[Federal Register Volume 61, Number 249 (Thursday, December 26, 1996)]
[Notices]
[Pages 67998-68013]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-32708]


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COMMODITY FUTURES TRADING COMMISSION


Chicago Board of Trade Futures Contracts in Corn and Soybeans; 
Notice That Delivery Point Specifications Must Be Amended

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of, and request for public comment on, Notification to 
chicago board of trade to amend delivery specifications.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has 
notified the Board of Trade of the City of Chicago (``CBT''), under 
Section 5a(a)(10) of the Commodity Exchange Act (``Act''), 7 U.S.C. 
7a(a)(10), that the delivery terms of the CBT corn and soybean futures 
contracts no longer accomplish the objectives of that section of the 
Act; and that the CBT has seventy-five days from the date of this 
notice to submit proposed amendments to those contracts which will 
accomplish the objectives of that section.
    The Commission has determined that publication of the notification 
to the CBT for public comment is in the public interest, will assist 
the Commission in considering the views of interested persons, and is 
consistent with the purposes of the Commodity Exchange Act.

DATES: Comments must be received by February 24, 1997.

ADDRESSES: Comments should be mailed to the Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, 
D.C. 20581, attention: Office of the Secretariat; transmitted by 
facsimile at (202) 418-5521; or transmitted electronically at 
[[email protected]]. Reference should be made to ``Corn and Soybean 
Delivery Points.''

FOR FURTHER INFORMATION CONTACT: Blake Imel, Acting Director, or Paul 
M. Architzel, Chief Counsel, Division of Economic Analysis, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
N.W., Washington, D.C. 20581, (202) 418-5260, or electronically, Mr. 
Architzel at [PA[email protected]].

SUPPLEMENTARY INFORMATION: Section 5a(a)(10) of the Act provides that 
as a condition of contract market designation, boards of trade are 
required to:

permit the delivery of any commodity, on contracts of sale thereof 
for future delivery, of such grade or grades, at such point or 
points and at such quality and locational price differentials as 
will tend to prevent or diminish price manipulation, market 
congestion, or the abnormal movement of such commodity in interstate 
commerce. If the Commission after investigation finds that the rules 
and regulations adopted by a contract market permitting delivery of 
any commodity on contracts of sale thereof for future delivery, do 
not accomplish the objectives of this subsection, then the 
Commission shall notify the contract market of its finding and 
afford the contract market an opportunity to make appropriate 
changes in such rules and regulations.

    The Commission, by letter dated December 19, 1996, notified the CBT 
under Section 5a(a)(10) of the Act, that its futures contracts for corn 
and soybeans no longer were in compliance with the requirements of that 
section of the Act. The text of that notification is set-forth below.

December 19, 1996.
Patrick Arbor
Chairman, Chicago Board of Trade, 141 W. Jackson Blvd., Chicago, 
Illinois 60604

Re: Delivery Point Specifications of the Corn and Soybean Futures 
Contracts.

    Dear Chairman Arbor: The Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') hereby notifies the Board of Trade of 
the City of Chicago (``CBT or Exchange'') under Section 5a(a)(10) of 
the Commodity Exchange Act (``Act''), 7 U.S.C. 7a(a)(10), that the 
delivery terms of the CBT corn and soybean futures contracts no 
longer accomplish the statutory objectives of ``permit[ting] the 
delivery of any commodity * * * at such point or points and at such 
quality and locational price differentials as will tend to prevent 
or diminish price manipulation, market congestion, or the abnormal 
movement of such commodity in interstate commerce.'' 1
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    \1\ The full text of Section 5a(a)(10) of the Commodity Exchange 
Act is appended to this letter.
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    The Commission, as detailed below, bases this finding on the 
following: (1) the continuing diminution of the role of terminal 
markets in the cash market for grain; (2) the increasing shift of the 
locus of the main channels of commodity flows away from the delivery 
points on the contracts, particularly the par-delivery point of 
Chicago; (3) the continuing decline in cash market activity generally 
at the contracts' delivery points, particularly Chicago; and (4) the 
serious, precipitous drop in regular warehouse storage capacity at the 
Chicago delivery point

[[Page 67999]]

over the past fourteen months. These conclusions are supported by a 
number of CFTC staff inquiries into these issues and by four separate, 
comprehensive studies of these issues completed in 1991 (one of which 
was sponsored by the CBT). Each of these inquiries and studies 
identified the above trends and indicated that deliverable supplies on 
the subject contracts were not available in normal cash market channels 
in amounts sufficient to tend to prevent or to diminish price 
manipulation, market congestion, or the abnormal movement of such 
commodity in interstate commerce.
    Although the CBT has attempted previously to respond to these 
problems by amending the contracts, those steps, such as the addition 
of St. Louis as a delivery point, have proven to be ineffective. With 
the recent precipitous drop in warehouse capacity in Chicago, the 
problem has reached a critical juncture. Recognizing this, the CBT 
convened a Task Force to consider changes to the grain contracts. More 
than a year after the Task Force began its deliberations, the Exchange 
membership rejected the modifications to the terms of the corn and 
soybean contracts recommended by the CBT's Board of Directors.
    And, as provided under section 5a(a)(10) of the Act, the Commission 
hereby notifies the CBT that the Exchange is afforded the opportunity 
to submit for Commission approval proposed amendments to the delivery 
terms of the corn and soybean futures contracts that will accomplish 
the statutory objectives by March 4, 1997, a period of seventy-five 
days from the date of this letter. In determining whether its proposal 
is adequate to accomplish the objectives of section 5a(a)(10) of the 
Act, the CBT should be guided by a number of illustrative alternatives 
provided below. Failure to respond in a manner which in the 
Commission's judgment is ``necessary to accomplish the objectives'' of 
this section of the Act will result in further proceedings under 
section 5a(a)(10).
    In light of the Commission's determination that the CBT's futures 
contracts in corn and soybeans no longer comply with the requirements 
of section 5a(a)(10) of the Act, the CBT should refrain from listing 
additional months for trading in those contracts during the pendency of 
these proceedings.
    By limiting this notification under Section 5a(a)(10) of the Act to 
the CBT's futures contracts for corn and soybeans, the Commission is 
not thereby making any determination regarding any other CBT futures 
contract. The Commission notes, however, that the delivery 
specifications for the CBT wheat futures contract are also subject to 
many of the same trends which have affected adversely the corn and 
soybean contracts. In light of the importance of these issues, the 
Commission determined to limit this Section 5a(a)(10) notification to 
the corn and soybean contracts, which have been fully considered by the 
CBT in the first instance. The Commission believes that such a full 
consideration by the CBT of the delivery specifications of its wheat 
contract is also warranted and should be undertaken immediately. The 
Commission is of the view that this reconsideration should be completed 
within 120 days.
    In notifying the CBT of the Commission's finding that the terms of 
the corn and soybean futures contracts do not accomplish the objectives 
of Section 5a(a)(10) of the Act, the Commission is not questioning the 
continued utility of the contracts for hedging or price basing under 
ordinary conditions or their role as the world's premiere futures 
contracts for corn and soybeans. Rather, the Commission's action, as 
explained in greater detail below, is predicated upon its finding that 
bringing the delivery terms of the contracts into closer alignment with 
an otherwise broad and active cash market is necessary to meet the 
requirements of Section 5a(a)(10), tending to prevent or to diminish 
price manipulation, market congestion, or the abnormal movement of such 
commodities in interstate commerce.

