SUBCOMMITTEE ON SPECIAL SMALL BUSINESS PROBLEMS JOSEPH P. ADDABBO, New York JOSEPH M. McDADE, Pennsylvania THOMAS G. POWERS, Subcommittee Counsel JACOB N. GROSS, Special Counsel (II) Caldwell, Alex C., Administrator, Commodity Exchange Authority, 311, 346 Carpenter, L. C., vice president, Midcontinent Farmers Association; Gaston, W. W., senior vice president, Gold Kist, Atlanta, Ga.; accom- Hall, Argie, director, Grain Division, Farmers Grain Dealers Associa- Smith, Hon. Neal, a Representative in Congress from the State of Spicola, James R., group vice president, processing group, Cargill, Inc.; accompanied by Calvin J. Anderson, vice president and sec- Uhlmann, Frederick G., chairman of the Board of Trade of the City of (III) 19 209 47 70 283 7 1 80 133 236 198 Additional information, material, and correspondence submitted for the Caldwell, Alex C., Administrator, Commodity Exchange Authority, Page Bills proposing injunctive authority, 1954–73, table_. Notices dated October 14, 1971, and April 20, 1972, to registered futures commission merchants and to contract markets_ Orders issued in cases initiated and concluded since January 1, Christopher, Hearne, president, Kansas City Board of Trade, Kansas Mills, grain elevators and operators in Kansas City, storage ca- 218 Sundry material referred to in testimony_. Hall, Argie, director, Grain Division, Farmers Grain Dealers Associ- ation of Iowa: Prepared statement--- Saunders, Walter B., group vice president, Cargill, Inc.: Summary of negotiations with various railroads concerning the movement of 234 Smith, Hon. Neal, a Representative in Congress from the State of Legislative proposals by the Chicago Board of Trade to regulate trading in all contracts for future delivery and to create a Weinberg, Michael, Jr., chairman of the board, Chicago Mercantile Chicago Mercantile Exchange's special executive report- Submissions to additional subcommittee questions__ Westley, Richard O., chairman of the board of governors, Board of 201, 202 SMALL BUSINESS PROBLEMS INVOLVED IN THE MARKETING OF GRAIN AND OTHER COMMODITIES WEDNESDAY, JULY 25, 1973 HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON SPECIAL SMALL BUSINESS PROBLEMS OF The subcommittee met, pursuant to notice, at 10 a.m. in room 2359, Rayburn House Office Building, Hon. Neal Smith (chairman of the subcommittee) presiding. Present: Representatives Smith, Addabbo, Hungate, Conte, and McCollister. Also present: Representative Bergland; Jacob Gross, special counsel; Charles D. Loyd, general counsel; Thomas G. Powers, subcommittee counsel; Myrtle Ruth Foutch, clerk; and James R. Phalen, minority counsel. Mr. SMITH. The hearing will come to order. The Chair has a lengthy prepared opening statement, which in the interest of time, will be inserted in the record. [Chairman Neal Smith's opening statement follows:] OPENING STATEMENT OF CHAIRMAN NEAL SMITH The commodity futures markets in the past have been a very important part of our marketing system. Producers of commodities, processors and those in the marketing business hedge the prices at which they buy or sell on a particular day. When the local elevator buys from the farmer, he immediately contracts on the futures market for the sale price of the grain. This takes the gamble out of the operation for him and he can lock in a relatively small margin of profit. If he sells the commodity somewhere else at a later date, he can then sell his futures contract the same day and offset whatever changes in price have occurred since he bought the commodity. This system has worked well most of the time, but whenever the supplies of commodities are short or the number of speculators becomes excessive, there are opportunities for manipulations and distortions in the marketing system to such a great extent that the market no longer reflects supply and demand and during part of the marketing season prices can either be artificially raised or lowered. In the past year fluctuations in the market have been so wide and erratic as to indicate the existence of manipulation and squeezing. Businessmen who handle commodities on some occasions have been unable to buy back contracts the day they sell the commodity and many of them have found that the commodities markets such as the Chicago Board of Trade, the Kansas City Board of Trade and the Chicago Mercantile Exchange do not always provide a dependable place to hedge their business deals. With the destruction of this kind of insurance, many of these businessmen who handle commodities have felt compelled to substantially increase the margin they charge for their part in the marketing system and some have lost vast sums of money. The situation has become so bad that there is a strong possibility that the grain marketing system