transparency in the energy markets. APGA urges the 
CFTC to take additional steps to increase transparency within 
its existing authorities. For example, the CFTC in 2007 made 
certain enhancements to the commitment of traders reports by 
reporting separately the aggregate positions held by long-only, 
passively managed investment funds. To the extent that such 
funds hold positions in energy commodities, APGA encourages the 
CFTC to reconsider expanding those enhancements to the 
commitment of traders reports to include energy commodities.
    The CFTC plays a critical role in protecting consumers and 
the market as a whole from fraud and manipulation. APGA 
encourages Congress to provide sufficient funding for the CFTC 
to effectively carry out its oversight responsibilities. 
Natural gas is the life blood of our economy and millions of 
consumers depend on natural gas every day to meet their daily 
needs. It is critical that the price those consumers are paying 
for natural gas comes about through the operation of fair and 
orderly markets. It is too soon to determine whether the 
provisions of the farm bill will fully achieve the goals of 
increasing transparency with respect to pricing and natural gas 
markets.
    In light of the critical importance of this issue to 
consumers, we believe that the Committee should maintain active 
and vigilant oversight of the CFTC's market surveillance and 
enforcement activities, and APGA and its approximately 700 
public gas system members applaud your efforts to do so. We 
look forward to working with the Committee to determine whether 
further enhancements are necessary to restore consumer 
confidence and the integrity of price discovery mechanisms.
    [The prepared statement of Ms. Campbell follows:]
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    The Chairman. Thank you, Ms. Campbell. I will now recognize 
each Member for 5 minutes for questions in the order in which 
they appeared. I will now recognize myself for 5 minutes. Mr. 
Ramm, you indicated that you wanted to raise the margin 
requirements for non-commercial entities. Legislation 
introduced in the Senate, called the Consumer-First Energy Act 
of 2008, could raise margin requirements for everyone. What do 
you think of their proposal, and how would this impact your 
company's ability to use these markets for hedge purposes?
    Mr. Ramm. Well, I think in my testimony I stated that there 
would be a non-commercial raising so it would be only in the 
non-physical speculator, and I don't think----
    The Chairman. But my point is the Senate bill would raise 
it for everyone.
    Mr. Ramm. Yes, and we don't support that.
    The Chairman. Okay. That was my question. Dr. Newsome, your 
testimony states that the crude oil market has been declining 
in non-commercial participation over the last year. I believe 
that is what I read. The GAO study on energy derivatives cited 
by Mr. Ramm also makes that point that non-commercial 
participation in crude oil has declined. How do we square these 
facts with the facts that crude oil prices have increased and 
claims that speculators are behind it all?
    Dr. Newsome. Mr. Chairman, to me it is a clear indication 
that speculators are not behind the rise in crude oil prices or 
potentially the other commodities. I think devaluation of the 
dollar, the supply-demand fundamentals that we talked about 
earlier are the clear drivers behind the increase in these 
commodity prices.
    The Chairman. Mr. Ramm, you mentioned in your testimony the 
issue regarding the five percent tax credit on ethanol that is 
used in blending gasoline and that with some companies it is a 
splash blend, others it is injection. And without naming the 
companies, which I may eventually, we have at least one, now 
two, talking about already moving to injection so, number one, 
they can use a lower grade to raise the level of the octane 
with the ethanol, which means you as the distributor do not get 
that portion of the credit, so they retain it. Is that what you 
were saying?
    Mr. Ramm. That is correct, sir.
    The Chairman. So does that mean if the major company is 
retaining it and they have stores or stations of their own, you 
are at a five percent competitive disadvantage to begin with?
    Mr. Ramm. That would be correct.
    The Chairman. I am not sure that was the intent of the 
legislation.
    Mr. Ramm. I would agree.
    The Chairman. This is not the Committee of jurisdiction, 
but it certainly seems to me that somebody is--I reckon the oil 
companies probably are figuring they aren't making enough 
money.
    Mr. Ramm. The practice that we are seeing is that as 
terminals put in the injection equipment, the major companies 
are not allowing us as marketers to splash blend anymore. We 
are not seeing a corresponding price of the credit on the 
product that we are now having to buy after it has been 
injected.
    The Chairman. So that means that you are at a five percent 
disadvantage starting off?
    Mr. Ramm. Yes, sir.
    The Chairman. Would you share with the Committee what 
``splash blending'' is for people that don't know what ``splash 
blending'' is?
    Mr. Ramm. ``Splash blending' would be where a marketer 
purchases his own ethanol, buys his product, and then puts the 
ethanol, the 10 percent blend of ethanol, into the fuel before 
delivery.
    The Chairman. So what advantage--why would you want to do 
that?
    Mr. Ramm. Based on that type of action then the marketer 
can apply for the credit.
    The Chairman. And it flows to the marketer?
    Mr. Ramm. Then it would flow to the marketer, then in turn 
would flow to the end-user.
    The Chairman. But if I as the major oil company do the 
blending, I do not pass that on to you?
    Mr. Ramm. It is not being passed on.
    The Chairman. But they could?
    Mr. Ramm. They could.
    The Chairman. But they are not?
    Mr. Ramm. They are not. Some are, but not all. I wouldn't 
know exactly which terminals and which companies are. I do know 
that there are some companies that have stated that they are 
not.
    The Chairman. Okay. Thank you, sir. I will stop at this 
point and yield to Mr. Moran. I may have a follow-up question 
later. I yield.
    Mr. Moran. Mr. Chairman, thank you very much. Mr. Duffy and 
others, apparently the Senate has now passed the so-called farm 
bill by a vote of 81-15, which means we may have less reason. 
This includes the reauthorization of the Commodity Futures 
Trading Commission which means we may see less of you, unless 
we have more hearings on the price of commodities and the 
fluctuations of the market. So, maybe we will find another 
reason to have you and other participants back to talk about 
this topic. But, Mr. Etheridge, the farm bill is now on its way 
to the President. Let me see, what caught my attention in the 
testimony of this panel is Mr. Stallman's topic of convergence. 
Maybe this is a question Mr. Duffy or Dr. Newsome can answer. 
Is convergence based upon an economic theory? Is that what is 
supposed to happen despite some fluctuations? It is not 
perfect, but convergence should occur, and, if so, is Mr. 
Stallman, President Stallman, correct in his concern that it is 
not happening in today's market? What is the significance of 
that being the case? Is this a legitimate concern?
    Mr. Stallman. Theoretically, law of one price says that at 
a given point in time, at a given location, assuming costless 
delivery, which is not the real world, the price, cash price, 
and the futures price contract should be equivalent. Now in the 
real world there are variations. There are differentials, but 
what has occurred, and we go back to look at what Dr. Kunda 
from the University of Illinois actually presented to the CFTC 
forum here, if you do the analysis, it looks like for some 
contracts that to hedge effectively, you need to be able to 
depend on that convergence occurring at the end of the contract 
basically.
    Mr. Moran. So farmers in making their decision about 
hedging are relying upon a theory that says these prices will 
converge?
    Mr. Stallman. Yes.
    Mr. Moran. And then is that, Mr. Duffy or Dr. Newsome, is 
that based in economic theory that is the reality of the way 
the market should work?
    Dr. Newsome. Yes, sir, that is the way that the market 
should work. If the market is operating efficiently, the two 
prices should converge, and then you would therefore have very 
few actual deliveries of the underlying commodity. If the 
market is not operating efficiently and you don't have 
convergence, then you enter a different form of risk into the 
hedger's equation which is the basis risk. So you end up, 
again, having more risk to deal with than just the risk that 
you are trying to hedge to begin with.
    Mr. Moran. And when you were at the CFTC, Dr. Newsome, this 
would be something that the CFTC would be monitoring is whether 
convergence occurs?
    Dr. Newsome. Absolutely they would monitor that.
    Mr. Moran. And is the trend, as Mr. Stallman outlines, that 
there is something different about todays market when it comes 
to convergence than we have seen historically?
    Dr. Newsome. I don't spend time looking at the agriculture 
markets that he was discussing, so I don't have any specifics 
on that.
    Mr. Moran. What is true in the petroleum, the oil market?
    Dr. Newsome. The crude oil market is operating very 
efficiently. We are having price convergence. We have had fewer 
than 1,300 contracts over the last year and a half go to 
delivery which is the prime example that the market is 
operating very efficiently.
    Mr. Moran. Mr. Duffy.
    Mr. Duffy. Congressman Moran, we have studied the 
convergence issue quite a bit, especially recently with the 
increase in the prices of agricultural products. We work 
closely with the commodity markets and bring in all different 
groups into the exchange to work with them. There are a number 
of factors that go into the convergence issues. We are actually 
asking some of the same questions of why the non-commercials 
are not arbitrating the price between the cash and the futures 
so we can have convergence. There are also factors of freight 
cost and storage cost that are variances and that convergence 
equation, and we also as you know, we have just applied with 
the CFTC for a swaps contract on convergence between cash and 
futures, which we think will help mitigate this problem. But, 
the convergence issue has actually taken care of itself. The 
market has worked quite effectively over the last several 
expirations, and we have had convergence in our agricultural 
products.
    Mr. Moran. But, Mr. Stallman, you are saying something is 
different today than it has been historically?
    Mr. Stallman. Well, the numbers we were looking at were 
comparing the 2001 to 2005 period with 2006 to 2008 period. So, 
it was a historical comparison. I think recent activity has 
indicated that the convergence is better than what it was.
    Mr. Moran. I am about to lose my time, but in fact maybe it 
is gone. Anybody have anything they want to tell me about this 
topic that I haven't asked? Thank you very much, Mr. Chairman.
    The Chairman. Thank you. The gentleman from Georgia, Mr. 
Marshall, for 5 minutes.