I. Background.

    The CBT's corn and soybean futures contracts are major United 
States (U.S.) futures markets and principal vehicles for hedging and 
pricing by U.S. firms with commercial interests in these two important 
agricultural commodities. They rank among the most actively traded 
commodity futures contracts in the world and are used extensively by 
foreign commercial interests. In this regard, for the 1995/96 crop 
year, the average daily open interest was nearly two billion bushels 
for CBT corn futures and approached one billion bushels for CBT soybean 
futures. The total trading volume over the same period was 
approximately 95 billion bushels for corn futures and 70 billion 
bushels for soybean futures.
    These activity levels for corn represent a greater than eight-fold 
increase in the levels of volume and open interest experienced in these 
markets in the early 1970s. For soybeans, these current levels are more 
than four times the levels experienced in the early 1970s. This 
increased overall level of trading activity can be attributed to an 
approximate 80 percent increase in the combined U.S. annual production 
of corn and soybeans over the last 25 years; a steadily decreasing 
level of federal crop price support activities, which has led to 
increased commercial uncertainty and need for hedging; and an increased 
internationalization of cash markets for feed grains and soybeans, 
which has also led to increased foreign participation in these futures 
markets for purposes of hedging and price-basing.
    The preponderant use of these markets is commercial in nature. For 
example, in mid-November of this year, reportable commercial traders 
held 60 and 70 percent of the reportable long and short sides, 
respectively, of the soybean futures market and 85 and 64 percent of 
the reportable long and short sides, respectively, of the corn 
market.2 Presumably, commercial traders also held a substantial 
proportion of the non-reportable positions.
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    \2\ Reportable traders are individuals or firms that hold 
futures positions of 500,000 bushels or more in soybeans or 750,000 
bushels or more in corn in any one contract month through any U.S. 
or foreign broker.
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    The predominant economic function of the CBT corn and soybean 
futures markets is risk-transfer and price-basing, rather than 
merchandising or title transfer for the underlying commodity. 
Consistent with this, the preponderance of positions established in 
these markets are liquidated through the purchase or sale of offsetting 
futures contracts, rather than through making or taking delivery of the 
commodity. Nonetheless, the orderly convergence of futures prices and 
cash market merchandising values is essential to these contracts' risk-
transfer and price-basing functions, and this convergence is dependent 
on the unimpeded opportunity of market participants to conduct 
arbitrage between the cash and futures markets. As a result, it is 
essential that the delivery specifications of these contracts 
effectively link futures trading to a substantial segment of the 
underlying cash markets.
    The manner in which cash and futures prices are linked through the 
delivery mechanism is straightforward. If, at contract expiration, 
short position holders believe that expiring futures prices are higher 
than the current value of the commodity, they can satisfy their 
contractual obligations by acquisition and delivery of the physical 
commodity, rather than through the purchase of offsetting futures 
contracts. Likewise, if long position holders believe that

[[Page 68000]]

expiring futures prices are lower than the current merchandising value 
of the commodity, they can require delivery in lieu of selling 
offsetting contracts in the futures market. To the extent that this 
arbitrage process is not impeded, convergence of cash and futures 
prices at contract expiration is assured.
    The terms of delivery are critical in determining the degree of 
arbitrage between cash and futures markets and the strength of the 
linkage between cash and futures prices. When contract delivery terms 
do not correspond to a substantial segment of the cash market, the 
strength of the arbitrage linkage is diminished. In particular, when 
the futures market requires delivery at a location or of grades for 
which the commodity is not sufficiently available, short position 
holders may not be able to acquire the commodity or gain access to the 
delivery facilities in the event they believe that cash and futures 
prices are misaligned. Long position holders, seeking to profit from 
their positions, have no incentive to liquidate their positions through 
offset, and futures prices may take a course that is independent of the 
cash market. The resulting market congestion, or distortion of prices, 
is disruptive to proper functioning of the futures market, because 
prices no longer reflect cash market fundamentals. Thus, the nature of 
the delivery terms is critical to use of the CBT's corn and soybean 
futures contracts throughout the U.S. and abroad in the hedging and 
pricing of corn and soybean transactions and directly determines the 
degree to which the prices of the futures markets may be manipulated or 
otherwise become independent of fundamental conditions in those cash 
markets.
    As discussed in detail below, the CBT's corn and soybean contracts 
currently specify delivery through the use of warehouse receipts for 
stocks held in specified facilities at Chicago, Toledo, and St. Louis. 
It is the location of these delivery points, as well as the nature of 
the delivery instrument, that is the subject of the Commission's 
analysis regarding the CBT's compliance with the provisions of Section 
5a(a)(10) of the Act.

II. General Cash Market Trends

    Chicago and Toledo, the primary delivery points of the CBT's corn 
and soybean futures contracts, are now situated at the periphery of 
current major cash market channels for these commodities. Their 
declining importance as cash market centers is the result of long-term 
trends in the storage, transportation, and processing of grains. As 
discussed below, these trends include: (1) increasing shipment of corn 
and soybeans from production areas directly to domestic users or export 
locations, bypassing intermediate locations such as terminal markets; 
(2) increasing processor use of corn and soybeans in production areas, 
to produce food, feed, and other products, thereby reducing the 
relative quantity of corn and soybeans shipped to locations outside of 
production areas including terminal markets; (3) substantially 
declining export activity from the Great Lakes relative to the growth 
of exports from Gulf of Mexico and Pacific Northwest ports; and (4) 
increasing decentralization in grain storage capacity, with marked 
increases in both on-farm and commercial storage capacity in production 
areas.

1. Changes in Transportation Patterns

    The increasing shipment of corn and soybeans directly from 
production areas to domestic users or export locations, bypassing the 
traditional terminal markets, is related, in large part, to the 
deregulation of railroad freight rates. Prior to rail freight-rate 
deregulation in 1980, a practice called ``transit'' or

[[Page 68001]]

``proportional billing'' permitted grain to be shipped from production 
areas to an intermediate point for storage, such as a traditional 
terminal market, and then to the final destination at a single, fixed 
rate. After 1980, negotiated point-to-point rates replaced transit 
billing, favoring direct shipments of corn and soybeans to domestic 
users or export locations, to the detriment of traditional terminal 
markets located at major railroad centers such as Chicago.

2. Processing Trends

    Substantial increases in corn and soybean processing at new and 
existing locations within the major production areas has further 
reduced the role of traditional terminal markets. According to U. S. 
Department of Agriculture (USDA) data, the quantity of corn processed 
into corn sweeteners, ethanol, and other products quadrupled between 
1970 and 1995 (from about 400 million bushels to over 1.6 billion 
bushels) and the quantity of soybeans crushed in the U.S. approximately 
doubled over the same time period (from about 760 million bushels to 
about 1.34 billion bushels). Most of these new or expanded facilities 
are located in production areas, in which the processors obtain their 
supplies of corn and soybeans directly from nearby grain warehouses or 
producers. Moreover, even processing facilities located at terminal 
markets now purchase the majority of their supply directly from lower-
cost production-area locations rather than from terminal market 
elevators. The inability to participate in this growth sector of the 
cash market has further eroded the relative importance of traditional 
terminal-market elevators.

3. Export Marketing Channel Changes

    Over the past 25 years, corn and soybean exports have grown 
dramatically. However, the trends favor the all-year export facilities 
of the lower Mississippi River. In addition, the growth in exports to 
Asia has favored export facilities at Pacific Northwest ports. The 
growth in exports from these two areas has relatively disadvantaged the 
third major export route--the Great Lakes. More fundamentally, corn and 
soybean exports from the Great Lakes have declined absolutely, as well. 
This decline is, in part, attributable to the fall in exports to 
Northern European countries where Great Lakes ports sometimes have a 
cost advantage relative to other U.S. ports. In addition, exports from 
the Great Lakes are limited by the relatively high cost of shipping 
corn and soybeans by vessel from Great Lakes ports. This is partially 
due to the fact that the St. Lawrence Seaway, through which all vessels 
from Great Lakes ports must pass, can accommodate only relatively small 
vessels, which tend to charge higher freight rates for grain shipments 
than those assessed by larger vessels. In view of this consideration, 
corn and soybeans frequently are transferred from such smaller ships to 
larger vessels at Canadian ports.
    These changes have significantly eroded the role, and general 
business activity, of the Great Lakes ports and the traditional 
terminal markets located there. For example, USDA data indicate that 
average annual exports of corn from Chicago and Toledo combined fell by 
33 percent between 1968-70 and 1993-95. Average annual soybean exports 
from Toledo and Chicago over this same period fell by 53 percent. In 
addition, the percentage of total U.S. exports of corn and soybeans 
accounted for by Chicago and Toledo combined declined from an average 
of about 17 percent in the 1968-70 period to an average of about four 
percent in the 1993-95 period.
    As the following charts indicate, the decline in the export role of 
Chicago and Toledo has been associated with, and is in contrast to, the 
increasing importance of corn and soybean exports through ports on the 
Gulf of Mexico and on the Pacific Coast.3
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    \3\ Ports located on the lower Mississippi River accounted for 
about 93 percent of average annual soybean and corn exports from 
Gulf of Mexico ports over the period 1993-95. Virtually all Pacific 
Coast exports of corn and soybeans move through Pacific Northwest 
ports located on the Columbia River and Puget Sound.

