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IMPACT OF THE DROUGHT ON
PRICES AND PRODUCTION

HEARING
BEFORE THE

SUBCOMMITTEE ON
ECONOMIC STABILIZATION
OF THE

COMMITTEE ON BANKING, FINANCE AND
URBAN AFFAIR,S
HOUSE OF REPRESENTATIVES
ONE-HUNDREDTH CONGRESS
SECOND SESSION

JULY 6, 1988

Printed for the use of the Committee on Banking, Finance and Urban Affairs

Serial No. 100-75

U.S. GOVERNMENT PRINTING OFFICE
86-824fc>___________________________ WASHINGTON : 1988______________________
For sale by the Superintendent of Documents, Congressional Sales Office
U.S. Government Printing Office, Washington, DC 20402




HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS
FERNAND J. ST GERMAIN, Rhode Island, Chairman CHALMERS P. WYLIE, Ohio
HENRY B. GONZALEZ, Texas
JIM LEACH, Iowa
FRANK ANNUNZIO, Illinois
NORMAN D. SHUMWAY, California
WALTER E. FAUNTROY, District of
STAN PARRIS/Virginia
Columbia
BILL McCOLLUM, Florida
STEPHEN L. NEAL, North Carolina
GEORGE C. WORTLEY, New York
CARROLL HUBBARD, J r., Kentucky
MARGE ROUKEMA, New Jersey
JOHN J. La FALCE, New York
DOUG BEREUTER, Nebraska
MARY ROSE OAKAR, Ohio
DAVID DREIER, California
BRUCE F. VENTO, Minnesota
JOHN HILER, Indiana
DOUG BARNARD, J r., Georgia
ROBERT GARCIA, New York
THOMAS J. RIDGE, Pennsylvania
CHARLES E. SCHUMER, New York
STEVE BARTLETT, Texas
BARNEY FRANK, Massachusetts
TOBY ROTH, Wisconsin
AL McCANDLESS, California
RICHARD H. LEHMAN, California
J. ALEX McMILLAN, North Carolina
BRUCE A. MORRISON, Connecticut
JAMES SAXTON, New Jersey
MARCY KAPTUR, Ohio
PATRICK L. SWINDALL, Georgia
BEN ERDREICH, Alabama
PATRICIA SAIKI, Hawaii
THOMAS R. CARPER, Delaware
ESTEBAN EDWARD TORRES, California
JAMES BUNNING, Kentucky
JOSEPH J. DioGUARDI, New York
GERALD D. KLECZKA, Wisconsin
BILL NELSON, Florida
PAUL E. KANJORSKI, Pennsylvania
THOMAS J. MANTON, New York
ELIZABETH J. PATTERSON, South Carolina
THOMAS McMILLEN, Maryland
JOSEPH P. KENNEDY II, Massachusetts
FLOYD H. FLAKE, New York
KWEISI MFUME, Maryland
DAVID E. PRICE, North Carolina
NANCY PELOSI, California
GARY L. ACKERMAN, New York

S u b c o m m it t e e

on

E c o n o m ic S t a b il iz a t io n

MARY ROSE OAKAR, Ohio, Chair
JOHN J. La FALCE, New York
NORMAN D. SHUMWAY, California
BRUCE F. VENTO, Minnesota
GEORGE C. WORTLEY, New York
MARCY KAPTUR, Ohio
AL McCANDLESS, California
PAUL E. KANJORSKI, Pennsylvania
J. ALEX McMILLAN, North Carolina
DOUG BARNARD, J r., Georgia
TOBY ROTH, Wisconsin
ROBERT GARCIA, New York
JAMES SAXTON, New Jersey
ELIZABETH J. PATTERSON, South Carolina PATRICIA SAIKI, Hawaii
THOMAS McMILLEN, Maryland
PATRICK L. SWINDALL, Georgia
FLOYD H. FLAKE, New York
JOSEPH DioGUARDI, New York
KWEISI MFUME, Maryland
DAVID E. PRICE, North Carolina
FRANK ANNUNZIO, Illinois




(II)

CONTENTS
WITNESSES
Page

Hearing held on:
July 6, 1988................................................................................................................
Appendix....................................................................................................................
W

edn esday,

J uly

1
31

6, 1988

Seal, William E., Commissioner Commodity Futures Trading Commission........
Wilson, Ewen, Assistant Secretary for Economics, U.S. Department of Agri­
culture ............................................................................................................................

