TESTIMONY OF THE

NATIONAL GRAIN AND FEED ASSOCIATION

TO THE

COMMITTEE ON AGRICULTURE, NUTRITION AND FORESTRY U.S. SENATE

FEBRUARY 13, 1997

Good morning, Mr. Chairman, Senator Harkin, and members of the committee. I am Kendell Keith, President of the National Grain and Feed Association (NGFA). I appreciate the invitation to testify before the committee this morning on amendments to the Commodity Exchange Act.

The NGFA is the national nonprofit trade association of about 1,000 grain, feed and processing firms comprising 5,000 facilities that store, handle, merchandise, mill, process and export more than two-thirds of all U.S. grains and oilseeds utilized in domestic and export markets. Founded in 1896, the NGFA's members include country, terminal, and export elevators; feed mills; cash grain and feed merchandisers; commodity futures brokers and commission merchants; processors; millers; and allied industries. The NGFA also consists of 37 affiliated state and regional grain and feed associations whose members include more than 10,000 grain and feed companies nationwide.

First, Mr. Chairman, let me commend you and Senators Harkin and Leahy for your bill, S. 257, that was introduced on February 4. Member companies of the NGFA rely heavily on the commodity exchanges to manage their risk and enable them to provide services to their farmer-customers. We believe it is very important to insure that our risk management system, one of U.S. agriculture's strong competitive advantages over other nations, remains healthy, strong, and adaptable to new challenges. It appears to us that S. 257 reforms and streamlines the processes by which exchanges are regulated by the Commodity Futures Trading Commission (CFTC), which will enable the exchanges to remain cost-competitive while still maintaining a balance with the need for adequate regulation.

There are two provisions of S. 257 relevant to the grain, feed and processing industry on which I would like to comment briefly. The first is Section 3 of the bill which contains language referring to business operators "hedging themselves against possible loss through fluctuations in price." The bill proposes to delete the words "through fluctuations in price" to clarify that risks other than those directly resulting from price changes are legitimate hedging activities.

The NGFA supports this small but important change. In today's changed agricultural policy environment, it is critical that businesses providing risk management services to farmers have the flexibility to offer a wide range of instruments, including various types of cash and forward grain contracts, to help their customers increase income from markets. Risks to be managed may well extend beyond just price risk.

The second provision on which I will comment is Section 8 of the bill, which proposes to delete a provision of the Commodity Exchange Act that allows any federally licensed warehouse to make delivery against a futures contract, on giving reasonable notice. This provision appears to us to be a good housekeeping measure that will protect the integrity of futures contracts offered by exchanges and allow the exchanges to establish their own trading procedures, including delivery points.

Finally, Mr. Chairman, I would like to offer brief comments on a matter not addressed in your bill but closely related to its subject matter and consistent with its intent. As you know, the CFTC currently has in place a ban on agricultural trade options. The NGFA believes lifting that ban is a very important step toward providing U.S. farmers and ranchers with a broader range of risk management and marketing tools. On January 30, 1997, the NGFA petitioned the CFTC to jump-start a 1991 rulemaking that would lift the ban on agricultural trade options.

The CFTC on September 3, 1991, published in the Federal Register a proposal to lift the ban on agricultural trade options, along with a detailed explanation of the Commission's authority to take such action and the history of current rules. The NGFA believes strongly that now is the time for the CFTC to take action allowing trade options on agricultural commodities. Given the desire of today's farmers and ranchers for an array of marketing and risk management vehicles, ranging from crop insurance policies providing revenue assurance to cash grain contracts to exchange-traded futures and options, and given farmers' increasing sophistication with such tools, lifting the CFTC's ban would facilitate the transition of farmers and ranchers to a more market-oriented farm policy. That necessity also has been recognized by various commodity organizations that have voiced support for lifting the agricultural trade options ban. There is another element to the agricultural trade options issue which recently has surfaced. Crop insurance companies and the Federal Crop Insurance Commission have designed hybrid insurance products designed to protect farmers against volatility in both commodity prices and yields. These vehicles, subsidized by U.S. taxpayers, guarantee a certain level of revenue to the producer.

Many cash grain market participants would like to offer products in the private marketplace providing similar revenue assurance outcomes, at no cost to the government. However, under current regulation, they are precluded from doing so. The NGFA believes participants in the cash grain marketplace should have the same opportunity as crop insurance companies to offer these kinds of risk management strategies. Lifting the agricultural trade options ban would help facilitate the development of private revenue assurance instruments to the benefit of U.S. farmers and ranchers. The issue of federal subsidization of some revenue assurance instruments competing against private, unsubsidized products is an issue that may need to be addressed in the future.

I would like to make one final observation on this issue. Some have argued that existing cash grain contracts or prospective revenue assurance instruments compete against -- some would say, serve as a substitute for -- exchange-traded instruments. The NGFA believes this is an incorrect and short-sighted objection to lifting the ban. Without a doubt, those offering hybrid cash grain contracts today, and potentially offering revenue assurance products if the ban is lifted, must hedge their own (sometimes substantially increased) risk on exchanges. The NGFA strongly believes -- and, in fact, experience already has shown -- that the enhanced flexibility provided by lifting the ban will increase the need for exchange-traded instruments, thereby increasing volume on commodity exchanges. Further, it is important to note that the NGFA's petition, if granted, would do nothing to diminish the CFTC's ability to investigate and enforce its regulations in those rare cases where fraud or unlawful representations may occur.

Obviously, it is important for all market participants to fully understand the risks and potential outcomes of utilizing any risk management vehicle, including crop insurance, cash grain contracts, and exchange-traded instruments. As in the past, Mr. Chairman, the NGFA is committed to helping provide that education to facilitate truly beneficial outcomes for users of all risk management tools.

Thank you, Mr. Chairman and members of the committee. I would be happy to respond to any questions.