BILLING CODE 6351-01-P

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[GRAPHIC] [TIFF OMITTED] TN26DE96.000



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[GRAPHIC] [TIFF OMITTED] TN26DE96.001



BILLING CODE 6351-01-C

[[Page 68004]]

4. Geographic Changes in Storage Capacity Location

    Finally, the role of some terminal markets as grain storage centers 
has declined as increasing storage capacity has been constructed in 
production areas, both off-farm and on-farm. Increases in off-farm 
storage capacity in production areas is due, in part, to the 
deregulation of rail freight rates, increased processing activity in 
production areas, and the need for additional storage capacity due to 
the significant growth in corn and soybean production in recent 
decades. In addition, on-farm storage capacity has increased 
significantly over the past 25 years to allow producers to maintain 
harvesting efficiency and access to lower cost storage. As a result, 
the role of terminal markets as storage centers has greatly diminished.

III. Cash Market Conditions at CBT Delivery Points.

    As indicated above, general cash market trends disfavor traditional 
terminal markets such as Chicago. Moreover, cash market activity in 
Chicago and Toledo, the primary delivery locations for the CBT's corn 
and soybean futures contracts, has declined substantially, both on an 
absolute and relative basis, in recent decades. USDA production data 
and CBT data on grain receipts by elevators and processors at the 
primary delivery locations indicate that, despite U.S. corn production 
nearly doubling from 1970 to 1995, total corn receipts at Chicago and 
Toledo combined increased only by about 26 percent from 1970 to 1995, 
representing a mere 2.5 percent of total U.S. corn production in 1995. 
These data also indicate that, while U.S. soybean production also 
nearly doubled over this period, total soybean receipts in these 
locations actually fell by about 64 percent during the 1970-95 period, 
representing less than 2 percent of total 1995 U.S. soybean production. 
These trends illustrate the peripheral nature of the delivery points of 
the CBT's corn and soybean futures contracts to the cash market for 
these commodities.
    The decline in the importance of the primary CBT delivery locations 
relative to the cash market is further illustrated by the trends in 
storage capacity at these locations in relation to changes in storage 
capacity in states which contain primary production areas for corn and 
soybeans. In particular, USDA data indicate that, from January 1, 1970, 
to December 1, 1995, total off-farm storage capacity in Illinois more 
than doubled, whereas CBT data for the same period indicate that the 
registered storage capacity of regular elevators at Chicago remained 
essentially constant until 1995, when it fell by about 58 percent. 
Similarly, during the period January 1, 1978, through December 1, 1995, 
total off-farm storage capacity in Illinois, Indiana and Ohio combined 
increased by about 42 percent, whereas total regular storage capacity 
in Chicago and Toledo combined declined by about 15 percent. This 
decline includes the 25 percent decrease in total regular storage 
capacity during 1995.
    The decline in the cash market importance of the primary CBT 
delivery points has not been uniform. Rather, the declining cash-market 
importance of Chicago, the par delivery point, has recently been 
particularly acute.

1. Cash Market Trends at Chicago

    Chicago's decreasing cash market role has been reflected over the 
years in a gradual loss in regular elevator storage capacity and in the 
number of firms operating such elevators. As discussed in more detail 
below, this loss has recently become precipitous. According to CBT 
data, in 1970, five firms operated seven regular elevators with a total 
registered storage capacity of about 52.4 million bushels. Currently, 
there are only three firms operating three regular elevators, with a 
total registered storage capacity of 22.8 million bushels. Further, one 
of the three remaining regular elevators, representing about 8.1 
million bushels of storage capacity, recently ceased accepting grain 
and soybeans and appears to be closing down its operations, leaving 
total registered storage capacity at 14.7 million bushels.
    Currently, soybean cash market activity in the Chicago area is 
limited to the merchandising by regular elevators of soybeans received 
from production locations, generally at harvest time. In this regard, 
total annual soybean receipts by regular CBT elevators declined by 
about 86 percent from 1970 to 1995, to about 8 million bushels. The 
merchandising role played by CBT regular elevators essentially is 
limited to shipping soybeans into export channels, either by barge to 
lower Mississippi River export points or via vessels through the Great 
Lakes and the St. Lawrence Seaway.
    The existing corn cash market in the Chicago area primarily 
consists of purchases of corn by two local processing facilities and 
the merchandising by regular elevators of corn received from production 
locations. Annual receipts of corn in Chicago in 1995 totaled 112 
million bushels, remaining relatively unchanged since 1970. CBT data 
indicate that a very small share of these receipts is received by 
regular elevators, with these elevators accounting for only about 14 
percent of total corn receipts in 1995. Further, corn processing 
facilities in Chicago purchase essentially all of their annual corn 
requirements directly from production areas rather than from regular 
elevators. As with soybeans, regular elevators merchandise the limited 
quantities of corn they receive primarily into export channels.
    USDA data indicate that average corn exports via the Great Lakes, 
during the period 1993-95, declined in absolute terms by over 60 
percent relative to the average levels observed in 1968-70 and, as a 
percentage of total U.S. exports, from about 11.3 to 1.2 percent.4 
These data also indicate that average soybean exports via the Great 
Lakes declined by approximately 70 percent between these same two time 
periods and, as a percentage of total U.S. exports, from about 7.3 to 
about 1.1 percent.
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    \4\ These data actually overstate the level of corn and soybean 
exports from Chicago, because the USDA's export data for Chicago 
also include exports from Milwaukee.
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2. Cash Market at Toledo

    Corn and soybean cash market activity in Toledo has been less 
affected by these trends than the par delivery point of Chicago. Since 
Toledo was added as a delivery point for corn and soybeans in the mid- 
to late 1970s, the number of regular elevators in Toledo has remained 
relatively stable, although overall registered storage capacity has 
increased from about 36 million bushels in 1978 to about 57 million 
bushels today. Currently, there are seven regular elevators at the 
Toledo delivery point. The cash market for corn and soybeans at Toledo 
consists exclusively of the merchandising activities of the regular 
elevators; there are no processing facilities for these commodities at 
this location.
    From 1970 to 1995, annual receipts of corn at Toledo doubled, 
increasing to an average of about 65 million bushels during 1994-95. 
Despite the overall doubling of receipts, however, average corn exports 
via the Great Lakes, during the period 1993-95, exceeded by only about 
20 percent the average levels observed in 1968-70. In contrast, soybean 
receipts at Toledo declined in absolute amount by about 30 percent over 
this same period to an average of about 30 million bushels during 1994-
95. Average soybean exports from Toledo declined by an even greater 
amount--approximately 47 percent between these same two time periods. 
Thus, while these data indicate that

[[Page 68005]]

Toledo, unlike Chicago, has retained a larger measure of cash market 
activity, it is of a decidedly mixed nature.