10
6

APPENDIX
Prepared statements:
Seal, William E.........................................................................................................
Shumway, Hon. Norman P.....................................................................................
Wilson, Ewen.............................................................................................................
A

d d it io n a l

M

a t e r ia l

S u b m it t e d F o r T h e R e c o r d

Oakar, Hon. Mary Rose:
Map entitled “Droughts Worldwide Trade Impact” ........................................
Submitted a graft from the Department of Agriculture that shows what
the farmer gets from the food sales in grocery stores..................................
Webb,jJean A., cover letter dated July 22, 1988 with attachment........................
Wilson- Ewen, submitted table entitled, “Relative importance of food groups
in consumer price index for urban consumers, December 1987” .......................




32
50
39

(h i)

49
48
52
47

IMPACT OF THE DROUGHT ON PRICES AND
PRODUCTION
Wednesday, July 6, 1988
H ouse of R epr esen tatives ,
S u bc om m ittee o n E con om ic S ta biliza tio n ,
C o m m itte e o n B a n k i n g , F in a n c e a n d U r b a n A ffairs ,

Washington, DC.

The subcommittee met pursuant to call at 2:40 p.m. in room 311,
Cannon House Office Building, Hon. Mary Rose Oakar [chair of the
subcommittee] presiding.
Present: Chair Oakar, Representative Roth.
Chair O a k a r. The subcommittee will come to order. This after­
noon the Subcommittee on Economic Stabilization is conducting
this emergency hearing to assess the impact of the continuing
drought on the stability of the economy. We will do so by looking
at changes in prices and production of agricultural commodities af­
fected by the drought. I don't know of any part of the country that
isn't affected in some measure by this terrible situation.
Specifically, we are concerned about price increases for basic food
items. What amount of increase may be justified, what might be
attributable to speculative profiteering and what overall impact
this will have on inflation. Crises have a way of bringing out the
best in most, and unfortunately the worst in some.
This subcommittee will not sit idly by when consumers are
gouged by artificial price hikes or speculative profiteering. I want
to commend the Members of the respective agricultural committees
in the House and the Senate and others who are working toward a
bipartisan response to the conditions resulting from this crisis.
The Chair wishes that matters related to the drought such as
crop insurance, and subsidy payments, regulation of grain storage
are rightfully within the jurisdiction of the Agriculture Committee
and therefore not the subject of this hearing today.
We have a response that is very, very distinct. This subcommit­
tee is charged with overseeing relating to the economy and that is
why we have called this hearing. The crisis that is the focus of the
hearing today has many dimensions. It now extends to 30 States
and has resulted in crop losses, reductions in stockpile surpluses,
damage to the soil, and a near halting of traffic on our Nation's
major rivers.
These factors are all being considered by the Congress and obvi­
ously by the administration. So we will try to focus today on the
untold story, that is the impact on the family budget at the super­
market and the national budget through inflation. At the begin-




( l)

2

ning of the year the Agriculture Department was predicting a 2- to
4-percent increase in retail food prices for 1988. That upward pres­
sure on prices could be offset by the sale of supplies in storage
which the Government has done.
Traders in the commodities pits are bidding prices higher. In
fact, Kellogg Company and General Mills, two leading breakfast
foodmakers, already moved to increase prices on their cereals, for
example. Analysts predict more increases in the fall can be expect­
ed. Mindful that raw materials make up only a small portion of the
overall cost of most foods, we will attempt to determine where the
price increases may come, if any come, what is a fair increase to
expect and what can be done to mitigate the cost to consumers.
We are delighted to have two outstanding witnesses in the series
of hearings we will be conducting on this issue. We want to thank
everyone for coming on short notice. I apologize that we were
asked to attend a briefing today related to the Iranian, American
situation in the Gulf, and I apologize to our witnesses.
I know you have a very busy schedule. The Chair and others—as
you see, we don't have everybody here who wants to be here. Many
Members are at another briefing. I know they would want to be
here. Let me call on Mr. Roth for opening remarks. Thank you
very much for attending, Toby.
[The opening statement of Chair Oakar follows:]




3
OPENING STATEMENT
CONGRESSWOMAN MARY ROSE OAKAR, CHAIR
SUBCOMMITTEE ON ECONOMIC STABILIZATION
HEARING ON THE IMPACT OF THE DROUGHT
ON PRICES AND PRODUCTION
JULY 6, 1988
THIS AFTERNOONr- THE SUBCOMMITTEE ON ECONOMIC STABILIZATION
IS CONDUCTING AN EMERGENCY HEARING TO ASSESS THE IMPACT OF THE
CONTINUING DROUGHT ON THE STABILITY OF THE ECONOMY.

