ARLINGTON, VA., July 17, 2008 – Members of Congress should act to provide stability to futures markets that specialize in agricultural commodities, according to a letter the American Feed Industry Association (AFIA) sent to House and Senate leaders this week.
In the letter, AFIA President and CEO Joel G. Newman urges members of Congress to end an exemption, granted in 2000, that permits Wall Street banks to use speculative position limits for hedging over-the-counter swap transactions. Rolling back the exemption would return all speculative investors to the same limits and close loopholes for swaps and electronic exchanges.
Congress granted the exemption when lawmakers codified earlier action by the Commodity Futures Trading Commission (CFTC). The Wall Street banks represent institutional investors such as pension funds, hedge funds, investment banks and university endowments.
“The U.S. feed industry is the single largest purchaser and user of corn and soybeans, as well as their processed meals and byproducts. It is critical the grain, oilseed and ingredient commodity markets accurately reflect true supply and demand situations for these commodities,” Newman writes.
Significant speculative interest in agricultural commodity futures markets exists today. “In some crops, the trading on a daily basis almost meets the entire U.S. crop volume, significantly adding to price volatility. The size and influence of these large financial players was never contemplated” during enactment of the original Commodities Exchange Act, Newman writes.
“The net result is that speculator demand actually increases the more prices increase, providing unrealistic commodity price levels relative to true demand. Index speculators do not normally sell, but rather buy and hold commodity positions, producing an artificial economic increase in demand and, in turn, commodity market pricing.” These issues have contributed to the current situation where hedging is no longer effective as a risk management tool.
In addition to rolling back the exemption, AFIA also urges Congress to bring all commodity trades under CFTC authority and enforcement. Another recommendation is to re-establish speculative position limits for all commodities and contracts, thus reversing a 1998 decision to eliminate large and liquid market position limits—with enforcement by the CFTC, rather than exchanges. AFIA also urges that new limits on speculative trades be set by the actions of producers and consumers of commodities, rather than exchanges. The CFTC also needs appropriate funding and staffing to fulfill its responsibilities.
AFIA submitted the letter to Senate Majority Leader Harry Reid (D-Nev.) and other members of the House and Senate leadership and agriculture committees. The letter was timed to coincide with Reid’s introduction of S. 3268, the Stop Excessive Energy Speculation Act of 2008.
AFIA is one of the nation’s foremost agribusiness associations, and it is devoted exclusively to representing the business, legislative, regulatory, advocacy and educational needs of the animal feed and pet food industry and its suppliers.
AFIA members include approximately 500 domestic and international companies, as well as state, national and regional agribusiness associations. Members include feed and pet food manufacturers, livestock and poultry integrators, animal health companies, ingredient suppliers, equipment manufacturers and companies which supply other products and services to feed and pet food manufacturers. AFIA members represent more than 70 percent of the commercial feed and pet food manufactured in the U.S. each year.
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