3. Cash Market Conditions at St. Louis

    Cash market activity at the contracts' St. Louis delivery point is 
of a substantially different nature than at the contracts' two primary 
delivery points. This location primarily serves as a barge loading area 
for corn and soybeans for shipment to the lower Mississippi River 
export market. The four regular elevators currently at St. Louis have a 
registered storage capacity of 12.2 million bushels. CBT data indicate 
that these elevators handle relatively large quantities of corn and 
soybeans. Specifically, receipts of corn averaged 52 million bushels 
during the period 1994-95, while receipts of soybeans averaged 23 
million bushels over this same period. Similar quantities of corn and 
soybeans were shipped (almost exclusively by barge) during these two 
years. However, regular elevators at this location do not store 
significant quantities of corn or soybeans for extended periods of time 
due to the need to keep storage space unencumbered in order efficiently 
to conduct the unloading/loading process. Accordingly, because delivery 
on the CBT's corn and soybean contracts calls for the issuance of 
warehouse receipts that require regular elevators to store the 
commodity until the receipt is redeemed, there have been only a token 
number of futures deliveries at St. Louis.

IV. History of Revisions to the CBT Corn and Soybean Futures Delivery 
Point Specifications--1973 to 1993

    The trends discussed above are long-term in nature. There has been 
an equally long history of modest attempts, made only in response to 
the urging of the federal regulator, to address the effect of these 
trends on the continued viability of the delivery terms of these 
futures contracts, while retaining the primacy of Chicago. Until the 
1970's, Chicago was the sole delivery point on the CBT's corn and 
soybean futures contracts. At that time, a number of problem 
liquidations and price manipulation investigations in these futures 
markets focused attention on the inadequacy of Chicago as a delivery 
point and the need for additional delivery points. In particular, in 
the summer of 1973, both futures markets experienced problem 
liquidations, due, in part, to a general tightness in supplies 
associated with large Soviet grain purchases. Later that year, 
Congressional hearings were held in response to these problems. 
Ultimately, as part of far-reaching amendments to the Act, Section 
5a(a)(10) was added, providing for new federal authority to address 
directly the delivery point provisions of futures contracts.

1. Proposals to Add Toledo and St. Louis

    In 1974, the CBT submitted proposals to the USDA's Commodity 
Exchange Authority, the Commission's predecessor agency, to add Toledo 
and St. Louis as delivery points on the corn and soybean contracts at a 
discount of 5 cents per bushel to Chicago.5 The CBT never placed 
these amendments into effect, because the proposed discounts were 
thought to be too great relative to cash market pricing relationships 
between Chicago and the proposed delivery points. In 1975, these same 
amendments were resubmitted to the newly formed CFTC for its approval. 
The Commission approved the proposal for corn (effective with the 
December 1976 contract month); and the CBT withdrew the soybean 
proposal. In 1978, the CBT resubmitted the proposal to add Toledo (but 
not St. Louis) as a delivery point for the soybean contract at a 
discount of 8 cents per bushel. The Commission approved those 
amendments, effective with the November 1979 contract month.
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    \5\ Toledo was established by the CBT as a delivery point for 
its wheat futures contract in the early 1970s.
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2. Proposal to Add St. Louis as a Soybean Futures Delivery Point

    In July 1989, a commercial long trader held large long positions 
that exceeded the amount of soybeans that short traders were able to 
deliver at the contract's then existing delivery points and indicated 
that it would stand for delivery on its positions. This prompted the 
CBT to declare a market emergency, taking action to ensure an orderly 
liquidation of that futures contract month. In response to the 
outpouring of concerns over the adequacy of the contract's delivery 
provisions expressed by market participants after this incident, the 
CBT in 1990 proposed a number of changes to its soybean and grain 
futures contracts. These included adding St. Louis as a delivery point 
for soybeans at a discount of 4 cents per bushel to Chicago. Based upon 
evidence that the proposed discount for St. Louis delivery was too 
great relative to cash market pricing relationships, the Commission 
returned this submission for further justification under Commission 
Rule 1.41(b). The Commission also reiterated its view that the CBT 
should consider more substantive changes to its soybean and grain 
futures contracts in order to ensure adequate deliverable supplies.
    In response to the heightened concerns over the adequacy of the CBT 
grain and soybean delivery points renewed by the July 1989 market 
emergency, the National Grain and Feed Association, the CBT, the 
General Accounting Office, and the Commission all conducted or 
sponsored studies on the delivery terms of the soybean and grain 
futures contracts. These separate studies were all completed in 1991. 
They generally found that long-term trends in the structure of the 
grain industry had affected adversely the viability of the cash markets 
at Chicago and Toledo. Their specific conclusions are summarized below.
a. MidAmerica Institute
    The CBT commissioned the MidAmerica Institute to conduct a study of 
its corn and soybean futures contracts. The study concluded that, based 
on an analysis of cash and futures price data for the 1984-89 period, 
the delivery process for these contracts effectively resulted in the 
convergence of futures prices and cash prices at the contracts' Chicago 
and Toledo delivery points. The study noted, however, that the Chicago-
Great Lakes-East Coast cash market for grains and soybeans had declined 
markedly in importance relative to the Mississippi-Gulf of Mexico area. 
The study concluded that this decline had reduced the benefits of 
retaining Chicago as the primary delivery point and of relying upon 
Toledo as the alternative delivery point. In this respect, the study 
concluded that Chicago had become a relatively low price point because 
it is located near the origin, rather than at the destination, of grain 
and soybean flows for most of the year. The study indicated that this 
feature enhances the potential for manipulation, since deliverable 
supplies may only be increased to address a manipulation attempt by 
drawing these commodities from higher value locations. The study noted 
that such an action to increase deliverable supplies is costly and that 
a manipulator can profitably exploit this cost to inflate futures 
prices artificially under conditions that recur periodically in grain 
markets. The study also noted that the decline in Chicago's tributary 
area means that more hedgers must bear additional basis risk when 
Chicago is the primary delivery point.
    This increased susceptibility to manipulation and basis risk, the 
study concluded, could be ameliorated by improving the alignment of the 
contracts' delivery mechanisms with

[[Page 68006]]

prevailing cash market conditions and pricing relationships. In 
particular, the addition of an effective Mississippi River delivery 
point, such as St. Louis, and the establishment of price differentials 
for all delivery locations at levels reflecting typical cash price 
relationships, was recommended. The addition of a delivery point at an 
active cash market location such as St. Louis, the Institute noted, 
would enhance the futures contracts' hedging performance by improving 
the extent to which their prices reflect prices in primary cash market 
channels. In this regard, however, the MidAmerica Institute cautioned 
that, because of their limited storage capacity and throughput nature, 
the addition of St. Louis warehouses would only modestly enhance 
deterrence of manipulative activity.\6\
---------------------------------------------------------------------------

    \6\ Providing for emergency barge or rail delivery, or for some 
mechanism of ensuring access of throughput elevators in the vicinity 
of that city to the delivery process, would, according to the 
MidAmerica Institute, address these shortcomings in St. Louis as a 
potential additional delivery point.
---------------------------------------------------------------------------

b. Food Research Institute
    The Food Research Institute of Stanford University was commissioned 
by the National Grain and Feed Association to study these issues as 
well. This study concluded that deliverable stocks at the contracts' 
delivery points were, in the years preceding the study's completion in 
1991, too low relative to the size of positions normally held by the 
largest traders. It concluded that, in this respect, positions held by 
the largest traders were of such a size relative to deliverable stocks 
that neither delivery nor the threat of delivery was a credible 
alternative. Moreover, this limited level of deliverable stocks was not 
due to any warehouse capacity constraints existing at that time, but 
rather to the general inexorable decline of cash market activity at 
grain terminal markets--Chicago, in particular.
    The Food Research Institute recommended that the CBT address this 
fundamental problem by rethinking its specifications requiring delivery 
of grain and soybeans in-store via warehouse receipts. Suggested 
alternatives included barge delivery, incorporating aspects of a call 
on production, or delivery at Mississippi River export facilities, with 
the receiver given the option as to when the product is loaded upon one 
month's notice.\7\
---------------------------------------------------------------------------