    Mr. Marshall. Thank you, Mr. Chairman. I got my rant off my 
chest with Mr. Harris and Mr. Fenton, and at this point would 
like to hear, Dr. Newsome, your comments about Mr. Ramm's 
testimony. In fact, it turned out that your opening statement 
written, I assume, without having looked at Mr. Ramm's opening 
statement or heard it, kind of addressed what he was asserting. 
But, it would be helpful for us to hear specifically what you 
thought was off the mark in his assertions. And then, Mr. Ramm, 
if you are in a position to do so, if you could respond, that 
would be pretty good.
    Dr. Newsome. Well, we certainly didn't have access to Mr. 
Ramm----
    Mr. Marshall. I understand.
    Dr. Newsome. And the first we heard it was when he gave it 
sitting next to me. I guess a couple of comments, Mr. Marshall. 
One, the margin issue in my opinion is only an issue if you 
believe that speculators are in fact artificially moving 
prices. We do not believe that is the case, and we think we 
have the data to show that is the case. So given that fact, the 
margin issue becomes a moot issue as far as we are concerned.
    Mr. Marshall. That is number one. I think from the 
speculative standpoint, and we show the actual numbers in the 
chart, I would go beyond that to say even if you bought into 
the theory that speculative long positions were driving the 
market higher, I think you have to look at the flip side of 
that. Because they are speculators, they do not have the 
ability to make or take delivery so they have to trade out of 
that contract prior to expiration. So then where is the down 
side that should also be put on the marketplace when the 
speculators are trading out of their positions? It doesn't 
occur. It doesn't exist. And, therefore, that is part of our 
philosophy as to why speculators are not driving these higher 
prices.
    And just one too, that is it, Mr. Ramm. Do you----
    Mr. Ramm. I guess we get our position from a couple of 
things. One is that in looking at the testimony that Stephen 
Simon from ExxonMobil gave who is Vice President of the largest 
oil company in the United States that their fundamentals say 
that oil is at $50 to $55 and then $127 means that it still 
looks like there is something other than maybe the weak dollar 
that might be involved in this. The other thing is that in the 
NYMEX and also in CME those are regulated markets, and there is 
full transparency there. I think that all of the data that we 
see is showing that there is not excessive speculation on those 
trading platforms.
    What we would say is that there is activity outside of 
those and I think was referred to as a dark market or an opaque 
market, that those types of trades are not being seen, and it 
is increasing.
    Mr. Marshall. Something like the tulip craze is going on 
here, and prices are being bid unrealistically high by 
investors that are not very sophisticated and don't understand 
fundamentals. Is that why they are way up over twice what the 
barrel of oil should actually bring?
    Mr. Ramm. Well, I think that what we have seen is also some 
correlation to just the amount of cash that has moved into 
those markets from other areas. Like when the subprime hit 
there was a lot of cash that moved into commodity market 
trading, and then in turn there was quite a bit of increase in 
price.
    Mr. Marshall. Dr. Newsome, your response on $50, $55 
fundamentals?
    Dr. Newsome. Well, I think it is interesting to step back 
and look at the amount of information that is available, and 
there are basically two entities that have the information 
about speculative positions, the CFTC and NYMEX. Both have 
taken the position that given the data, given the numbers, 
speculators are not responsible for the upturn. People have 
talked about it so much, I think a lot of people have just come 
to believe that it is a fact.
    Mr. Marshall. You are basically saying this guy is wrong 
when he thinks the fundamentals are at $50 to $55?
    Dr. Newsome. I absolutely think that he is wrong.
    Mr. Marshall. And what about the assertion that this dark 
pool of money that is out there that we can't see as Mr. Duffy 
pretty aptly described it, that all kinds of money has flowed 
there. You have said that the commercial side is dominating 
right now, trading where oil is concerned at least on-exchange. 
And could it be that off-exchange there is something going on 
that we just don't understand and don't know about that is 
causing this?
    Dr. Newsome. Well, two things. One, about the $50-$55. If 
oil companies really believe that was the case, they would be 
selling everything that they could currently get their hands on 
in today's market. That is not the case, so what they are 
saying and what they are doing are two very different things. 
All I can do is present the information that we have in NYMEX, 
and that is what I have done today. There is no doubt that in 
the less transparent markets things can go on. We don't have 
access to that. CFTC doesn't have access to that. I do know at 
the end of the day transparency is a key component for a 
competitive marketplace, and the more we can make these markets 
transparent the better.
    Mr. Marshall. May I just ask one more? How do you compare 
the size of the market, those two markets, your market? Don't 
you have the lion's share of the trading activity that goes on? 
Isn't the OTC market fairly small or can you not even tell?
    Dr. Newsome. No, the OTC market in crude oil is huge, and 
we would estimate that exchange traded market with regard to 
crude is 20 to 30 percent of the overall OTC market.
    Mr. Marshall. And do you understand the OTC market to be 
paying attention to the values that are set on your exchange 
and doing their deals?
    Dr. Newsome. Typically the settlement price that is 
determined at NYMEX is at least a component of the pricing 
mechanism of the OTC.
    Mr. Marshall. Thank you for your indulgence, Mr. Chairman.
    The Chairman. I thank the gentleman. Since there are only 
three of us with your indulgence, you have been kind enough to 
come and wait, we are going to do a second round very quickly, 
and then move to our next group. Mr. Duffy, the National Corn 
Growers Association in their testimony state they have 
forwarded to the Chicago Board of Trade several 
recommendations, including investigating methods to allow 
farmers that have taken short positions to actually deliver 
against future contracts. Second, implement a forced loan out 
plan whereby some set percentage of contracts have to go to 
delivery, third, increase storage rates. And, finally, 
investigate the establishment of base contracts. What are your 
thoughts on this proposal if you had time to study it?
    Mr. Duffy. Mr. Chairman, I apologize. I do not have a copy 
of that economic study from the Corn Growers Association on 
what they are proposing, and I think I will go one at a time, 
you said on the first one that limit the ability or increase 
the ability of having the participation of making delivery but 
a small----
    The Chairman. Small.
    Mr. Duffy. They have that ability today to make delivery on 
the contract. The contract does not discriminate from making or 
taking delivery.
    The Chairman. Okay. I am sorry. I thought maybe you had 
this. It was something that was submitted in testimony. I will 
share it with you, and if you could just sort of share it back 
with us to the Committee, it would be fine. Ms. Campbell, you 
have been named as a member of the CFTC's new energy market 
advisory committee. Congratulations. I guess my question is 
what are your expectations for this committee, and what will 
you be pushing for the CFTC to accomplish when you meet with 
them in your first meeting next month?
    Ms. Campbell. Well, the very first thing is that we are 
really hopeful that the Title XIII of the 2008 Farm Bill is 
going to go a long way to address the transparency issues that 
the other folks on the panel have raised. So, the very first 
thing will be to start to look at the materials that are coming 
back, the information that is coming back and assess whether we 
have further action that needs to be taken by the committee.
    The Chairman. Thank you very much, and I would yield to the 
gentleman from Kansas for 5 minutes.
    Mr. Moran. I would yield to Mr. Marshall.
    Mr. Marshall. Thank you, Mr. Moran. Mr. Duffy, I would like 
to follow along the same line of questioning that I was 
addressing to Dr. Newsome. The public counter market, and this 
isn't necessarily limited to oil, but to all of these 
commodities that seem to be rising very rapidly in price, can 
you think of ways in which the over-the-counter market--well, 
first, if you would, describe the size of the over-the-counter 
market compared to the----
    Mr. Duffy. Regulated exchange derivatives are listed 
products on exchanges today has a notional value of $77 
trillion. Over the counter look alike derivatives have an 
estimated notional value of $415 trillion, so roughly six times 
larger than that of a regulated platform. An agricultural 
commodity at the CBOT, the grain products have roughly a 
notional value of $80 billion. On an over-the-counter grains 
look alike contracts the notional value is about $270 billion.
    Mr. Marshall. Though you are with the exchange, you are in 
the business, you generally know how the over-the-counter 
market works, the different kinds of instruments that are out 
there, transactions that occur, can you go ahead and share with 
us ways in which the over-the-counter market could be causing 
artificially high prices where commodities are concerned?
    Mr. Duffy. Mr. Marshall, in my testimony we are not 
accusing the over-the-counter markets of manipulating price at 
all. All we are saying is these exempt commercial markets, no 
one knows the activity of their participation or the level of 
their participation. I congratulate the Congress on passing the 
farm bill, and in that farm bill, Congressman Moran mentioned 
that the reauthorization was done in that there was some 
provisions as it relates to energy.
    Mr. Marshall. Yes, just energy though.
    Mr. Duffy. There were some provisions but there was one 
lacking and that is position limits. It was not required. And 
that is probably the most important component that you could 
have in the transparency of the market to have position limits 
accountability.
    Mr. Marshall. Well, and position limit is intended to do 
what? To limit the risks associated with failure to sort of 
protect? So when you mention position limits as a problem in 
the OTC market, it is principally one that could cause a 
systemic failure if we don't know----
    Mr. Duffy. Again, sir, we are not accusing or----
    Mr. Marshall. Well, I understand you are not accusing. I am 
just asking for speculation.
    Mr. Duffy. One of the things I learned a long time ago when 
I became the Chairman is not to speculate. I speculated for 23 
years as a trader so I decided speculation should be out of the 
equation. And again we can only go by the facts. We are just 
saying that these exempt commercial markets should look the 
same since they are look alike products as a regulated exchange 
and----
    Mr. Marshall. You are making that suggestion because you 
are at a competitive disadvantage. There are lots of folks out 
there----
    Mr. Duffy. No, sir. No, sir. I think that the CME Group has 
expanded its business dramatically, and we have made the 
notions that we are going to enter into the over-the-counter 
markets. We have the capabilities and facilities to do so 
except the products that we are listing for trade that we are 
going to do over-the-counter. We are also going to go by the 
same requirements that we have in our regulated products.