WE WILL DO

SO BY LOOKING AT CHANGES IN PRICES AND PRODUCTION OF AGRICULTURAL
COMMODITIES

AFFECTED

BY

THE

DROUGHT.

SPECIFICALLY,

WE

ARE

CONCERNED ABOUT PRICE INCREASES FOR BASIC FOOD ITEMS, WHAT AMOUNT
OF

INCREASE MAY

BE JUSTIFIED,

WHAT MIGHT BE ATTRIBUTABLE TO

SPECULATIVE PROFITEERING, AND WHAT OVERALL IMPACT THIS WILL HAVE
ON INFLATION.

CRISES HAVE A WAY OF BRINGING OUT THE BEST IN

MOST AND, UNFORTUNATELY, THE WORST IN SOME.

THIS SUBCOMMITTEE

WILL NOT SIT IDLY BY IF CONSUMERS ARE GOUGED BY ARTIFICIAL PRICE
HIKES OR SPECULATIVE PROFITEERING.

I WANT TO COMMEND THE MEMBERS OF THE RESPECTIVE AGRICULTURE
COMMITTEES IN THE HOUSE AND SENATE AND OTHERS WHO ARE WORKING
TOWARD A BIPARTISAN RESPONSE TO THE CONDITIONS RESULTING FROM THE
DROUGHT.

THE CHAIR IS MINDFUL OF ITS JURISDICTION AND THAT OF OTHER
COMMITTEES.

ACCORDINGLY, MATTERS RELATED TO THE DROUGHT, SUCH AS

CROP

INSURANCE,

GRAIN

STORAGE

ENHANCED
ARE

SUBSIDY

RIGHTFULLY

PAYMENTS,

WITHIN

THE

AND

REGULATION OF

JURISDICTION OF

AGRICULTURE COMMITTEE AND THEREFORE NOT THE SUBJECT OF THIS




THE

4
- 2 -

HEARING TODAY.

OUR RESPONSIBILITY ON THE ISSUE IS SEPARATE AND

DISTINCT.

THE SUBCOMMITTEE ON ECONOMIC STABILIZATION IS NO STRANGER TO
EVALUATING

ECONOMIC

CRISES

AND ACTING

WHEN

SUBCOMMITTEE, UNDER THE RULES OF THE HOUSE,
MONITORING
CONTROL

OF

ALL

ECONOMIC

PRICES

OF

STABILIZATION

COMMODITIES,

NECESSARY.

IS RESPONSIBLE FOR

MATTERS

RENTS,

THIS

INCLUDING

SERVICES,

THE

AND

ALL

MATTERS RELATING TO FINANCIAL AID TO ALL SECTORS AND ELEMENTS
WITHIN

THE

ECONOMY.

RESPONSIBILITY

THAT

IT
THIS

WAS

IN

EXERCISING

SUBCOMMITTEE

CRAFTED

THIS

LATER

SUCCESSFUL

FINANCIAL AID- PACKAGES FOR CHRYSLER CORPORATION AND NEW YORK CITY
SOME YEARS AGO.

THE CRISIS THAT IS THE FOCUS OF THIS HEARING TODAY HAS MANY
DIMENSIONS.

IT NOW EXTENDS TO 30 STATES, IT HAS RESULTED IN CROP

LOSSES, REDUCTIONS IN STOCKPILE SURPLUSES,
AND A
THESE

DAMAGE TO THE SOIL,

NEAR HALTING OF TRAFFIC ON OUR NATION *S MAJOR RIVERS.
FACTORS

ARE

ALL

BEING CONSIDERED

CONGRESS AND THE ADMINISTRATION.

BY

COMMITTEES

IN THE

OUR MISSION TODAY IS TO FOCUS

ON THE UNTOLD STORY, THAT IS, THE IMPACT ON THE FAMILY BUDGET AT
THE SUPERMARKET AND THE NATIONAL BUDGET THROUGH INFLATION.

AT THE BEGINNING OF THE YEAR, THE AGRICULTURE DEPARTMENT WAS
PREDICTING A 2-4% INCREASE IN RETAIL FOOD PRICES FOR 1988.