as we have (1) known it for 50 years may already have been destroyed. Some now feel compelled to triple or quadruple the normal margin to cover new risks or to act only on a commission basis. Our Committee wants to know all the facts relating to this situation and what can be done about it. There is a Commodity Exchange Act and a bureau in the Department of Agriculture which is responsible for protecting hedgers against the kinds of losses some have sustained in the past year. Section 3 of that Act states that the purpose of the Act, among other things, is to assure "that such futures transactions are utilized by shippers, dealers, millers and others engaged in handling commodities and the products and by-products thereof in interstate commerce as a means of hedging themselves against possible loss through fluctuation in price . . ." We will investigate to see whether the purpose of the Act is being frustrated to the disadvantage of the innumerable small businesses engaged in agriculture and the processing and distribution of agricultural products. We will seek ideas as to how the system can be restored and what can be done to prevent a further breakdown of the system in the future. Consumers are also affected greatly by a breakdown in this marketing system. When the futures markets are manipulated or become undependable, wider margins required at each level add to the price of the final product. Historically, erratic swings in prices result in retail prices going up more than they ever come back down. So consumers also have a great stake in preventing excessive speculation or manipulation from causing wide fluctuations in commodity prices. The lack of transportation facilities in this country also has an important part in the breakdown of our marketing system. Increases in production have occurred much faster than increases in the ability to transport the products. All Government action is now directed toward increasing production more than ever before, but there is no corresponding activity directed toward increasing transportation facilities. When transportation facilities are so limited that grain cannot be delivered in fulfillment of the contract, the holder of the contract is able to demand an exorbitant price for release of the contract. Lack of transportation facilities has also resulted in many businessmen having to store their product at great cost to themselves considerably beyond the date when a market was available. Transportation problems are so entertwined with these problems that they will be an important part of this grain marketing study and investigation. Tomorrow and Thursday we will hear from witnesses who will testify as to the operations as they currently are conducted on the Chicago Board of Trade and the Chicago Mercantile Exchange, with particular reference as to how manipulations and squeezing can occur and may have occurred; the effectiveness of the Commodity Exchange Authority in discharging its responsibility under the Commodity Exchange Act; and possible abusive practices in the trading in commodities. Witnesses will also discuss their experiences in the recent commodity futures trading in the 1972 soybean crop; and what they experienced in their attempt to hedge against the fluctuation in the price of soybeans, soybean oil, and soybean meal. It is also expected that testimony will be received from hedgers who were wiped out by the drastic increase in required margins resulting from huge increases in the price of soybeans which have not been wholly or satisfactorily explained in the normal terms of supply and demand. After the initial inquiry Wednesday and Thursday, the hearings will resume in early September. We expect to hold eight or ten more days of hearings during September and October. I want to stress the fact that these hearings will be impartial and that all interested parties, be they farmers or processors, hedgers, speculators or board of trade officials, are invited to contact the Subcommittee to express their views within the limits of the time available. This will be the most comprehensive investigation and study ever made of our marketing system and the commodity market. We realize that the commodity futures trading is a technical and quite sophisticated subject. Therefore, the Committee has employed a special counsel, Jacob N. Gross, of Chicago, Illinois, who has experience in this field, and who will lend his considerable expertise to this vast study. Also, the GAO is cooperating and furnishing four men on a full-time basis who have had experience in this area as well as services as needed from their field offices. In addition to this, Mr. Tom Powers and others on the regular staff of the Committee will be working on the study and investigation. |