    \7\ The Food Research Institute study suggested that the CBT 
consider adopting the delivery procedures used on the New York 
Mercantile Exchange's crude and heating oil futures contracts if the 
CBT selects a Gulf of Mexico delivery point system.
---------------------------------------------------------------------------

c. The CFTC
    The Commission staff's study of the contracts' delivery terms 
reviewed and analyzed the general cash market trends and the specific 
cash market conditions at Chicago and Toledo during the period 1960 
through 1990. The study found that Chicago and, to a lesser extent, 
Toledo had declined substantially as storage locations for corn and 
soybeans to be exported via the Great Lakes and shipped to other U.S. 
destinations for domestic consumption purposes. In addition, the study 
analyzed several potential alternative delivery-point specifications 
for the corn and soybean futures contracts, which would locate the 
contracts' delivery points within the commodities' primary cash market 
channels. These included delivering corn and soybeans in-store at 
Central Illinois warehouses via warehouse receipts; making delivery at 
Illinois River barge-loading, or Mississippi River vessel-loading 
export facilities via shipping certificates; and cash settlement. The 
study concluded that these alternatives, by aligning the contracts' 
terms more closely with the underlying cash markets for corn and 
soybeans, would thereby reduce the potential for market problems and 
concomitant regulatory interventions.
d. General Accounting Office (GAO)
    At the request of the Chairman of the Agriculture Committee of the 
U.S. House of Representatives, the GAO completed a review of the CBT 
grain and soybean futures delivery-point issues in 1991. The GAO 
conducted interviews of interested parties, including CBT and 
Commission officials, and reviewed the above-noted studies prepared by 
the MidAmerica Institute and the Stanford University Food Research 
Institute.
    In its study, the GAO noted that CBT officials believed that 
changing delivery points might interfere with the economic purposes of 
futures trading and that surveillance and disciplinary action programs 
rather than changing delivery points might be better suited to 
preventing potential market manipulation. The GAO noted that, in 
contrast, the Commission was reluctant not to alter futures contract 
terms that in its judgement resulted in an increased threat of 
manipulation and required an excessive level of regulatory intervention 
to prevent frequent market congestion, price distortions or 
manipulation. The GAO also noted that the MidAmerica and Food Research 
Institute studies supported the need for the CBT and the Commission to 
assess alternatives for improving how delivery points for grain and 
soybean futures contracts meet the economic purposes and anti-
manipulation goals of the Act.
e. Symposium on CBT Grain and Soybean Delivery Point Issues
    In conjunction with the completion of these studies, in September 
1991, the Commission sponsored a symposium to discuss these issues. 
Attendees at that symposium represented a broad cross section of 
interested parties, including major grain companies, academic 
institutions, the CBT, and the Commission. Members of the grain 
industry generally agreed that the performance of the futures contracts 
under their current delivery specifications was not satisfactory in all 
respects, but disagreed on the degree of the problem and the nature of 
the possible solutions. Although acknowledging that Chicago was a 
declining cash market, a CBT representative nevertheless maintained 
that Chicago was still a viable delivery point based upon the variety 
of transportation alternatives available to long traders taking 
delivery at that location. The CBT representative further indicated 
that the CBT was continuing to study the situation and develop 
appropriate revisions to the contracts' delivery specifications.
f. Final CBT Proposals Responding to July 1989 Soybean Incident
    In 1992, the CBT re-submitted its proposal to add St. Louis as a 
delivery point for soybeans, at a premium of 8 cents per bushel rather 
than at a discount of 4 cents per bushel as previously proposed in 
1990. The CBT also proposed to revise the price differential for St. 
Louis corn futures deliveries to a premium of 7 cents per bushel from 
the then existing 4 cents per bushel discount and to reduce the 
discount for the delivery of corn in Toledo to 3 from 4 cents per 
bushel. Although approving these proposals in April 1992 for 
implementation beginning with the December 1993 corn contract month and 
the November 1993 soybean contract month, the Commission, in its 
approval letter, stated that it:

understands that the addition of St. Louis as a delivery point for 
soybeans and wheat and revisions to locational differentials for 
corn were intended by the Exchange to provide additional deliverable 
supplies for these contracts. Nevertheless, the Commission is 
concerned that these changes may not be sufficiently responsive to 
the long run changes in the cash market, and therefore may not 
significantly alleviate concerns about the contracts' specifications 
in either the immediate future or the long run.

[[Page 68007]]

    In particular, in view of the long term trends in the cash 
market, the Commission is concerned about the continued reliance on 
warehouse receipts in terminal markets as the sole source of 
deliverable supplies for each of these contracts. Further, the 
Commission notes that the limited warehouse space at St. Louis may 
be devoted primarily to ``through-put'' merchandising activities 
and, as a result, operators of these facilities may be reluctant to 
make significant space and/or receipts available for purposes of 
futures delivery.

    The Commission concluded by again putting the CBT on notice that:

    [i]n consideration of this, the Commission believes that the CBT 
should continue its efforts to develop comprehensive contract 
revisions that will enhance deliverable supply and reduce the need 
for formal and informal market intervention by the Exchange or the 
Commission. It is the Commission's belief that such revisions may 
require linking contract terms more directly to commodity flows or 
to decentralized storage. In the Commission's view, continued active 
consideration of this matter is particularly advisable in view of 
the possibility of further declines in the viability of the Chicago 
delivery area and the time necessary to develop and fully implement 
more substantive contract changes.

V. Recent Events--1995 to the Present

    As predicted by the Commission in 1992, the CBT's response to the 
continuing deterioration of the cash market at its delivery points 
proved to be a solution of limited effect and short duration. In the 
fall of 1995, three of the existing six Chicago delivery warehouses 
ceased operations. As a result, Chicago delivery capacity was 
immediately reduced by more than half--from 53.9 to 22.8 million 
bushels. Significant as this drop in capacity is, it must be kept in 
mind that actual supplies available in those warehouses have been a 
fraction of the total capacity. Nevertheless, the precipitous drop in 
warehouse capacity served to reawaken concerns over the viability of 
the contracts' delivery points.8
---------------------------------------------------------------------------

    \8\ Moreover, as also anticipated by the Commission in 1992, 
there have been few, if any, warehouse receipts registered for 
delivery on the soybean (or wheat) futures contracts at St. Louis, 
since it became a soybean (and wheat) delivery point in 1993. In 
addition, despite the substantial increase in the locational price 
differential applicable to St. Louis corn futures deliveries under 
the 1992 amendments, there continues to be very little futures 
delivery activity in corn at that location.
---------------------------------------------------------------------------

    Commission Chairman Mary Schapiro, in an October 11, 1995, letter 
to the CBT, expressed once again the Commission's concerns regarding 
the adequacy of the contracts' delivery provisions, stressing that the 
Commission's concerns were heightened by this further deterioration. 
Chairman Schapiro requested that the Exchange keep the Commission staff 
informed on a frequent basis of the progress of a Special Task Force 
established by the CBT to study the situation. Chairman Schapiro's 
letter further noted the Commission's recommendation that the Exchange 
not limit its consideration to short-term responses to the closure of 
the above-noted Chicago regular elevators. The letter noted, 
specifically, that the Exchange should consider, in the context of 
long-run cash market trends, comprehensive contract revisions that 
would enhance deliverable supply and provide a viable price-basing 
service for the international grain industry.

1. CBT Task Force.

    As noted above, the halving of deliverable storage capacity at 
Chicago prompted the CBT to form a Special Task Force on September 25, 
1995, to determine what changes, if any, were needed to be made to the 
contracts' delivery terms to ensure adequate deliverable supplies. The 
Special Task Force held numerous meetings from the date of its 
establishment through early June 1996. It invited a significant number 
of individuals, representing a broad cross section of the industry and 
other interests, to express their views. It considered in depth the 
merits of a number of suggested alternatives. The Special Task Force's 
Chairman also briefed the Commission on its progress.
    On June 4, 1996, the CBT Special Task Force issued its final 
recommendations for changing the delivery provisions of the grain 
futures contracts. The Special Task Force recommended: (1) adding 
delivery points in East Central Illinois, Northern Illinois River 
locations, and Milwaukee, Wisconsin, for the corn and soybean 
contracts, with warehouse receipts continuing to serve as the delivery 
instrument; (2) reducing the locational price differentials for 
delivery of corn, soybeans, and wheat at Toledo, Ohio; (3) deleting St. 
Louis as a delivery point for the corn, soybean, and wheat futures 
contracts; (4) reducing the daily barge load-out requirement for 
Chicago elevators from 3 to 2 barges, but permitting the receivers of 
corn or soybeans to request up to 4 barges per day, which the Chicago 
warehouseman could provide either entirely from the Chicago elevator or 
through a combination of loadings at the Chicago elevator and a 
separate loading point along the Northern Illinois River; and (5) 
establishing higher minimum financial requirements for regular 
warehousemen.