THAT

5
- 3 -

UPWARD

PRESSURE

ON

PRICES

COULD

BE

OFFSET

BY

THE

SALE

OF

SUPPLIES IN STORAGE— WHICH THE GOVERNMENT HAS DONE— TRADERS IN
THE COMMODITIES PITS ARE BIDDING PRICES HIGHER.

IN FACT, KELLOGG

COMPANY AND GENERAL MILLS— TWO LEADING BREAKFAST FOOD MAKERS—
ALREADY MOVED TO INCREASE PRICES ON CEREALS.

ANALYSTS PREDICT

MORE INCREASES IN THE FALL CAN BE EXPECTED.

MINDFUL THAT RAW

MATERIALS MAKE UP ONLY A SMALL PORTION OF THE OVERALL COST OF
MOST

FOODS,

WE

WILL

ATTEMPT

TO

DETERMINE

WHERE

THE

PRICE

INCREASES MAY COME, WHAT IS A FAIR INCREASE TO EXPECT, AND WHAT
CAN BE DONE TO MITIGATE THE COST TO CONSUMERS.

WE ARE FORTUNATE TODAY TO HAVE TWO OUTSTANDING WITNESSES.
OUR FIRST WITNESS

IS MR.

EWEN WILSON,

ASSISTANT SECRETARY FOR

ECONOMICS AT THE DEPARTMENT OF AGRICULTURE.
IS THE HONORABLE WILLIAM SEALE,
FUTURES TRADING COMMISSION.

OUR SECOND WITNESS

COMMISSIONER OF THE COMMODITY

WE THANK YOU FOR COMING ON SUCH

SHORT NOTICE, AND WE LOOK FORWARD TO YOUR REMARKS.




6

Mr. R o th . Thank you, Madam Chairman. I am delighted that we
are having this hearing this afternoon and this briefing. I have
come back from Wisconsin where I worked a day on the farm and I
can tell you that the hay bales used to weigh 80 pounds, now they
weigh 35 to 40 pounds because there isn't much moisture content
in the hay this year.
Our farmers are being hard hit because of the heat and the
human toil is the highest cost of all now, not to say anything about
the economic toll that is being extracted. So I am very much inter­
ested in this hearing this afternoon and I am here to ask some
questions. We can't make it rain, but if there is something we can
do, I would certainly want to do it. Thank you, Madam Chairman.
Chair O a k a r. I used to think one of my favorite plays was the
Rain-maker but I have changed my mind since the real tragedies
that are going on related to the drought.
Our first witness is Mr. Ewen Wilson, Assistant Secretary for Ec­
onomics of the Department of Agriculture, and he will be followed
by Hon. William Seale, commissioner of the Commodity Futures
Trading Commission.
Mr. Wilson, thank you very much for coming, and if you want to
introduce anyone who is with you who might want to say a few
words, that would be fine.
STATEMENT OF EWEN WILSON, ASSISTANT SECRETARY FOR
ECONOMICS, U.S. DEPARTMENT OF AGRICULTURE

Mr. W ils o n . Thank you, Madam Chairperson, and Congressman
Roth.
I do have with me today Keith Collins, who is director of the Eco­
nomic Analysis Staff.
We appreciate the opportunity to appear before you at this hear­
ing to discuss the impacts of the drought on major commodities and
prices, and the implications for food supplies and prices.
Unusually intense drought for this stage of the growing season
has spread over much of the farm land. The 30-day weather fore­
cast issued last Wednesday indicated continued dry conditions in
the Eastern Corn Belt. The drought has caused great turbulence in
the commodity markets. The drought also has disrupted barge traf­
fic, reduced power generation and increased the likelihood of forest
fires.
As a result of the drought, cash grain prices are up sharply since
early May—up V for wheat, % for corn and nearly double for oats.
3
Cattle prices, however, are down reflecting distress sales because
there is not enough forage for herd maintenance in some areas of
the country. At the beginning of June, pasture and range condi­
tions were rated at 68 percent of ideal, the lowest rating for this
time of the year since 1934. Pasture conditions in the northern
plains were particularly poor with severe drought reported in
North Dakota.
USDA response: The Department of Agriculture has taken action
to alleviate the distress of cattle producers. I think in the interest
of time I would rather not go through all of those actions, but they
are contained in my written testimony. Basically, those actions
were attempts to increase supplies of forage.




