TESTIMONY OF THE NATIONAL FARMERS UNION

PRESENTED BY LARRY QUANDT, PRESIDENT
ILLINOIS FARMERS UNION

REGARDING AMENDMENTS TO THE COMMODITY EXCHANGE ACT

PRESENTED TO THE SENATE AGRICULTURE COMMITTEE

FEBRUARY 13, 1997

Good morning. My name is Larry Quandt. I operate a grain farm in Mason, Illinois, and I serve as president of the Illinois Farmers Union. I also am a member of the board of directors of the National Farmers Union and serve on the Agricultural Advisory Committee to the Commodity Futures Trading Commission (CFTC). Thank you for the opportunity to present the views of the nearly 300,000 members of the National Farmers Union to the committee today.

The Commodity Exchange Act was reauthorized two years ago, in very brief legislation. We appreciate Congress now revisiting the Commodity Exchange Act to provide for consideration of public policy issues surrounding the exchanges.

My testimony will focus on two questions:

1. What additional issues should be addressed in S. 257, which will be the main legislation considered by Congress this year regarding the exchanges?

2. How does the existing legislation affect America's farmers and ranchers?

Although many farmers and ranchers are very uncomfortable using the futures commodities exchanges, there is little doubt that they will be forced to use these tools to a greater extent in the future. Agricultural policy has taken a sharp turn away from the period when producers and consumers could rely on governmental programs to assist in providing a secure food supply. Grain reserves and other programs designed to add stability to a food system have been rejected in favor of a hands-off, free-market approach. Consequently, producers who need to insure against catastrophic loss and market downswings will be forced to use the futures market for hedging and other activities.

Policy of the National Farmers Union

In relevant part, the policy statement of the National Farmers Union calls on the CFTC to: 1. guard against insider trading by individuals or firms which possess foreknowledge of significant price changes due to large market transactions; 2. ensure that there exists an adequate number of delivery points for hedging participants; 3. work in cooperation with state securities enforcement agencies to crack down on "boiler room" operations and other violators of the Commodities Exchange Act; 4. monitor with special vigilance any market movements which indicate a deliberate accumulation of excessive speculative positions, and to exercise, when necessary, those emergency powers granted by Congress; and

5. monitor and guard against proposals by the commodity futures exchanges impacting trading rules and trading limits that would increase market volatility to the detriment of agricultural producers. FU further urges that there be increased farm owner-operator representation on exchange boards, specifically on those committees responsible for rulemaking of new agricultural commodity contracts.

In addition, NFU policy calls for federal oversight of the National Cheese Exchange (NCE). Our members have taken a very active role in working to achieve this goal. Although the NCE is a cash market, activities there have the effect of influencing the futures and options for cheese, butter, and fluid milk, all of which are traded on exchanges regulated by the CFTC. In addition, lack of regulation has left the NCE vulnerable to manipulation which has cost dairy farmers over a billion dollars, according to a recent study by the University of Wisconsin.

Recommended Additions to S. 257

The pending legislation, S. 257, does not focus on family farmers; in fact, the professional trader exemption does not even directly apply to agriculture. However, since S. 257 is the major piece of legislation the Congress will consider this year to improve the commodity exchanges, we believe this is the appropriate forum to provide recommendations on additional measures for Congress to consider. Therefore, we recommend the following additions:

1. We urge the Senate Agriculture Committee to adopt legislation proposed in S. 256 as an amendment to S. 257. Introduced by Senator Kohl and cosponsored by Senator Feingold, S. 256 would amend the Commodity Exchange Act to require the CFTC to regulate the National Cheese Exchange, which sets the price used as the chief factor to calculate the minimum price producers are paid for milk. A federally funded investigation into the activities of the National Cheese Exchange found that the NCE is very thinly traded, highly concentrated, completely unregulated, and subject to manipulation.

2. Those who are involved in crop forecasting should be prohibited from owning or trading commodity futures contracts. The exclusion should apply to individuals, associations, partnerships, corporations, and trusts, that publish crop information or give general circulation of letters, circulars, telegrams or reports, which concern crop information that affects or tends to affect the price of any commodity.

Impact of S. 257 on America's Farmers and Ranchers

Protecting and enhancing the integrity of the operations of the exchanges is a key goal for the Securities Exchange Act. To this end, we believe it is imperative to provide the CFTC with adequate authority to regulate exchange activities, and we are in general agreement with the testimony of Commission Chair Brooksley Born, presented to this committee on February 11, 1997.

1. Impacts of Professional Trader Exemption - We urge the committee to carefully consider Chairperson Born's statement as to CFTC's concern regarding the professional trader exemption, wherein she states that allowing regulated markets in agricultural products to trade side-by-side with unregulated markets on the same exchange could jeopardize CFTC's ability to effectively regulate agricultural markets in that environment. (Born statement, p. 13) It is difficult to maintain the

integrity of the regulated marketed if those trades are cleared with a large volume of unregulated trades.

In addition, the provision may result in fewer contracts sharing regulatory and nonregulatory costs, thereby requiring agricultural contracts to bear a greater share of costs.

And, the existence of the unregulated markets would put pressure on the agriculture markets to also join the ranks of the unregulated in the future.

2. U.S. Delivery Points for Foreign Futures Contracts - We are supportive of the intent in Sec. 4 to strengthen the CFTC's authority to obtain information from regulators of foreign exchanges which locate delivery points in the United States. However, we agree with the concern expressed in the consolidated testimony of the exchanges that enforcement provisions would be a positive addition to this section.

3. Streamlining the Approval Process - We should insure that the desire to streamline the approval process does not result in curtailing the commission's ability to give meaningful review to proposed rule changes and curtailing the public's ability to provide comments.

Conclusion

Based on a recent estimate by Commissioner Dial, public oversight of the futures exchanges calls on the Commodity Futures Trading Commission to regulate $3 trillion worth of financial transactions per day, or a whopping $750 trillion in the 250 days of trading each year. It is essential that the Commodity Exchange Act provides the necessary tools to the CFTC.

Finally, we would like to emphasize that while use of the commodity exchanges can provide one more tool to producers, futures trading and hedging should never be considered a replacement for agricultural programs such as crop insurance, disaster assistance, marketing loans, grain reserves, or the Conservation Reserve Program. In addition, while volatility may do wonders for the futures market, it can be a disaster for farmers, ranchers, and those who depend on them to eat.

Thank you for the opportunity to testify. We look forward to working with the Senate Agriculture Committee and others in the effort to improve the Commodity Exchange Act.