2. March 1996 Wheat Expiration Problem

    In the midst of the Special Task Force's deliberations, the March 
1996 wheat futures contract experienced a problematic 
liquidation.9 On the last trading day of this future, a major 
commercial trader maintained a significant long position against export 
sales contracts and a major commercial trader who did not own wheat in 
deliverable position maintained a significant short position until the 
final few minutes of trading. The commercial short trader and several 
other short position holders elected to offset their positions rather 
than make delivery. During the final minutes of trading, this buying 
interest was met by a lack of selling interest--the large commercial 
long trader had determined to stand for delivery and had not entered 
any orders on the close. As a result, wheat futures prices were bid 
sharply higher, from about $5.00 to over $7.00 per bushel during and 
after the close of trading. Although the Commission staff report 
10 on this incident was not addressed to the causal links, if any, 
between the delivery specifications for the contract and the problem 
liquidation, the recent problem in the expiration of the March wheat 
futures contract may foreshadow similar problems for the corn and 
soybean futures contracts.
---------------------------------------------------------------------------

    \9\ As noted above, although this notification under section 
5a(a)(10) of the Act applies only to the CBT corn and soybean 
futures contracts, many of the same trends affecting the corn and 
soybean futures contracts have affected the wheat futures contract, 
as well. The Commission is requesting the CBT to conduct an in-depth 
reconsideration of the delivery specifications for its wheat 
contract within the next 120 days, similar to that which it 
undertook for its corn and soybeans futures contracts.
    \10\ See, Report on Chicago Board of Trade March 1996 Wheat 
Future Expiration on March 20, 1996, (November 26, 1996).
---------------------------------------------------------------------------

3. CBT Action on Proposals to Revise the Contracts

    On September 18, 1996, the CBT's Board of Directors considered the 
Special Task Force's recommendations and approved for membership 
balloting all of the Special Task Force's recommended changes except 
the proposal to add East Central Illinois as a delivery area. On 
October 17, 1996, the Exchange membership voted to reject the 
recommended changes by a margin approximately of 2 to 1.

4. More Recent Developments

    In the last week of October 1996, Commission staff were notified 
that one of the three remaining Chicago elevators, operated by 
Countrymark, has stopped accepting soybeans and grain for the 
indefinite future. Accordingly, at

[[Page 68008]]

present, there are only two functioning regular Chicago elevators. They 
have a combined rated storage capacity of 14.7 million bushels.11
---------------------------------------------------------------------------

    \11\ Trade sources indicate that, if the latest elevator to stop 
accepting grain and soybeans closes, the effective regular storage 
capacity in Chicago which is available to hold grain and soybeans 
will be reduced to an even lower level, to about 12.0 to 12.5 
million bushels. These lower effective capacity estimates reflect 
the fact that a certain proportion of storage within an elevator 
must be kept empty to allow blending of the stored grain and 
soybeans and for the efficient movement of these commodities into 
and out of the facility.
---------------------------------------------------------------------------

VI. Requirements of Section 5a(a)(10) of the Act

    The Commodity Exchange Act was extensively amended in 1974. Those 
amendments substantially expanded the Act's scope, created a regulatory 
system for the trading of all commodity futures contracts, and created 
the Commission as an independent regulatory agency to administer and to 
enforce the Act's provisions. Many of these amendments were designed to 
address apparent weaknesses in the prior statutory scheme. In this 
regard, the Commission's predecessor agency, charged with administering 
the Act, testified before the House Committee on Agriculture, that:

    For many years, the Department has been urging the exchanges to 
provide an adequate number of delivery points in the production 
areas and along the routes by which the various commodities move 
from the producer to the consumer. The need for such points is 
readily apparent. On July 20, 1973, the last trading day for July 
corn on the Chicago Board of Trade, the futures price rose $1.20 per 
bushel. * * * Transportation problems made it difficult to move corn 
into the Chicago area and warehouses in that area were either filled 
or reluctant to accept corn coming in for delivery on the futures 
contract. The result was that many who would have made delivery had 
there been provision for delivery at other points where supplies are 
ordinarily available * * * were * * * forced to buy futures 
contracts at an escalating price largely caused, not by an overall 
change in the supply or demand for corn, but an artificial shortage. 
* * *
    [T]he establishment of * * * additional delivery points * * * 
ought to be made by the exchanges in the first instance. Our concern 
here is simply making sure that if they do not do the job properly, 
adequate authority is present for the regulatory agency to take 
action should such be desirable.

H.R. Rep. No. 975, 93rd Cong. 2d Sess. 77 (1974).
    In recognition of the crucial role played by adequate deliverable 
supplies in promoting orderly markets, Congress enacted Section 
5a(a)(10) of the Act, which specifies, in part, that each contract 
market is required to:

    permit the delivery of any commodity, on contracts for sale 
thereof for future delivery of such grade or grades, at such point 
or points and at such quality and locational price differentials as 
will tend to prevent or diminish price manipulation, market 
congestion, or the abnormal movement of such commodity in interstate 
commerce.

7 U.S.C. Sec. 7a(a)(10).
Moreover, Congress granted the Commission authority under Section 
5a(a)(10) of the Act to determine whether exchange rules regarding 
delivery terms fail to accomplish these objectives and to take 
appropriate remedial action.
    As an aid to the exchanges in meeting the statutory requirements 
for designation, including the provisions of Section 5a(a)(10), the 
newly formed Commission published Guideline No. 1 (now codified at 17 
CFR Part 5, Appendix A). As explained in Guideline No. 1, to 
demonstrate continuing compliance with the Act, exchanges must provide 
evidence that each individual contract term conforms with the 
underlying cash market and provides for a deliverable supply that will 
not be conducive to price manipulation or distortion and which can be 
expected to be available to the short trader, and saleable by the long 
trader at its cash market value in normal cash marketing 
channels.12
---------------------------------------------------------------------------

    \12\ Specifically, with respect to delivery points, Guideline 
No. 1 provides that exchanges must consider: (1) the nature of the 
cash market at the delivery point; (2) the composition of the market 
at that point; (3) the normal commercial practice for establishing 
cash market values and the availability of published cash prices 
reflecting the value of the deliverable commodity; (4) the level of 
deliverable supplies normally available, including the seasonal 
distribution of such supplies; and (5) any locational price 
differentials that would be applicable to the delivery points, 
including the economic basis for discounts or premiums, or lack 
thereof, applying to delivery points. In addition, Guideline No. 1 
specifies that contract markets must provide information which 
describes the delivery facilities, including: (1) the type of 
delivery facility at each delivery point; (2) the number and total 
capacity of facilities meeting contract requirements; (3) the 
proportions of such capacity expected to be available for traders 
who may wish to make delivery, and seasonal changes in such 
proportions; and (4) the extent to which ownership and control of 
such facilities is dispersed or concentrated.
---------------------------------------------------------------------------