    Mr. Marshall. Can any of the witnesses offer just some 
thoughts about how if it is possible the over-the-counter 
market could be causing prices to surge inappropriately? I take 
it from your silence that none of you despite your----
    Mr. Ramm. I think I would just make one comment that the 
fact is they don't know because those numbers aren't being 
seen. No one sees that today, so I think that if the numbers 
were seen then they could see if there was, but I am sure there 
are ways of doing it. Whether it is happening or not, nobody 
knows.
    Mr. Marshall. Dr. Newsome, from your response to the 
suggestion that market fundamentals have price per barrel at 
$50 to $55, if that is the case people would be selling like 
crazy--let us capture the profit now. Don't you think the over-
the-counter market works the same way? I mean different types 
of instruments, transactions, et cetera, but are parties also 
rational?
    Dr. Newsome. Well, I think because of the very nature of 
that market is two sophisticated participants striking a deal 
with each other so that level of sophistication I think 
probably keeps the contract relatively fair. I think the point 
of concern is the financial integrity of the overall 
marketplace and the fact that you could have an Amaranth type 
scenario that creates damage for legitimate market 
participants.
    The Chairman. I think we all agree.
    Dr. Newsome. But I think since I was the Chair of the CFTC 
back when the CFMA was passed obviously we had no crystal ball 
at that time, and markets have changed dramatically over the 
last 7 or 8 year period. What we have seen in the OTC markets 
is really a move away from the very individually negotiated 
contracts to trading more of exchange look alike contracts that 
serve the exact same function as an exchange contract. At the 
end of the day if it looks like a duck, acts like a duck, walks 
like a duck, it probably is a duck.
    The Chairman. I thank the gentleman. Thank you. The 
gentleman from Kansas, 5 minutes.
    Mr. Moran. Thank you, Mr. Chairman. Mr. Ramm, one of the 
things that is pleasing to me about your testimony is that it 
provides some relatively specific recommendations, and I 
don't--I am happy to have you explain any of those things. I 
was particularly looking at what you suggest the Congress and 
the Administration might consider. I am happy to have you 
expand upon what you have in your testimony, but I would be 
interested in also hearing what other participants on the panel 
have to say about the consequences of those recommendations. 
Mr. Ramm, do you have anything to add to your recommendations 
to your testimony?
    Mr. Ramm. Well, as we made those recommendations, we are 
cognizant of liquidity and making sure that there is liquidity. 
We agree that the regulated markets are working well. Again, it 
comes to this opaque market, and no one knows what is going on. 
So when we looked at raising margins--this is a crisis that we 
are under. Petroleum marketers throughout the nation are going 
to be out of business because they can't afford to carry the 
farmer anymore because their credit lines are getting too high. 
The banks have quit lending us money. The risk is too high. Our 
margins are low. The risk reward for a tanker load of diesel 
today at $40,000, we net maybe less than $100. Our gross is 
about $600, but that is before freight.
    And our farmers can't even establish a credit line with us 
anymore for the fuel that they need to be able to go out to the 
farms with, so this is a crisis. We are looking at some type of 
solution to try to get some control over this what we feel is 
an out of control market. It seems to be dysfunctional.
    Mr. Moran. Thank you, Mr. Ramm. Dr. Newsome, do you have 
any responses to the seven items? You have seen Mr. Ramm's 
testimony or heard his testimony.
    Dr. Newsome. Well, just from what I heard, Mr. Moran, what 
I would prefer to do is really to look at them and respond back 
to the Committee with more thoughtful comments.
    Mr. Moran. That would be fine, Dr. Newsome. Raising margin 
requirements, just a general reaction, whether that is a good 
idea or bad idea?
    Dr. Newsome. I think that is a bad idea for a couple of 
reasons. One, because you would only address that if you 
believed that it was speculative money that you are trying to 
control. We don't believe that is the case.
    Mr. Moran. So if you start with the premise that it is not 
speculation that is causing the problems then the solutions 
suggested by Mr. Ramm would not be appropriate?
    Dr. Newsome. Absolutely.
    Mr. Moran. Thank you, Mr. Chairman.
    The Chairman. The gentleman from Georgia, Mr. Scott, for 5 
minutes.
    Mr. Scott. Let me ask this question, going back to the 
institutional investors. Would you interpret the fact that 
because they are bringing needed liquidity into the market that 
the investors could very well be bringing some needed stability 
to the markets?
    Mr. Duffy. I will be happy to respond to you, Congressman, 
and if the Committee will allow me, I will tell you a quick 
story about how investors can help the producer on markets that 
go down as much as what happens when they go up. In 1998, we 
had post-World War II lows in the price of the hogs in the 
United States here, and the nearby contracts were severely 
depressed in pricing. But the back end of the market, the 
futures market, was at a premium because the speculator or the 
investor felt that the market was entirely too low, and it kept 
the market higher. It kept buying the market which in turn gave 
the producer hedger an opportunity to sell into that in order 
to protect their crops or their hog production, which they did, 
and a lot of them survived in business.
    When the markets go up or the markets go down investors, 
their appetite for risk is great, and it is a good thing they 
are there on both sides of the market. I think they are 
essential to the efficiency of any marketplace, whether it is 
going up or whether it is going down. And the fundamental 
factors, and that is what this hearing seems to be more about 
whether the pricing is obvious that it is fundamentally driven.
    Mr. Scott. Do you all believe that in the new farm bill 
there was some new substantial powers were given to the CFTC. 
Dr. Newsome, do you believe those are adequate, and what are 
your thoughts on the new powers that were contained in the new 
farm bill for the CFTC?
    Dr. Newsome. Congressman Scott, I think the powers given to 
the CFTC were adequate as it relates to natural gas markets, 
but it only addresses natural gas at this point. I think that 
same kind of authority can be very useful in some of these 
other larger OTC markets, and I think that is what some of the 
colleagues at the table are expressing this morning.
    Mr. Scott. Okay. Thank you, Mr. Chairman.
    The Chairman. I thank the gentleman. Let me thank each of 
you, each one of our panelists, for your patience this morning 
for staying through the hearing with the votes we had. Each 
Member may have an opportunity to submit to you written 
questions. We would encourage you to get it back to the 
Committee within 10 days should they do so. Thank you very 
much. We will now move to our third panel. Mr. Gary Niemeyer, 
who is a corn and soybean producer, on behalf of National Corn 
Growers Association; Mr. Layne Carlson, Corporate Secretary and 
Treasurer, Minneapolis Grain Exchange; Mr. Rodney Clark, Vice 
President, CGB/Diversified Services, on behalf of National 
Grain and Feed Association; Mr. Thomas Farley, President and 
Chief Operating Officer of ICE Futures U.S., New York; Mr. Andy 
Weil III, President, American Cotton Shippers Association, 
Montgomery, Alabama. Mr. Niemeyer, please begin when you are 
ready, 5 minutes. And I would only just remind all of you that 
your total statements have been entered into the record, and if 
you will try to summarize it in about 5 minutes. Thank you.

         STATEMENT OF GARRY NIEMEYER, CORN AND SOYBEAN
   PRODUCER, AUBURN, IL; ON BEHALF OF NATIONAL CORN GROWERS 
                          ASSOCIATION

    Mr. Niemeyer. Good morning. I am Garry Niemeyer, and I am a 
corn and soybean farmer in central Illinois. I am here today 
representing the National Corn Growers Association. NCGA 
represents the interests of over 32,000 corn farmers throughout 
the United States. For over 100 years, commodity exchanges have 
played two valuable roles critically important to farmers, 
price discovery and risk management. Over the last several 
months, though, we have witnessed a lack of convergence between 
cash and futures markets as the futures contract expires. 
Without market convergence the futures markets are not 
fulfilling the role of price discovery, leading us to question 
whether market fundamentals still underpin current grain 
prices.
    Corn growers are not upset about higher corn prices. Our 
concern is that the current prices may not be fundamentally 
supported. This is leading people to speculate that we may be 
witnessing the development of a commodity bubble. As this 
bubble inflates, it has harmed the elevator industry and has 
been devastating to our livestock customers. I should point out 
the corn that I grow, I produce, is railed to the Texas 
Panhandle to feed cattle, so I am very sensitive to the price 
impact to livestock feeders. In early March we saw the bubble's 
first impact when the grain elevators were hit with tremendous 
margin calls. In response, many elevators suspended or severely 
restricted forward contracting. One of my local elevators will 
not even contract for grain this fall.
    As a farmer, how am I supposed to manage my price risk if 
my elevator will not contract grain? Farmers have always had 
the ability to do their own risk management on exchanges, but 
it is estimated that less than 10 percent of the farmers use 
this tool themselves. Lacking other hedging opportunities, 
growers will have to absorb the cost and risk of the futures 
market. In today's market conditions, these costs and risks are 
not insignificant. In the end, the unwillingness of commercial 
players in the market to offer forward cash prices has 
effectively transferred the market risk onto producers and 
producers still do not have a means to offset this basis risk.
    NCGA is not blaming the elevator industry for their recent 
phenomenon. The elevators are businesses that must be able to 
recoup losses and manage price risk. During the last several 
years, we have witnessed a tremendous increase in input cost, 
especially fertilizer and diesel fuel. In March, my fertilizer 
dealer asked me to lock in my fertilizer for the crop that I 
will plant next spring. The prices for anhydrous, DAP, and 
potash have risen 52, 100, and 118 percent, respectively, since 
last fall, and the trend is pointing to even higher prices by 
this fall. Since no elevators are offering this on the 2009 
production, my options are simple and unpleasant. I can borrow 
more money to buy the fertilizer and borrow more money to 
finance risk management on the exchange or I can stay 
completely exposed.
