TESTIMONY OF

CARGILL, INCORPORATED

BEFORE

THE SENATE COMMITTEE ON AGRICULTURE

May 5, 1999

Cargill is a privately held agribusiness company founded over 130 years ago in Iowa. Today the company is headquartered in Minneapolis, Minnesota, and is involved in marketing, processing, and distributing agricultural, food, financial, and industrial products throughout the world. We have some 80,000 employees in more than 1,000 locations in 65 nations with customers and suppliers in approximately 130 countries.

Cargill appreciates being given the opportunity to present testimony regarding the agriculture trade option (ATO) pilot program of the Commodity Futures Trading Commission (CFTC). We applaud both this committee and the CFTC for your willingness to address this important issue for farmers and ranchers and for American agriculture as a whole.

Cargill is a long-time advocate of providing farmers and grain users with better tools and greater flexibility to manage the price risk inherent in production agriculture. U.S. producers should be given every possible opportunity to be successful. Although they may not be useful for every farming operation, agriculture trade options are an important risk management product that will help American agriculture become a more efficient and more profitable enterprise.

Cargill recognizes that a viable agriculture trade option program will not solve the hardships farmers are currently facing. Trade options cannot improve the economic crises in Asia, strengthen a weak U.S. dollar, or alleviate large grain reserves when there are so few paying customers for grain to be found. However, a viable ATO program will help producers to better manage the financial risks of farming so that they will ultimately benefit when prices and demand for U.S. agriculture products improve.

Changes to U.S. farm and trade policy, improved communications, technological advancements and greater attention to cost-effective risk management have made a viable agriculture trade options program more critical than ever before. Markets today are global in nature and more volatile. Adding agriculture trade options to the risk management portfolio of producers, processors and others in the agriculture industry would create a potentially effective, cost-efficient complement to existing risk management tools.

To this date, the ATO pilot project has not been utilized by a single market participant. This is the direct result of excessive regulatory requirements. Unless the rules are modified substantially, Cargill does not intend to participate in the ATO pilot program. Barring substantial regulatory reduction, we believe that most other companies involved in cash agricultural commodity markets will reach a similar conclusion. Bankers, regulated futures firms, end users, exporters, commercial elevators and insurance companies are also potential vendors of agriculture trade options. If the rules governing the current ATO pilot program were improved, we believe these merchants would both participate in the program and introduce new risk management products that are currently unavailable to America's farmers. Finally, since farmers outside of the United States are currently using agriculture trade options to mitigate their price risk, Cargill believes ATOs would similarly meet the needs of U.S. producers, if allowed. In short, the industry wants and needs a pilot program that fosters rather than limits the use of agriculture trade options.

Cargill would like to address five specific areas where we believe the current ATO pilot program could be improved to increase participation and generate new interest in using agriculture trade options as a viable, affordable risk management tool.

Registration

Cargill strongly encourages the CFTC to require prospective agriculture trade option merchants (ATOMs) to notify the CFTC of their intention to offer agriculture trade options rather than formally register with the CFTC or National Futures Association (NFA). This approach would provide balance, assuring both access by and protection for farmers, processors, food manufacturers and their customers while reducing the regulatory strictures inherent in registering with the CFTC or NFA. Uncertainty around the registration process and the implications relative to reparations present a significant barrier for some potential ATOMs.

Cargill does support preserving rights to arbitration for all ATO participants.

Reporting

Cargill supports preserving the CFTC's ability to require that ATO merchants provide moderate risk disclosure requirements to buyers. However, substantial improvement to the CFTC's pilot program can be made in this area. For example, we believe such risk disclosure statements should be generally limited to majors factors of risk, such as whether an option's risk is limited (i.e. the premium purchase price is the only risk) or if the risk is open-ended. We also oppose the existing requirement to file risk disclosure documents with the CFTC each time an ATO transaction occurs even if the same option is traded between the same merchants numerous times. This is redundant, costly and inefficient. In short, risk disclosure requirements work best if they truly educate and inform the buyer. Thus, while we recognize that these are legally-binding contracts, we urge the CFTC to simplify the complex legal terms and lengthy disclosure statements currently required in risk disclosures for futures and options trading on organized exchanges and put them into language that everyone can clearly understand.