VII. Compliance of the CBT's Corn and Soybean Delivery Point 
Specifications with Section 5a(a)(10) of the Act

    The Commission believes that the CBT's corn and soybean futures 
contracts currently do not meet the requirements of Section 5a(a)(10) 
of the Act that delivery terms be specified which ``tend to diminish 
price manipulation, market congestion, or the abnormal movement of such 
commodity in interstate commerce.'' As noted, the current level of 
total regular capacity in Chicago available for the storage of 
deliverable corn, soybeans, wheat, and oats has been reduced by about 
60 percent since the fall of 1995, as three of the six regular Chicago 
warehouse operators closed operations. Moreover, effective regular 
storage capacity could decline to even lower levels (about 12 million 
bushels of effectively available storage capacity) in the very near 
future in view of the potential that another existing regular elevator 
may cease operations. With the withdrawal of three--and now, apparently 
four--elevators at the contracts' Chicago delivery point, the available 
deliverable supplies potentially have been reduced to levels which 
increase the futures contracts' susceptibility to price manipulation or 
distortion.
    The recent closure of these elevators in Chicago greatly 
exacerbates a deliverable supply situation that is already severely 
limited due to the low levels of cash market activity in Chicago. These 
closures confirm that Chicago is at the periphery of normal cash market 
channels for corn and soybeans. The reduced number of regular 
warehouses, the frequently low levels of stocks available, and the lack 
of commodity flows to Chicago resulting from normal cash market 
activities increase the likelihood that futures prices may become 
distorted and that abnormal interstate movements of corn or soybeans 
may be required to meet futures delivery requirements.
    Moreover, this situation is not confined to Chicago, the primary 
delivery point on the contracts. The inadequacy of the contracts' 
overall delivery point specifications is suggested by the very low 
deliverable supply conditions frequently observed at season-end for the 
corn and soybean futures contracts during recent years. As shown in 
Chart 3, season-end deliverable stocks of corn at all CBT delivery 
points combined have often fallen to very low levels from 1980 to the 
present, independent of the recent precipitous decline in regular 
storage capacity in Chicago. In particular, deliverable stocks of corn 
fell to as low as 2 million bushels (400 contracts) on September 1, 
1990. As shown in Chart 4, since 1980, deliverable stocks of soybeans 
at all delivery points combined also have declined to levels as low as 
1.2 million bushels (240 contracts) in 1985 and 1.05 million bushels 
(210 contracts) in 1996.13 Further, effective deliverable stocks 
of corn (stocks at Toledo and Chicago minus stocks at St. Louis) have 
declined to even lower levels on other occasions.\14\ For instance, on 
September 1, 1996, effective corn stocks fell to about 1.1 million 
bushels (about 220 contracts).
---------------------------------------------------------------------------

    \13\ The low levels of corn and soybean stocks at the contracts' 
delivery points observed in September 1996 were associated with low 
stock levels throughout the U.S. Nevertheless, it is clear that low 
stocks at the contracts' delivery points are

[[Page 68009]]

also a problem in years where U.S. stock levels are not at uniformly 
low levels.
    \14\ As discussed above, there have been very few deliveries at 
St. Louis since this location became a delivery point in the 1970s. 
The lack of deliveries at this point reflects the fact that 
elevators in St. Louis, unlike the regular elevators in Chicago and 
Toledo, operate as barge-loading facilities rather than storage 
facilities. Corn and soybeans received at St. Louis elevators are 
stored only temporarily until they can be loaded into barges.
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BILLING CODE 6351-01-P

[[Page 68010]]

[GRAPHIC] [TIFF OMITTED] TN26DE96.002



[[Page 68011]]

[GRAPHIC] [TIFF OMITTED] TN26DE96.003



BILLING CODE 6351-01-C

[[Page 68012]]

    Charts 3 and 4 also indicate the comparative levels of open 
interest for the expiring September contract month and the spot month 
speculative position limits for the corn and soybean futures contracts. 
These figures indicate, for instance, that total stock levels 
frequently have fallen to levels near or below the maximum number of 
contracts a single speculative trader may hold during the delivery 
periods of expiring contract months (600 contracts). Moreover, 
commercial firms may have been granted exemptions from these limits for 
purposes of bona fide hedging. These comparisons show that the 
potential requirements for futures delivery frequently exceed, by a 
substantial degree, the level of deliverable stocks available for 
futures contracts. They thereby indicate the increased potential for 
market problems as well as the increased potential for regulatory 
intervention required to ensure that positions are liquidated in an 
orderly fashion.
    Moreover, the recent loss of substantial regular warehouse capacity 
likely will cause further deterioration in the chronically low 
deliverable stock situation. The primary factor drawing deliverable 
supplies to Chicago has been the existence of warehouse capacity for 
futures contract deliveries at that location, rather than traditional 
cash market demand. Numerous trade sources and cash market experts have 
verified that the cash market flow of corn and soybeans to Chicago 
elevators for purposes other than futures delivery is weak or non-
existent. Accordingly, the Commission believes that the recent decline 
in the number of grain merchandisers in Chicago will necessarily result 
in a further decline of stocks from the low levels depicted in the 
charts.
    In such situations, where stocks are available for delivery only at 
chronically low-levels due to the location of a contract's delivery 
points at the periphery of cash market channels, futures prices can 
more become distorted relative to cash market prices. This results from 
the need to attract the necessary quantities of corn or soybeans, which 
are otherwise not normally available, to the contracts' delivery points 
to fulfill delivery requirements. Thus, when the delivery points for a 
futures contract are not located within active cash market channels for 
the underlying commodity, the likelihood increases that abnormal 
interstate movements of the commodity will be required to meet futures 
delivery requirements. In contrast, when a contract's delivery points 
are located within active cash market channels for a commodity, 
deliverable supplies readily can be made available for delivery from 
stocks at, or flows of the commodity through, the contract's delivery 
points at a price that is representative of prevailing cash market 
prices for the commodity.
    These circumstances were clearly envisioned by the MidAmerica 
Institute study discussed above, which concluded that because Chicago 
had become a low price point, deliverable supplies required to respond 
to an attempted manipulation could only be drawn from higher value 
locations, thereby enhancing the potential for, and possible 
profitability of, market manipulations.\15\
---------------------------------------------------------------------------

    \15\ The inclusion of Toledo does not cure this fundamental flaw 
because it, too, is on the periphery of the cash market.
---------------------------------------------------------------------------

    The situation is critical in that, except for cash-settled 
contracts, the threat of delivery is the mechanism through which the 
market forces futures and cash prices to converge. To the extent that 
delivery is not a viable alternative because of inadequate deliverable 
supplies, trading will increasingly require regulatory intervention to 
remain orderly, particularly during contract month expirations.
    Accordingly, the Commission has determined to notify the CBT under 
the provisions of Section 5a(a)(10) of the Act, that for the reasons 
discussed above, and in light of the CBT's failure to date to take 
appropriate corrective action, the Commission finds that the CBT rules 
specifying the terms of its corn and soybean futures contracts do not 
accomplish the Section 5a(a)(10) objectives of ``tend[ing] to prevent 
or diminish price manipulation, market congestion, or the abnormal 
movement of such commodity in interstate commerce.''
    Further, the Commission hereby notifies the CBT, under the 
provisions of Section 5a(a)(10) of the Act, that the CBT has until 
March 4, 1997 to adopt and submit for Commission approval ``appropriate 
changes'' to CBT rules.

VIII. Alternative Contract Specifications.

    To avoid further proceedings under Section 5a(a)(10), the CBT must 
make changes to the contracts which, in the opinion of the Commission, 
are necessary to accomplish the objectives of this subsection of the 
Act. Although the Commission has not reached a conclusion as to the 
exact nature of the changes which are ``necessary to accomplish the 
objectives'' of providing delivery terms ``as will tend to prevent or 
diminish price manipulation,'' it is providing guidance to the CBT on a 
range of possibilities which could constitute ``appropriate changes'' 
by providing for the necessary, viable linkage with the cash market. By 
providing these alternatives, the Commission is not limiting the CBT's 
ability to respond to this Section 5a(a)(10) notification, nor is it 
specifying exact design criteria. Rather, these are examples of various 
means by which the Commission believes the objectives of the section 
could be met. In any event, the particular contract specifications 
proposed by the CBT in response to this notification, in order to meet 
the statutory requirement, should provide for a linkage with the cash 
market through specific terms which are in conformity with a 
substantial segment of that underlying market.