    As I had mentioned, NCGA's concern is the development of a 
commodity bubble and now the hope is that the bubble doesn't 
burst. This bubble was not caused by ethanol. Instead, it has 
been caused by dramatic increase in non-traditional investors 
in all commodities. It is the general investment pattern of the 
index funds that has inflated this bubble. These funds take 
huge net long positions--buy futures--which given the volume of 
purchases naturally drives prices higher. Our challenge is to 
restore the efficiency in price discovery and risk management 
without jeopardizing the market openness and liquidity. In 
light of that goal, NCGA would like to submit the following 
possible solutions for the consideration.
    First, to address the lack of convergence in between cash 
and futures markets, we must simply fix the delivery system. 
Second, and more importantly, we must find a way to head off 
the development of the commodity bubble or if it has already 
occurred stop it from bursting. Several possible solutions 
include: since large funds are having a disproportionate 
influence and are non-commercial traders, they should be 
treated as speculators counter to several CFTC decisions, we 
believe, to truly be classified as a hedger an entity must have 
a cash commodity position. This would still allow the large 
funds to take their net long positions, but they will have 
higher margin requirements just the same as any other 
speculator.
    Number two, short of redefining all players without cash 
positions as speculators, the CFTC and exchanges should 
implement a moratorium on providing a hedger status to any of 
the non-cash traders. I have several other positions that I 
would like to talk about, but I will answer the questions when 
asked.
    [The prepared statement of Mr. Niemeyer follows:]
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    The Chairman. Thank you, sir. Mr. Carlson, 5 minutes.

    STATEMENT OF LAYNE G. CARLSON, CORPORATE SECRETARY AND 
             TREASURER, MINNEAPOLIS GRAIN EXCHANGE,
                        MINNEAPOLIS, MN

    Mr. Carlson. Thank you. Good morning. My name is Layne 
Carlson, and I am an officer of the Minneapolis Grain Exchange. 
It is a great pleasure to be here before the Subcommittee on 
General Farm Commodities and Risk Management, and speak on 
matters important to us and participants on our market. The 
Minneapolis Grain Exchange is both a Designated Contract Market 
and a Derivatives Clearing Organization, which means we clear 
all our trades executed on our market and assume the 
counterparty risk. We are also subject to CFTC oversight.
    The Grain Exchange was first established in 1881, and is 
the only futures and options market for hard red spring wheat. 
Additionally, we have five financially settled index contracts 
based on interior cash prices of corn, wheat and soybeans. What 
happens to the price of those cash commodities is of 
significant importance to us. Participants from around the 
world now trade our contracts and that trend is expected to 
continue to grow. Trade volume and open interest records are 
routine events at the Grain Exchange. What happens on our 
markets has regional, national and now global importance. 
Conversely, what happens regionally, nationally and globally 
can have material effect upon our markets. For example, a 
drought in Australia will affect our spring wheat futures 
prices.
    The general objects and purposes of the Grain Exchange are 
spelled out in our Articles of Incorporation. To facilitate the 
buying and selling of all products, to inculcate principles of 
justice and equity and trade, to facilitate speedy adjustments 
of business disputes, to acquire and disseminate valuable 
commercial information, and so forth. These stated purposes 
indeed hold a lot of weight and responsibility which the Grain 
Exchange takes seriously. Our futures and options contracts are 
available to all who wish to trade, both speculators and 
hedgers. From a regulatory perspective, we monitor trade 
activity for evidence of fraud and manipulation. The MGEX 
believes our new contract, our market participants, including 
some funds, have greater liquidity and have added that to the 
marketplace. These are benefits to all market participants. 
While institutional investors do participate in very small 
amounts in our marketplace, it appears that many environmental 
factors have been building for some time in the wheat market, 
and culminated early this year with dramatic effect.
    The result was a rise in prices, both in the cash market 
and on our futures market. Over the past several years, wheat 
plantings and production have continued a downward trend. 
Meanwhile, demand remains high. Additional factors have 
exacerbated the existing and shrinking supplies of spring wheat 
such as has been mentioned before in other panels, wheat 
failures in Australia, weather factors around the world. Wheat 
stocks hit 30 year lows while U.S. wheat stocks dropped to 60 
year lows. Meanwhile, the value of the U.S. dollar continues to 
decline, enticing others to buy wheat on our markets. This past 
winter the cash price of wheat increased dramatically. As a 
result, there are many instances when the spring wheat futures 
market locked the limit price up. This hindered the price 
discovery and risk mitigation purposes for our futures 
contract.
    Additionally, energy costs, fuel and fertilizer prices have 
continued to increase, and wheat is having to compete with 
other commodities for space for acres. Despite the volatility 
of futures prices that has occurred on our market, there was 
almost perfect price convergence between the futures and cash 
price on the first notice day for delivery on our March futures 
contract, but there are still other factors that may interfere 
in the price convergence process. Therefore, the Grain Exchange 
has introduced financially settled index contracts that force 
convergence between the futures and cash price. These contracts 
can be used as a compliment to the current delivery contracts 
or provide an alternative to those who want the benefits of a 
financial settlement. These contracts could also offer relief 
to those expressing concerns about the influence of funds and 
other institutional investors.
    All parties will be able to rely upon the fact that there 
will be price convergence. As the settlement day approaches, 
those holding positions in MGEX contracts need not be concerned 
with who the position holders are or what the open interest is. 
The Grain Exchange has been involved in the cash and futures 
business for over 126 years offering valuable services to a 
varied and growing group of market participants. We do not have 
any control over the fundamental factors affecting the wheat 
market. However, we do want to make our futures contracts 
available to all participants for the purpose of price 
discovery and risk mitigation. To do that effectively and 
efficiently, the MGEX believe it is necessary to allow the 
widest possible range of market users to participate.
    After all these years, the Grain Exchange stands by its 
statements in its Articles to promote the furtherance of 
legitimate business pursuits and to advance the general 
prosperity and business interests of the region and the nation. 
The Grain Exchange expresses its appreciation to the 
Subcommittee for this opportunity to express our views.
    [The prepared statement of Mr. Carlson follows:]
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    The Chairman. Thank you. Mr. Clark, for 5 minutes.

        STATEMENT OF RODNEY CLARK, VICE PRESIDENT, CGB/
  DIVERSIFIED SERVICES; CHAIRMAN, RISK MANAGEMENT COMMITTEE, 
      NATIONAL GRAIN AND FEED ASSOCIATION, MT. VERNON, IN

    Mr. Clark. Thank you, Mr. Chairman and Mr. Moran, for 
calling today's hearing. My name is Rodney Clark. I am Vice 
President for CGB Enterprises, and I am Chairperson of the 
NGFA's Risk Management Committee. CGB/Diversified Services 
Division, which I am responsible for, provides risk management 
solutions to farmers and ranchers, including grain marketing 
strategies and crop insurance. We are one of the 16 companies 
that helped deliver and service the Federal Crop Insurance 
Program. I am here today representing the National Grain and 
Feed Association. NGFA members are intimately aware of the 
challenges currently inherent in the futures markets since we 
use them every day to hedge our risk. Without them, we cannot 
effectively run our businesses.
    In my brief comments, I would like to share what we believe 
are the two most important issues involving the futures market 
today, and end my comments by suggesting two important 
solutions that we have already proposed to the CFTC. I will 
begin with the issue of convergence and basis, of which we have 
already heard a lot here today. NGFA member firms have relied 
on U.S. agricultural futures markets to hedge their price and 
inventory risk. In addition, part of our daily business is to 
advise and counsel producers and ranchers to do the same. We 
count on well-functioning futures markets for price discovery 
and risk management.
    One of the bed rock fundamentals upon which hedging 
strategies are predicated is consistent and reliable 
convergence of cash in futures markets. Allow me to explain. 
Cash values are what the grain is really worth. It is what a 
buyer and a seller agree to in exchange for the actual 
commodity. It is what the commodity is really worth. The 
difference between this real cash price and the price which is 
reflected in the futures markets is called the basis. In 
properly functioning markets, the difference between the cash 
price and the futures price theoretically become the same as 
the futures contract enters its delivery period. Theoretically, 
the basis goes to zero. While there are many reasons why this 
seldom happens perfectly, the markets have historically 
functioned properly when the two markets converge in a 
predictable level.
    Today, convergence is occurring less often and only for 
very short periods of time. There are many factors that have 
contributed to this, transportation costs, storage rates, 
higher prices in and of themselves have had an influence on the 
lack of convergence. Ultimately, given time the futures markets 
may adjust and rediscover balance on their own, but we do not 
want to run investment out of U.S. agriculture. However, in 
today's environment we believe agricultural futures markets 
need to take a break from additional large infusions of 
investment capital. The second issue I would like to make the 
panel aware of is the tremendous financial pressure that our 
industry faces. As we purchase grain from our farmer customers, 
we hedge those purchases in the futures markets. The financial 
stress to finance inventory purchases from farmers and to meet 
the demands of margin calls from our hedges in the futures 
markets has been overwhelming.
    Because they are unable to adequately manage the risk or 
unable to obtain financing, some firms in our industry have 
been forced to restrict or eliminate deferred purchases from 
farmers. If the situation worsens in the months ahead, and this 
is a very real possibility, meaning if we have price gains and 
volatility due to weather or other reasons this financial 
stress will increase. A continued influx of long-only, 
passively managed investment capital will only make that worse. 
If that happens, our farmer customers may find continued lack 
of access to cash forward contracts that they have come to rely 
upon in managing their price risk simply because our industry 
does not have the wherewithal to continue to finance our margin 
calls and hedges.
    These problems are important and they are complex. The NGFA 
has worked diligently with futures exchanges and the CFTC to 
proactively deal with these issues. First, we have called upon 
the CFTC to put a moratorium on hedge exemptions for long-only, 
passively managed investment capital. Second, early last year 
the CFTC began publication of a supplemental report to its 
commitment of traders report that attempts to identify 
investment capital into a new index category. We believe that 
today's complex environment calls for re-examination of the 
report in a manner that provides more transparency. We have 
requested the CFTC to analyze in detail the reporting it 
receives from market participants to determine if long-only 
investment capital is reflected in the proper categories.