Cash Settlement

An important change necessary to make the ATO pilot program work is the inclusion of an allowance for the cash settlement or early termination of an agriculture trade option. Failure to allow producers to "walk-away" from an ATO position greatly limits both producers' interest in and the effectiveness of options. Recognizing the concerns of both producers and the CFTC regarding the possibility of speculative use of these products, we suggest including a one-time cash settlement or early termination allowance for each ATO sold.

Limitations

The current rules of the ATO pilot program prohibit producers from writing covered calls in such contracts as Min-Max and its variations. (Min-Max contracts give producers assurance that they will receive no less than a negotiated price for their grain if prices should fall in exchange for agreeing to receive no more than an offsetting price if prices should rise). The ability to buy a call and sell a further out of the money call (a call spread) can allow the hedger to lock in a minimum price and reduce the cost of the hedge. Cargill supports allowing farmers to have these opportunities if they so choose. However, in lieu of restricting these types of contracts, we suggest that the CFTC impose strong disclosure requirements for these types of contracts to ensure that producers clearly understand how selling calls can increase the risk associated with these and similar transactions.

Exemption Level

The current ATO pilot program exempts from regulation parties to an agriculture trade option with a net worth in excess of $10 million. The current exemption level for eligible swaps participants is $1 million. While we recognize that the exemption was created to provide regulatory relief for larger, more sophisticated market participants, Cargill fears that exemptions based on net worth may create the perception of a separate, off-exchange trading network reserved only for those whose size exceeds the exempted level. We continue to believe it is important to lower the net worth requirement substantially from $10 million to $1 million. This is still a pilot program and that change at this time appears reasonable. However, one other consideration would be for the exemption only to apply to the writer of the ATO; the buyer of the ATO would not have any limitation. This would allow farmers to participate more freely in the program while still providing controls on the writer of the ATO.

To summarize, Cargill recommends the following changes to the CFTC's agriculture trade options pilot program:

· Agriculture trade options merchants should be required to notify the CFTC if they intend to participate in the pilot program.

· Producers should be allowed to write covered calls, provided that strict disclosure requirements are included to clearly convey potential risks.

· Arbitration rights for all ATO participants should be maintained.

· Allow a one-time cash settlement or "walkaway" provision for each ATO sold.

· The net worth requirement for exemption from ATO regulations should be reduced from $10 million to $1 million, and the possibility of removing the exemption for the taker of the option should be explored

· The CFTC should carefully monitor the progress of the ATO pilot program and take whatever steps necessary to encourage participation while maintaining minimal, but necessary regulatory requirements.

In closing, we would like to give a simple example of how lifting the ban on agriculture trade options in the way we have described could help a producer. Prior to planting, a producer faces much uncertainty regarding the weather, input costs, market signals and other factors. This uncertainty often makes it difficult to forward contract crops even when there may be excellent pricing opportunities present. Purchasing an ATO would allow producers to lock in a price for deferred delivery while keeping their delivery options open pending the size of the crop and other variables. Given this new flexibility, producers would be more likely to take advantage of pricing opportunities, even well ahead of planting. Futures and options markets would help writers of ATOs to manage their risk while producers would fulfill their marketing plans with full flexibility on actual delivery obligations. Cargill looks forward to providing these and other risk management tools to producers across the country if the changes we suggest can be made to the agriculture trade options pilot program. The ability to customize solutions for individual producer's needs has never been greater.

That brings us to one, final point. Cargill believes risk management education is a critical component of success for America's farmers. We are committed, through Cargill's AgHorizons program, to creating individual, customer-oriented solutions for the risk management challenges farmers currently face. We are committing substantial time, energy and resources to help ensure that our customers have the risk management tools and training they need to be successful. Thus, if Congress elects to provide additional assistance to producers this year, we suggest you also consider increasing the annual allocation for risk management education. An increase in funding for the establishment of marketing clubs, for courses at local community colleges, and for training seminars by local bankers would help producers learn how to use risk management tools successfully and profitably. Cargill believes investment in this area would be beneficial to all of U.S. agriculture.

In this testimony, Cargill has sought to identify changes to the CFTC agriculture trade option pilot program that would be beneficial not just for our company or our industry, but for the American agriculture system as a whole. All of us - producers, processors, users, and consumers - will benefit from better risk management. And since our business cannot exist without farmers, we want them to succeed and we hope this testimony helps produce the changes necessary to help them be successful.