1. Modified CBT Special Task Force Proposal

    The contract amendments recommended by the CBT Special Task Force, 
with certain modifications, could potentially provide for the necessary 
increase in deliverable supplies. Under the Special Task Force 
proposal, futures delivery would continue to be made at all locations 
by the transfer of a warehouse receipt for grain in store. Chicago and 
Toledo would continue as delivery points, with Chicago remaining the 
par delivery location, St. Louis being deleted, and existing discounts 
for Toledo delivery being reduced to 2 from 3 cents per bushel for corn 
and to 4 from 8 cents per bushel for soybeans.
    The Special Task Force also proposed that delivery be permitted at 
regular warehouses in Milwaukee, in East Central Illinois (ECI), and on 
the Northern Illinois River (NIR).16 Vessel deliveries of corn and 
soybeans in Milwaukee would be at par, with rail and barge deliveries 
subject to a discount of 8 cents per bushel. Corn and soybeans in store 
at regular ECI warehouses would be deliverable at discounts of 4 cents 
and 8 cents per bushel, respectively.17 Futures delivery at NIR 
warehouses would be at par for corn and at a discount of 4 cents per 
bushel for soybeans.
---------------------------------------------------------------------------

    \16\ The ECI delivery area would encompass the counties of 
Champaign, Coles, Douglas, Ford, and Iroquois. The NIR delivery area 
would consist of that part of the Illinois River that lies between 
Creve Coeur and Chicago.
    \17\ The recommended changes also would permit delivery 
receivers to require ECI regular warehouses to load the delivery 
corn and soybeans into barges at NIR barge-loading facilities at a 
premium of 4 cents per bushel. This provision implies that corn 
would be deliverable in barges on the NIR at par, while soybeans 
would be deliverable on the NIR at a discount of 4 cents per bushel.

---------------------------------------------------------------------------

[[Page 68013]]

    However, as to this proposal, the following changes would be 
necessary to provide for an economically effective linkage of the 
---------------------------------------------------------------------------
futures contracts with the cash market:

    1. In view of the infrequent participation of St. Louis as a 
delivery point, as well as the similarly limited storage capacity 
and through-put nature of the barge-loading warehouses on the NIR, 
the Special Task Force proposal to permit delivery in NIR barge-
loading warehouses must be modified to allow delivery at off-water 
warehouses located within a specified distance of this portion of 
the Illinois River, in order to make warehouses located on the NIR 
an effective source of deliverable supplies.18 The specified 
area should encompass corn and soybean storage facilities that 
typically store these commodities on a seasonal basis and from which 
substantial deliverable supplies would be available.
---------------------------------------------------------------------------

    \18\ As recommended by the Special Task Force for deliveries at 
ECI warehouses, the receiver of corn and soybeans in an off-water 
warehouse could be given the option of taking delivery of corn and 
soybeans in barges from regular warehouses on the NIR or by rail 
from the off-water facility.
---------------------------------------------------------------------------

    2. The recommended locational price differentials for delivery 
in store at Toledo, the ECI, and warehouses located on or near the 
NIR should be modified so that they reflect commonly observed cash 
price relationships with the contracts' other delivery locations. 
Specifically, for deliveries at NIR barge-loading facilities, the 
price differential levels selected should reflect the fact that corn 
and soybeans become more highly valued the further south the 
delivery location is on the NIR.

2. Illinois River Shipping Certificate Delivery Alternative

    An alternative specification that could also result in the 
necessary increase to deliverable supplies would replace the existing 
warehouse-receipt-delivery instrument with a shipping certificate and 
provide for delivery at Illinois River barge loading facilities, in 
addition to the contracts' existing Chicago, Toledo, and St. Louis 
delivery points.19 The Illinois River delivery area could be 
specified to include all or a substantial part of that River. The 
contracts' par pricing location could be shifted to a delivery 
location/area that has an active cash market, with locational price 
discounts for other delivery points/areas set at levels that fall 
within the range of commonly observed cash price differences between 
the specified delivery locations.
---------------------------------------------------------------------------

    \19\ The terms of the shipping certificate could be specified in 
several different ways. For example, the shipping certificate could 
require that the issuer ship corn or soybeans in rail cars or trucks 
to a location nominated by the buyer within the specified delivery 
areas, with the buyer having the option of requiring that the corn 
or soybeans be loaded into barges at a specified premium.
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3. Lower Mississippi River Export Alternative

    This alternative would eliminate the contracts' existing delivery 
locations and delivery instrument in favor of an export-oriented 
contract with a shipping certificate as the delivery instrument. The 
shipping certificate would call for delivery at export locations on the 
lower Mississippi River.20
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    \20\ As in alternative 2, the shipping certificate's terms may 
be specified in different ways. In this case, for example, the 
shipping certificate could require the issuer to deliver corn or 
soybeans in barges or rail cars to an export location on the lower 
Mississippi River specified by the buyer, with provision for 
delivery corn and soybeans to be loaded into vessels at a specified 
premium.
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4. Cash Settlement Alternative

    This alternative would replace the contracts' existing delivery 
provisions with cash settlement provisions. The cash price index could 
be based on the USDA-quoted prices for corn and soybeans in the primary 
production or export market areas on the last day of trading or any 
other method of calculating a cash-settlement price consistent with 
Guideline No. 1.
    Section 5a(a)(10) of the Act authorizes the Commission to change or 
supplement the terms and conditions of futures contracts. The 
Commission would prefer, however, not to take such an action. Rather, 
the Commission looks forward to receiving for its approval proposed 
modifications from the CBT to the delivery specifications for the CBT's 
corn and soybean futures contracts which satisfactorily address the 
issues discussed in this letter. In the event that the Commission fails 
to receive such proposed amendments by March 4, 1997, the Commission is 
prepared to take appropriate action under Section 5a(a)(10) of the Act 
to address the situation.

    By the Commission,
Jean A. Webb,
Secretary of the Commission.

    The Commission has determined that publication of the notification 
to the CBT for public comment will assist the Commission in its 
consideration of these issues, including in particular, the eventual 
response of the CBT. Accordingly, the Commission is requesting written 
data, views or arguments from interested members of the public. 
Commenters are specifically requested to address the following issues:
    1. To what extent do the current CBT delivery specifications for 
corn and soybeans reflect the structure of the cash market for the 
underlying commodity? To the extent the terms of the contracts depart 
from commodity flows in the cash market, does this have any detrimental 
impact on the trading of these contracts?
    2. What is the likely effect of failing to modify the current terms 
of the contract?
    3. To what extent would the alternatives listed by the Commission 
increase deliverable supplies on the contracts, and would such 
increases be sufficient under the Act?
    4. The Commission identified several changes to the CBT Task 
Force's recommendations necessary to provide ``a meaningful increase in 
the level of economically deliverable supplies available for futures 
delivery.'' To what extent is it necessary to permit delivery in off-
water warehouses if delivery on the contract continues to call for 
warehouse receipts at warehouses on the Illinois river, which largely 
tend to be through-put facilities? What is the range of discounts or 
premiums commonly observed in the cash market for corn and soybeans 
that would be deliverable in Toledo, East Central Illinois, or the 
Northern Illinois River, compared to Chicago?
    5. Is modification of the contracts' delivery provisions likely to 
enhance or detract from their hedging or price-basing utility?
    6. On a related issue, to what extent do the current CBT delivery 
specifications for the futures contract for wheat reflect the structure 
of the cash market for the underlying commodity? To the extent that the 
terms of the futures contract depart from commodity flows in the cash 
market, does this have any detrimental impact of the trading of futures 
contracts for wheat?
    7. What is the likely effect of failing to modify the current 
delivery specifications of the wheat contract?
    8. What alternatives to the current delivery specifications would 
increase deliverable supplies on the wheat contract, while maintaining 
its utility for hedging and price basing?
    Issued in Washington, D.C., this 19th day of December, 1996, by 
the Commodity Futures Trading Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-32708 Filed 12-24-96; 8:45 am]
BILLING CODE 6351-01-P