    I thank you for the opportunity to share my thoughts and 
those of the National Grain and Feed Association with the 
Subcommittee on these important topics. We want to be a 
proactive partner with the exchanges, the CFTC, and with 
Congress to find solutions to the problems that we face. I will 
be happy to respond to any questions. Thank you.
    [The prepared statement of Mr. Clark follows:]
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    The Chairman. Thank you, Mr. Clark. Mr. Farley, 5 minutes.

  STATEMENT OF THOMAS FARLEY, PRESIDENT AND COO, ICE FUTURES 
                       U.S., NEW YORK, NY

    Mr. Farley. Thank you, Mr. Chairman. I am Thomas Farley, 
President and COO of ICE Futures U.S., and I appreciate the 
opportunity to testify before the Subcommittee today on recent 
trends in the futures markets. ICE Futures U.S., formerly known 
as the New York Board of Trade, or NYBOT, was founded in 1870 
and is a wholly-owned subsidiary of IntercontinentalExchange 
known as ICE, an Atlanta based public company that operates 
regulated futures exchanges and clearinghouses in the United 
States, United Kingdom, and Canada, as well as an over-the-
counter marketplace. ICE Futures U.S. is the leading futures 
exchange for sugar, coffee, cocoa, cotton, and orange juice, 
and also lists currency and equity index futures contracts.
    Many of the products traded on our exchange and other 
exchanges have experienced dramatic price movements over the 
last several months and quarters. During periods of high prices 
and volatility, it may be a natural reaction to focus on 
exchanges. It is important to bear in mind that while we are 
the messengers of price information the prices that are 
discovered on our exchanges are the result of market-based 
activity. As such, we encourage a broader objective review of 
today's unusual environment. Recent dramatic movements are not 
isolated to our markets but have been seen across agricultural, 
metals, equity, energy, and interest rate markets.
    Comparing the historic volatility for a dozen equity, 
interest rate, energy, and agricultural markets traded on our 
exchange and elsewhere, we found that volatility in all of 
these markets for the month of March 2008 was between 1.4 to 
3.1 times higher than March of 2007. Further, we did not find 
the increase in agricultural markets to be any more pronounced 
than the increase in the these other markets. Nearly all global 
markets are experiencing increased volatility. Therefore, 
prescriptive measures intended to reduce volatility in a given 
market or across multiple markets will likely be negated by the 
existence of broader market turbulence and have unintended 
negative consequences. Worldwide commodity prices are moving in 
ways that defy conventional models constructed to produce price 
movements. With respect to agricultural commodities, I would 
like to share three factors that are impacting price levels.
    First, China, India, and other emerging economies are 
increasing consumption of raw commodities at an unprecedented 
rate taking global demand to new levels. Second, the dollar is 
at all time lows compared to many foreign currencies making it 
less expensive for global citizens to consume these goods. And, 
third, corn-based ethanol incentives and sugar-based ethanol 
tariffs here in the United States mean that over \1/3\ of our 
corn crop is now consumed in the production of corn-based 
ethanol. This demand has triggered a domino effect where the 
competition for acreage has contributed to record price levels 
of many agricultural products. One factor that some have 
suggested may be affecting volatility on futures exchanges is 
the role of so-called long-only commodity index funds.
    The complete analysis of the potential impact of such funds 
is still in process but our findings indicate that commodity 
index funds have had a positive impact on our agricultural 
markets as they enable producers, their cooperatives, and 
merchants to manage risk on a greater portion of their 
production. As a general rule, in the cotton market as well as 
our other agricultural markets the producers and merchants are 
sellers that use futures to protect or hedge against decreases 
in prices. Long-only index funds, whether you label them 
investors or speculators, fulfill an important role as they are 
buyers that take the other side of the producers and merchants 
futures transactions.
    While the involvement of long-only funds in the cotton 
market has been under particular scrutiny in the past several 
weeks. It is interesting to note that using a common measure of 
market participation the proportion of cotton futures and 
options long open interest attributable to such funds, their 
participation has actually decreased over the last 2 years. 
Looking at March of each year, the figure has gone from 37 
percent to 34 percent to 23 percent in March of 2008. I would 
like to briefly address the role of clearinghouses as well as 
the importance of futures style margining in managing systemic 
risks. Our clearinghouse, ICE Clear U.S., has its own governing 
board and rules subject to the regulation of the CFTC, much 
like our exchange.
    Each day, the clearinghouse marks the positions carried by 
each clearing member to the market based upon the closing or 
settlement price for each individual futures contract. The 
clearinghouse collects cash from the clearing firms who had a 
net loss on the prior day, and it pays that cash to the 
clearing firms who generated a net profit. These amounts are 
referred to as variation margins. To guarantee its obligation 
to make variation margin payments when due each clearing member 
makes a security deposit called initial margin. Initial margin 
and variation margin are designed to ensure that the 
clearinghouse has sufficient funds to cover its obligations 
even in highly volatile markets. Margin is not intended to 
control price volatility or the amount of trading at a 
particular market. Rather, it is the key element that protects 
the financial integrity of our markets.
    Attempting to employ margin payments for purposes other 
than risk management would be unprecedented and undermine a 
business model that has been a shining star in the financial 
markets for 150 years. Mr. Chairman, thank you again for 
inviting me to testify on behalf of the exchange.
    [The prepared statement of Mr. Farley follows:]
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    The Chairman. Thank you, Mr. Farley. Mr. Weil, for 5 
minutes.

       STATEMENT OF ADOLPH ``ANDY'' WEIL III, PRESIDENT,
         AMERICAN COTTON SHIPPERS ASSOCIATION; MEMBER,
  EXECUTIVE COMMITTEE, NATIONAL COTTON COUNCIL, MONTGOMERY, AL

    Mr. Weil. Thank you, Mr. Chairman. I am Andy Weil of 
Montgomery, Alabama, President of the American Cotton Shippers 
Association. I am also a Member of the Executive Committee of 
the National Cotton Council. With me today are other ACSA 
officials, Gerry Marshall, John Dunavant, and Neal Gillen. 
First of all, we thank you for holding and conducting this 
hearing today. Today I speak for the entire cotton industry, 
which was devastated by the disruptive and excessive 
speculative activity of March 3 and 4, and has yet to fully 
recover from its adverse effects. My written statement fully 
details what occurred in the cotton market in mid-February to 
early March. Now I will tell you in brief what occurred and why 
the U.S. cotton industry and its supporting financial 
institutions lack confidence in the ICE No. 2 Futures Contract 
as a vehicle to manage our price risks through hedging and to 
seek price discovery.
    By early March the open interest had reached record levels 
of just over 300,000 contracts for 30 million bales of cotton. 
About \2/3\ of this open interest was in the May and July 
contract periods, while the other third was in the December 
contract month. Since the U.S. provided only 19 million bales 
in 2007 the commercial trade represented a much smaller portion 
of this volume. The commercials who held the physical cotton 
had sold futures to lock in their basis and carry the cotton 
until sold and shipped. Speculative trading drove up cotton 
futures prices by over 50 percent in a 2 week trading period in 
late February and early March. On March 3, while futures prices 
was up the limit of 3 cents per pound the price rose to 
93.9 cents, up 12 cents that day.
    It was at this level of 93.9 cents where daily variation 
margins were set for collection. This resulted in a collective 
margin call on the industry that day well in excess of $1 
billion. As a result of this unprecedented financial stress, 
the following morning many traders were forced to liquidate 
their hedges by their lenders. This buying pushed prices to 
$1.09, only the second time since the Civil War that cotton has 
traded over $1.00. At the same time, the physical price was in 
the low 60 cents range. In the short time frame that day, the 
commercial trade did not have sufficient time to adjust to this 
irrational event, which was unrelated to the physical or cash 
market. The commercial market was subject to a severe financial 
strain never realized before in the history of the U.S. cotton 
industry.
    To meet margin calls, banks would have had to evaluate 
clients' physical stocks well beyond what the market could 
bear. The value of the cash commodity bore no relationship to 
the futures or options prices. The current futures market 
situation precludes any form of price discovery because of the 
potentially high margin risks. The result is that merchants and 
cooperatives cannot offer farmers forward prices. This 
situation also precludes individual farmers from using the 
futures market. Therefore, the producer cannot take a forward 
contract to his banker to secure financing. This is not only 
true for cotton but for other agricultural commodities. As a 
result, the banks financing producers, merchants, and 
cooperatives no longer have confidence in the futures market. 
Now they are either reluctant to or lack the capacity to 
provide the necessary margin funding.
    Lacking price discovery, the U.S. cotton farmer cannot 
adequately make production plans. The same goes for a U.S. 
textile mill who cannot determine what his raw fiber costs will 
be in future months. The entry of large speculative funds and 
index funds into the agricultural futures contracts has clearly 
distorted both the futures and the physical or cash markets and 
agricultural commodities. There is such an abundance of cash in 
the hands of these funds that their impact on the agricultural 
markets is overwhelming and negates the primary purpose for the 
existence of such contract markets. We no longer have a 
rational market for price discovery and hedging as used to the 
commercial trade has been minimized.
    It is not an investment vehicle for huge speculative funds 
and swaps dealers and other OTC entities that have created 
havoc in the market unimpeded by fundamentals or regulation. 
More importantly, there is no limit to or transparency in the 
trading activity. Therefore, I suggest that these unregulated 
entities be subject to the same reporting requirements that I 
as a legitimate hedger am subjected to by requiring that they 
report their full position to the CFTC each week. In 
conclusion, what we have learned from this bitter experience is 
that the CFTC does not know what is going on in the markets; 
who is doing the trading; how much they are trading; and in 
what markets. In point of fact, neither does the Federal 
Reserve, the Treasury Department, the SEC, or any other U.S. 
Government agency know what is going on.
    In sum and substance, Mr. Chairman, let us find out who 
they are and what they are doing. Accordingly, we believe that 
our recommendations if implemented by the CFTC will help to 
restore confidence in the agricultural futures markets. In the 
interest of time, Mr. Chairman, I can go ahead and read our 
recommendations, if that is okay.
    The Chairman. That would be fine.
    Mr. Weil. Okay. Thank you. Require that an index fund with 
a hedge exemption restrict its position in a commodity to the 
dollar allocation or the percentage of funds allocated to that 
commodity as defined in the funds prospectus and recorded with 
the CFTC. Further, any variation should be subject to the 
speculative position limits, and that such funds should report 
their cash positions on a weekly basis. Recommend that the CFTC 
monitor and oversee all swaps and OTC activity by requiring the 
reporting of all swap and OTC contracts by market participants, 
and that the CFTC determine the aggregation of positions from 
all sources, including the exchanges, ETFs, swaps, OTC, and all 
other trading entities.
    Require that all non-traditional hedge accounts, those not 
involved in the commercial enterprise of physically trading 
bales of cotton, be reported as a separate individual category. 
Require that the ICE and its clearing members adhere to the 
practice of margining futures to futures settlements and option 
to option settlements, that only those involved in the 
commercial enterprise of physically trading bales of cotton 
shall be eligible for hedge margin levels. And, finally, urge 
the CFTC to study the impact on price discovery and volatility, 
prior to any additional increases above current levels in 
speculative position limits in the single months or all months. 
Thank you, Mr. Chairman.
    [The prepared statement of Mr. Weil follows:]
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    The Chairman. I thank the gentleman. I thank each of you. I 
will now recognize Members, each for 5 minutes of questioning. 
I yield the first 5 minutes to myself. Mr. Niemeyer, in your 
testimony you say you don't want the commodity bubble to burst, 
and that you believe the bubble is not caused by ethanol but by 
non-traditional investors, as you say, playing in the commodity 
markets. However, wouldn't many of the proposals that you 
recommend force those investors out of the market, and wouldn't 
that have the effect of bursting the bubble if we force them 
out of the market?
    Mr. Niemeyer. First of all, Mr. Chairman, we are not 
interested in eliminating anybody from trading. We just think 
they ought to trade by the rules. I grow corn, the elevator 
stores corn and----
    The Chairman. I understand that, but how can you move--if 
you assume the speculators are in, and I will assume that is 
the assumption, how do you move them out?
    Mr. Niemeyer. I am not trying to move them out.
    The Chairman. A corresponding drop in prices, I guess.
    Mr. Niemeyer. I am not trying to move them out. What I am 
suggesting is as a hedger, if I go to hedge grain, it costs me 
$1,500 to contract currently to maintain a position. I grow all 
those--handle the grain, but as speculators come in, their 
margin money should be 20, 25 for the same position, so in a 
sense they have a 24 percent advantage because they don't grow 
the corn, they don't store the corn, and they don't transport 
it. All we want is fairness in the market. If they are a 
speculator, they should be considered a speculator. If they are 
a hedger and they handle the grain, they handle the physical 
commodity, then they should be a hedger and get that advantage.
    The Chairman. Okay. Thank you. Mr. Weil, if the markets are 
not true indicators of cotton prices, do you know what cotton 
farmers are using to base their decisions on whether to or how 
much cotton to plant this year? Do you think the problems being 
experienced in the cotton market will have--what will that have 
or how will that impact their planning decision this year?
    Mr. Weil. Mr. Chairman, growers, first of all, I think they 
look to the farm bill for some support going into the next 
crop. In terms of finding a contract from a merchant such as 
myself or a cooperative, it is very difficult for them. So, 
yes, they may think about how much cotton they will plant, and 
in certain areas of the country they can plant other crops such 
as corn and soybeans down our way. But, yes, this could have an 
impact on their decision.
    The Chairman. Okay. Thank you. Mr. Farley, you heard the 
comments a few minutes ago from Mr. Weil as it related to the 
March situation, and I know you were taking notes. So my 
question to you is how do you explain in March a pricing range 
from about 84 cents to $1.00, and it seems incredibly large 
when those holding cotton it was pretty clear, 63 cents, 
64 cents. Furthermore, I understand that a senior USDA official 
has raised that issue with the CFTC in a forum about that very 
event stating basically that all fundamentals in the 
marketplace at the time appeared to have been bearish, 
suggesting there is no reason cotton prices should have made 
such large movement upwards at that point. So since the 
traditional basis for forward purchasing of U.S. cotton from 
growers is typically 350 points off the--plus or minus off the 
highest futures price, they were off 250 points at one point 
during that day. What happened? And I guess what could have 
caused such an enormous deviation or divergence between cash 
price and future option prices for essentially an identical 
bale of cotton?
    Mr. Farley. Thank you, Mr. Chairman. I would be pleased to 
answer that question. If I can go back a few months, the price 
move in cotton, even going back to February 2008, the price of 
cotton was 54 cents and then moving forward in time to--excuse 
me, February 2007, 54 cents, and then the last trading day of 
February 2008, the price was 82 cents. And so that is kind of 
setting the stage for what occurred on the trading days of 
March 3 and March 4. Looking at that move, which is a very 
significant 28 cents move leading up to that time. There are a 
lot of supply and demand factors which have been discussed at 
this hearing several times by other panelists I won't go into 
in detail, and mentioned in my testimony, suffice it to say 
that despite the near term bearish fundamentals that you 
described, there are many long-term, bullish fundamentals.
    So now on March 3 and March 4 what you saw trading in the 
market was not traditional supply and demand. It was liquidity, 
and there was a perfect storm, if you will, in the cotton 
market. There was really three waves crashing together tossing 
the cotton market around. One was that rising price from 
54 cents to 82 cents. The second was on March 3, March 4 the 
cash market, as I understand it, all but shut down. So, while 
as you described the price was 250, the basis was 250 points 
off, it actually was--it was difficult to get even that price. 
It shut down. And the third wave was that we are in the middle 
of a global liquidity squeeze, so when the price got to 
82 cents, it became very difficult for these producers, 
farmers, producers, the co-ops, to finance their short margin 
positions with the exchange. And on March 3 the price jumped 
12 cents.
    And as Mr. Weil described in detail, their lenders on that 
evening required that they close out their hedge positions on 
March 4, which yielded another volatile day. We as an exchange, 
we don't operate a spot market. We operate a futures market, 
and our job is to provide a venue for price discovery, and we 
look at trading activity to determine if there is a price being 
discovered. On March 3 and 4 there clearly was. On March 4, we 
did 155,000 options. To put that in perspective, that is the 
most options we have ever traded on our exchange. There clearly 
was price discovery going on. Thank you.
    The Chairman. Thank you. I would like to follow it up but 
my time is expired. I will yield to the gentleman from Kansas.
    Mr. Moran. Mr. Chairman, thank you very much. Mr. Clark, 
thank you for your continued conversation about convergence. I 
appreciate that. Is there something, I still want to go back to 
what I asked an earlier panel, historically is something 
different today than there has been in the past; that we see a 
greater inability over time for the cash and futures price to 
come together at time of delivery?
    Mr. Clark. I answer that question by saying, ``Yes, there 
clearly is something fundamentally different about these 
markets today than there have been in the past.'' I mention it 
in my testimony, and it has been mentioned already today. 
Transportation costs are two to three times higher than what 
they used to be. Storage costs are higher than what they used 
to be. The cost of carrying the commodity from 1 month to the 
other is higher because interest rates--because the price of 
the commodity itself is higher. It costs more to finance those 
inventories. There are a lot of fundamental reasons why 
convergence is not happening the same way that it always has.
    But I would suggest that there are--that is what makes this 
so difficult is because there are real reasons but it is not 
that--if it wasn't happening the same way that it always has, 
that is fine as long as it is happening consistently. In other 
words, if they used to converge within five percent of each 
other and the price is twice as high or three times as high, 
you factor all those things in, then it should be converging 
within 15 percent of each other.
    Mr. Moran. None of those things seem to be nefarious. They 
are circumstances we face with changing prices, particularly as 
it relates to energy and transportation costs. What it suggests 
to me is that economically those two points have to come 
together or we are dealing with a system in which there is 
inadequate information to make the predicted estimate as to 
what the futures price should be, is that right?
    Mr. Clark. I think that is correct.
    Mr. Moran. And so as the world has changed, the markets 
have changed, we are not capable at this point of having 
sufficient knowledge to make the price of our futures contract 
the appropriate price. Maybe I am focusing too much on the 
futures price. Maybe we don't know enough about the--the cash 
market is set. There is a buyer and seller on that particular 
day, and so what we are lacking is knowledge about what the 
price is going to be in the future which is what the market is 
designed to----
    Mr. Clark. That is correct, and that is why the contract 
has lost its utility as a hedging tool. Because it is not 
happening, and it is inconsistent, and there is something 
fundamentally wrong about the futures contract if that 
convergence is not happening. I think we can point to a lot of 
the reasons. We can look at a lot of the reasons, but that fact 
of the matter it is not happening, and producers are losing 
their ability to use it as a hedge and we certainly are too.
    Mr. Moran. Well, do futures markets increase or decrease 
price volatility? Do we have more price volatility because 
there is speculation in futures markets or do they reduce price 
volatility?
    Mr. Clark. Well, I think there is something important here 
that as I have sat here all day and in some of the exchanges 
have made the comment, Mr. Scott asked the question, ``Isn't it 
fundamentally correct that their investment funds provide 
stability to the market?'' I think it is important to 
understand that just because they bring volume to the market 
doesn't mean they are bringing liquidity to the market. Just 
because they are bringing volume to the market doesn't mean 
they are bringing liquidity because they are passive, they are 
long only. They never change. They come in. They stay long, and 
they stay long forever. Therefore, they are not trading the 
fundamentals of the market like the cash market does, and 
therefore they are having an influence on convergence.
    Mr. Moran. I think it goes back to Mr. Etheridge's earlier 
point about setting a base or a floor, as he said, in price. 
And you mentioned, Mr. Clark, about perhaps restricting the 
market participants or perhaps the products that they invest 
in. Is that a fair statement of what----
    Mr. Clark. We have said that right now this market is in an 
unprecedented time. We are all struggling to figure out why 
these markets are acting the way they are. We believe very 
firmly that right now is not the time for the CFTC to continue 
to grant hedge exemptions to these kinds of passively traded 
funds. We think they need to put a moratorium on it. We are not 
against these monies coming in to our marketplaces. We just 
think we are in an unprecedented time. There has been so much 
change that the market needs time to adjust to that.
    Mr. Moran. Your testimony I think focuses on the problems 
that my grain elevators and co-ops have in this current market, 
and you focus upon the participants in the market. I assume 
that there is another side to this problem, which I don't know, 
which one is the one that deserves the most attention, but 
there has also got to be a credit problem. Your inability, I 
don't mean this in a pejorative way, but you blame the futures 
markets and the circumstances that your grain elevators face, 
but on the other hand the problem you face derives from the 
fact that you have the inability to access credit.
    Mr. Clark. There are two issues which we struggle with the 
most, one of which is convergence, which we have already 
addressed, which means the utility of us to be able to hedge 
our position is more difficult than it has been in the past. 
That needs to be fixed. That is one issue. The other issue is 
an issue that has more to do with high prices and volatility 
than anything. It is because prices are going up. Traditionally 
we are short, as most of our members, although we have members 
who are long hedgers, but if I am a country elevator and I buy 
grain from a farmer, I am going to sell it or hedge myself on 
the Chicago Board of Trade.
    When the price of corn goes up $2.50, I have to keep 
margining those positions. Somebody from the CFTC said earlier 
this morning that, ``It is no big deal for the big companies 
because they have the capital to withstand it,'' I beg to 
differ. If you have a nationwide operation where you are buying 
grain all over the nation and the price of corn goes up $2.50, 
and you are margining that position all the way up, you have a 
catastrophic problem. It is a catastrophic problem that we 
cannot continue to finance these positions. If we have a 
situation this summer where we have a drought, and the market, 
we have a runaway market like we had in wheat in Minneapolis, I 
think everybody needs to understand this problem is going to be 
huge. I think you will see we have problems already that grain 
companies are not buying deferred positions. That is going to 
be more prevalent and it is going to be a real problem.
    Mr. Scott [presiding.] Mr. Neugebauer.
    Mr. Neugebauer. I thank the chair for allowing me to go out 
of order here. I want to go back to Mr. Farley just a little 
bit, and I agree that markets are very efficient as long as 
there is not any circumstances that would cause markets to be 
inefficient. And I know that on your exchange you can trade 
commodities both with options and with futures, is that 
correct?
    Mr. Farley. That is right.
    Mr. Neugebauer. And I think the limits, for example, on 
cotton is 300 points, the daily limit, is that correct?
    Mr. Farley. There is an exception to that rule but in 
general.
    Mr. Neugebauer. Generally it is 300?
    Mr. Farley. 300.
    Mr. Neugebauer. And so these special days that we have been 
talking about, I understand it that while the futures were 
limit up the margin calls were not based on the limit move but 
on the closing price of the options that day. People that 
weren't even participating in the options were forced to make--
normally you would make a margin call based on the limit move, 
is that correct?
    Mr. Farley. We have had a policy for about a decade of 
margining the way you described.
    Mr. Neugebauer. And so all of a sudden the rules changed, 
and the people that thought that day that they were going to 
have to make a margin for a limit move had to make a margin for 
what would be the equivalent of four or five limit moves, is 
that correct?
    Mr. Farley. I am sorry, Congressman. I wasn't specific with 
my answer. We didn't change anything. We have had the same 
policy for a decade, and we didn't change anything on March 3 
and March 4.
    Mr. Neugebauer. So people did not have to put up a higher 
margin than just a limit move?
    Mr. Farley. They did. If I can, just by way of background. 
What you are describing is the price limit structure that is 
now really specific to the domestic agricultural markets. Going 
back 20 years, you can understand why these limits are in 
place. Money flows took a day or 2 and price dissemination to 
rural areas and other countries takes a while. For these small 
periods you put the price limits in place, and now our exchange 
as well as the other domestic exchanges represented here have 
these price limits in place, and we are no different. Most 
markets have moved away from these and we still have them. In 
the first 60 days of this year, we hit these limits 18 times. 
The most pronounced occasions were March 3 and March 4, and 
what I mean by that was the options price was the furthest from 
the futures limit up price.
    Going back to close to a decade ago, our Board which was 
then composed of industry leaders, this is prior to the ICE 
acquisition of NYBOT, our Board put through a policy to margin 
the way you have described. That is, use the synthetic price or 
the real price being discovered in the options pit as the 
margining price for both futures and options. And it is a 
prudent rule. It really protects the clearinghouse which is of 
paramount importance to us. And that rule was approved by our 
cotton committees and our product committees at that time. And 
so on March 3 and March 4, we didn't do anything different. The 
unfortunate reality for the industry is that the move was so 
significant that it put tremendous pressure on our customers to 
be able to come up with that money. As Mr. Weil indicated 
earlier, the margin requirement that day was over a billion 
dollars. I hope that answers your question.
    Mr. Neugebauer. So when I asked you the question before, 
you said affirmative but then you are saying that you misspoke 
and that this policy of using the options for discovery or the 
limit was whichever higher has been the policy for 10 years?
    Mr. Farley. I believe that figure is 8 or 9 years. I don't 
have the exact date, but that is right.
    Mr. Neugebauer. And does that give any credit to the fact 
that some of the people trading in that way actually own the 
commodity, holding the commodity, and other people that are not 
holding the commodity?
    Mr. Farley. There are two different types of margin at a 
clearinghouse. There is initial margin and variation margin. In 
the case of our initial margin, we do differentiate between the 
two different types of traders. Whereas, variation margin is 
more straightforward at the end of the day we determine what is 
the best available price for margining purposes; and that 
determines the market to market value of all the hedges, both 
futures and options.
    Mr. Neugebauer. I think all of us want the marketplace to 
function as consistently as it can. I think the problem is, and 
it has been articulated here by the people that are either 
storing or merchandising or growing these commodities because 
of these anomalies, as you call it, that happened. Basically, 
what it has done is it has taken a lot of people out of the 
marketplace that have been able to help producers manage their 
risk, and so that means that it is not working. Now I am not 
going to be one to radically throw out the baby with the bath 
water here, but I do think, and I would hope, that instead of 
relying on us, I would hope that the industry would sit down 
and start talking about making sure that we have a structural 
marketplace in place.
    I know that we have moved to electronic trading one of 
those days or very closely to that date. I just want to make 
sure that we are accomplishing the original goal here, and that 
is that these markets are really designed to help the 
agricultural market. Now I understand a lot of people want to 
hold American commodities because our dollar is diving and that 
one of the hedges for the dollar would obviously be to move 
into the commodities, and I understand that. That is something 
we have to address as well. I know my time has expired, and I 
would ask that Members be allowed to since this is such an 
important subject without objection that Members be allowed to 
submit questions to our panelists and hold the record open 
until such time as we get responses to those questions.
    Mr. Scott. Absolutely. We thank the gentleman from Texas 
for his insightful questions. I have a couple of questions I 
would like to ask. First, Mr. Farley, it seems that volatility 
is affecting a broad array of commodities. Looking at the 
different agricultural products that have traded on your 
exchange, how does your exchange work with the affected 
industries in periods of high volatility?
    Mr. Farley. Sure. I would like to answer that in two parts 
if I can. With respect to what the exchange can do in the 
period of volatility, the markets are volatile when the supply 
and demand equation is out of bounds or if supply or demand is 
growing--one is growing faster than the other. And today demand 
growth is far outstripping supply, and in that situation what 
an exchange can do primarily is continue to provide a mechanism 
for discovering price. It is by discovering that price and in 
these cases a high price that is going to attract additional 
investment capital, additional infrastructure into these 
industries and ultimately bring down the price of these 
commodities and the volatility of these commodities.
    Specifically, in terms of what we do to work with the 
industry, I think our exchange is unique in the respect that we 
work very closely with our industries. Each of our major 
products has a contract committee that is composed of industry 
leaders. In cotton, for instance, we have a panel made up of 20 
industry leaders. The three CEOs of the top three cotton 
merchants globally are on that panel. And we actually cede the 
codification of the terms and conditions of our cotton contract 
to them. This is a really turbulent time. In a turbulent time, 
we need to work with that group, that committee, even more than 
usual. And I agree with what Congressman Neugebauer said, which 
is we should really work together on these issues and find 
common ground.
    Mr. Scott. Right. Let me ask you this. I just have a couple 
more follow-up questions, and then I have a general question 
for everyone. But, Mr. Farley, recognizing that price discovery 
and risk management are the primary functions of the futures 
market, I don't quite understand why your exchange would set 
price limits on its futures contracts. You mentioned that you 
allow options to continue trading when futures hit the limit to 
provide a way to continue the price discovery function, but 
could you maybe a little better explain how that works?
    Mr. Farley. Well, these limits are a bit anachronistic, and 
they exist largely in the domestic agricultural commodities. 
The argument for price limits is that they prevent panic, a 
panic scenario, and by leaving the options open you provide a 
vent or a steam pipe during these periods where there is a lot 
of built up tension. Most markets have moved away from these 
limits, and it is something that we are evaluating together, 
and when I say together I mean with the industry what is the 
right structure. Are these anachronistic but they work or do 
these need to be substantially revised or even eliminated.
    Mr. Scott. The other part of that question, I wanted to get 
to the issue of the unregulated OTC trading of commodities that 
lacks transparency and yet has a major impact on the market. 
These opaque markets, what is your exchange doing to rein them 
in?
    Mr. Farley. I am the President and CEO of ICE Futures U.S. 
which we are a CFTC designated contract market here in the 
states, and we primarily trade in agriculture. Much of the talk 
on the earlier panels about ICE centered on our energy 
business. Since I can't speak directly to that, but I would 
like to give a couple thoughts. The first thing I would like to 
say is that ICE as a broader company including the parent 
organization strongly supports any efforts at increasing 
transparency in these markets. I would like to correct the 
record of earlier testimony. ICE took a proactive stance on 
working with this Committee and Congress on the bill that was 
passed yesterday, and that bill does include position limits 
for the highly liquid OTC contracts which is a meaningful 
distinction from one of the discussions earlier.
    And ICE in general takes great pride in bringing 
transparency to OTC markets. In the energy markets a decade ago 
there was black and white. There was the listed market, which 
was perfectly transparent. There was the OTC market, which was 
perfectly opaque. And into that were all the ICE shades of gray 
if I can carry the metaphor maybe a little bit too far.
    Mr. Scott. I think you did, and I certainly appreciate that 
answer. My time is slipping away. I did want to get this 
question in because I don't think we could leave this day 
without putting this question on the table particularly for you 
all who have to deal in the commodities markets. The big issue 
now is the high cost of fuel and food. The agriculture industry 
and the Agriculture Committee has expanded its territory in a 
very significant way of being the arbiter of those two 
essential areas. Especially as we now move to renewable 
energies, which is basically agricultural products. And chiefly 
now we are at a problem of corn with the downward pressure on 
corn and our over abundance of using that for ethanol.
    We have just passed a farm bill. I would like to get your 
opinions on do you think that we have done enough in terms of 
what we have done in the farm bill of taking some of that 
pressure off of corn by decreasing the tax credits on corn-
based ethanol and increasing the tax credits for cellulosic 
ethanol. And given the time frame of getting these new 
cellulose ethanol plants up and running, do you think we are 
too far behind the curve? What can we do to do a quicker--what 
is your assessment? Have we done sufficiently in this farm 
bill? Is there more we need to do to take the pressure off of 
corn, and what do you see the future in that area? Very 
quickly.
    Mr. Niemeyer. Congressman, first of all, I want to thank 
you for everything that you have done in the farm bill in 
passing it. I don't disagree with anything you said. Technology 
is moving at a fast pace. We are working right now with corn 
cobs, corn stalks, to make cellulosic ethanol. We have the 
technology. Maybe we don't have it down pat yet but we are 
going to get it at a very reasonable price. The one thing that 
Congress shouldn't do, it must not repeal the current RFS. We 
will have numerous economic studies that have indicated that 
the current ethanol demand has had very little role in the 
increase of corn prices, but a repeal of the waiver would have 
a significant psychological impact on the commodity markets 
that would virtually create a commodity bubble.
    The Chairman [presiding.] I thank the gentleman. His time 
has expired. The gentleman from Georgia, Mr. Marshall, for 5 
minutes.
    Mr. Marshall. Thank you. I had to step out and meet with 
some folks from the German Parliament to talk about NATO 
security issues so a little transition here. And actually my 
question probably was being addressed given what I just heard. 
During the first panel you all probably heard Mr. Fenton 
estimate or at least say that they had estimated that the 
impact of the weak dollar on the increase in the cost of oil 
was about 25 percent. That was his rough guess, and he 
described how they came about that estimate. What we hear is 
that there are various market forces that are causing the 
increase in food prices. One of the things that we regularly 
hear is that the decision to move to ethanol is one of the 
market forces that is causing this increase in food prices; and 
it is because so much of our acreage is now devoted to energy 
that might otherwise be devoted to producing food.
    And I think I just heard you, Mr. Niemeyer, is it, I think 
I just heard you say you have studies that tend to show that is 
not the case. I would be very interested to hear to what 
extent.
    Mr. Niemeyer. We have a lot of studies. One of the things 
that we have talked about today, this being a hearing on the 
CFTC, was are these markets really reflecting fundamentals. You 
know, in 2005-2006 marketing year our price of corn was $2 a 
bushel, and at that same time that is the year you passed the 
first renewable fuel standard bill. Quite honestly, I thought 
it was very interesting because at that time we were producing, 
we were utilizing about 1.6 billion bushels of corn to make 
ethanol, and now we are going to be using 3. So that was an 
increase of 1.4 billion bushels of corn going to ethanol. But 
in the same time frame that nobody seems to want to talk about, 
we went from 11.1 billion bushels of corn to 13.1 billion 
bushels of corn, which is a 2 billion bushel increase. So even 
though we had a 2 billion bushel increase in supply, we only 
had a 1.4 billion bushel increase in demand on the same time 
frame, I just don't think that justifies a $3 plus move in the 
corn price.
    The other thing is as a farmer and as a trader, I look at 
the Chicago Board of Trade, and I see that this last year we 
produced a 13.1 billion bushel corn crop. Currently, we have a 
1.3 billion bushel carryover. I don't get it. There are 
elevators at home full of corn. There is corn laying on the 
ground. And then we have this problem of convergence. There is 
a larger demand for futures than there is for cash. The same 
thing happened in the wheat market by $2.50 a bushel. That is 
the reason the bankers will not lend elevators the money to 
margin more grain, and then I am put in a position of margining 
my own position which really creates a lot more of a problem.
    Mr. Marshall. Right. Any of the others? Mr. Clark.
    Mr. Clark. I am not sure that I am expert enough to comment 
on what percentage of the price move has been responsible for 
ethanol, so I won't even want to try to comment on that. I 
think there are a lot of studies out there being done by 
universities and other people that are trying to peg that. But 
I think unquestionably, without a doubt, there is unprecedented 
demand for commodities. There is nobody in this room certainly 
that could deny that. There is unprecedented demand for corn. 
We simply cannot raise enough corn. And you can say that, 
soybeans, wheat, whatever the case may be, we are struggling in 
the United States to grow enough commodities to meet the 
overall demand.
    And you ask it in the context of the farm bill. Our 
position at the NGFA, we are disappointed that the farm bill 
did not open up some CRP ground to let out some fully 
sustainable tillable ground and allow us to produce more.
    Mr. Marshall. Well, that just wasn't going to happen. I 
tried.
    Mr. Clark. I know that.
    Mr. Marshall. I sort of tried to lead the way a little bit.
    Mr. Clark. We have to find a way to grow more commodities.
    Mr. Marshall. And is that because there is a world market?
    Mr. Clark. As the dollar weakens and as other countries get 
more wealthy, they move from when you were eating meats, China 
into the market eating two to three meals a day now, and India, 
it is worldwide demand and it is real.
    Mr. Marshall. The problem that most folks have with this is 
to the average consumer this has happened in the last 4 or 5 or 
6 months, and these trends we have been discussing are trends 
that have been going on for really quite some time so what is 
unique now is what people ask us. That is a statement. My time 
is up. I appreciate--I would be very appreciative of any 
follow-up that you might care to give to the Committee that 
identifies what is different now, and if nothing else maybe you 
are going to be suggesting again that it has something to do 
with these OTC funds and something with the markets. I don't 
know.
    Mr. Weil. I would like to make a comment. Right now there 
are no spec limits especially on the OTC funds, and their 
influence on the market is building, and I think that has added 
some volatility to certainly the cotton futures. I can't really 
speak to the other commodities. I am sure that is the case as 
well. But that is a place that in our recommendations we would 
like to see more transparency with regards to the OTC, and they 
should be limited. Certainly, those that are not traditional 
hedgers should be in a different category and recognized as 
such and limited to a degree. Right now the lenders who finance 
the industry are extremely fearful. They don't understand what 
is going on, and that is our life blood as our excess capital 
whether it be banks or holding companies somewhere.
    Getting on to another subject with the supply of cotton and 
why the fundamentals were completely--the fundamentals were 
just completely ignored. Cotton is at a 50 percent stock to use 
ratio. If we don't plant one seed of cotton this year, we have 
enough cotton to supply the world. We, being the world, have 
enough cotton to supply the world's needs for 6 months, and we 
are going to be planting cotton this year. Producers have a 
capital commitment to cotton all over the world. They do in 
this country. They have been paring that down because they see 
a lot more track of this in the grain markets, but they still 
want to grow cotton. I mean that is their expertise, and they 
still want to pursue that. And thanks for passing the farm 
bill. That certainly gives them some relief.
    The Chairman. Thank you. Let me thank each of you for your 
patience today through the voting. Fortunately, we only had one 
set. This I think has been an excellent hearing. I thank you 
for your participation, and I would say to you that we will 
have more in the weeks to come because I think this is an issue 
that requires our attention. This is an important issue for the 
American consumer, and with that, I would ask the Ranking 
Member if he has any final comments before we adjourn.
    Mr. Moran. Mr. Chairman, thank you. I agree with you this 
has been an interesting and useful hearing, and I appreciate 
the testimony we have heard from all three panels. I have a 
couple of additional questions, particularly from staff that I 
would like to submit to our witnesses in writing and ask for 
their response. And I look forward to working with you in the 
next few weeks as we determine what direction we go in 
additional hearings.
    The Chairman. I thank the gentleman. And let me just ask 
each of you, other Members will submit questions, and if you 
would within the next 10 days, please get that back to the 
Committee. I would appreciate it. Under the rules of the 
Committee, the record of today's hearing will remain open for 
10 days to receive additional materials and supplement a 
written response from witnesses to any questions posed by a 
Member of this panel. This hearing of the Subcommittee on 
General Farm Commodities and Risk Management is adjourned.
    [Whereupon, at 2:15 p.m., the Subcommittee was adjourned.]
    [Material submitted for inclusion in the record follows:]
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