7

Livestock and Poultry: Despite these actions, distress sales have
forced down cattle prices. The price of utility cows is down sharply
from $50 per cwt. in early May. Cows are currently selling for
around $40 per cwt., down nearly V*. Continued liquidation of the
cattle herd will add to beef supplies, particularly processing grade
beef, and will lead to lower prices than otherwise would have oc­
curred.
Overall supplies of red meat and poultry are record large this
year and the short-term impact of the drought will be to add to
these supplies. Heat stress could limit rates of gain, of livestock
and poultry on feed, but this will be more than offset by additional
marketings. Higher feed grain and soybean prices have affected
livestock feeding profitability, and if those higher prices continue,
will lead to a reduction in the size of the national herd. Smaller
cattle and hog numbers mean less meat production in future years,
but the retail price impact of such reduced supplies will not be felt
until next year at the earliest. If poultry flocks are reduced, the
impact on poultry prices could come sooner—by the end of the
year.
Feed grains: The impact of the drought on the livestock and poul­
try sectors depends, to a large extent, on the level of feed grain and
soybean prices. Currently, 10 of the 17 major corn-producing States
have X or more of the corn crop rated poor or worse, compared
A
with none last year. Corn prices are currently around $3 per
bushel compared with about $2 in April. However, projected stocks
of 4.1 billion bushels carried into the 1988-1989 marketing year
starting September 1, 1988—the second largest carry-in stocks
ever—are expected to temper further price increases.
The key to avoiding runaway price increases in the corn market
will be access to CCC-owned and FOR stocks. Catalogs listing CCC
stocks available to the trade are periodically being issued. Stocks
pledged as collateral for FOR loans are available through the use
of commodity certificates at or before loan maturity. If CCC and
FOR stocks continue to be made available to the market, then the
damage to the livestock feeding and poultry sectors can be con­
tained.
On June 27, corn prices rose to the level needed to allow farmerowned reserve loans to be repaid before maturity. Over 1.2 billion
bushels of reserve corn loans can profitability be redeemed and
brought onto the market.
Wheat: The winter wheat harvest is well underway. As of last
Sunday 65 percent of the winter wheat crop had been harvested.
Normally 44 percent of the crop is harvested by this time. Winter
wheat usually accounts for % of all wheat produced in the United
States and the combination of an earlier than normal harvest and
carry-over stocks from last year of 1.27 billion bushels on June 1 is
an assurance of sufficient supplies to meet domestic and export
needs.
The spring wheat crop, which normally accounts for
of U.S.
production, has been damaged, and durum wheat and oats grown
in the northern plains have been especially hard hit.
The prospect of reduced wheat yields has driven up Kansas City
wheat prices by more than V since early May* Prices of durum
a
wheat and oats have increased much more than this. Substantial




increases in wheat prices were expected during the 1988 crop year,
even prior to the onset of the drought. The Department's earlyseason estimates indicated demand would exceed production by 450
million bushels, leading to a 10- to 25-percent rise in season-average farm prices of wheat. With the drought, the drawdown in
stocks could be even greater than this.
If the drought persists and wheat prices go even higher, there
will be some additional pressure on retail prices of bakery products
and cereals. However, farm-level prices account for only 8 percent
of the retail value of cereal and bakery products. If wheat prices
for the entire season average 30 percent above last year, this alone
would translate into a 2.4 percent rise in the retail price of cereal
and bakery products. Actual price increases would also depend on
changes in other processing and marketing charges.
Soybeans: The soybean crop is generally rated fair to poor.
Eleven of 19 major soybean-producing States have a crop condition
rating of poor to very poor for 25 percent or more of the crop. A
year ago, no major-producing State had more than 15 percent of
the crop rated poor or worse. Soybean prices had already been
rising for several months in anticipation of very low carry-over
stocks for the 1988-1989 season. However, the drought greatly ac­
celerated the soybean price rise. Since early May, soybean and
meal prices in southern Iowa have jumped about 50 percent and
soybean oil is up 25 percent.
The soybean meal price increase will push up protein costs in
animal feed rations. The soybean oil price increase will affect the
entire fats and oils price complex. However, world oilseed produc­
tion is expected to be record large in 1988 and competition from
corn, palm, coconut, and cottonseed oil and animal fats will moder­
ate the impact at the retail level.
Prior to the onset of dry weather, food prices were forecast by
the USDA to rise 2 to 4 percent in 1988. If the drought continues,
food prices will increase at a slightly higher rate during the second
half of 1988 and the first half of 1989. Even so, the outlook is for
moderate rather than sharp increases in the Consumer Price Index
(CPI) for food.
USDA will release an official food price projection on July 10,
but based on preliminary analysis, it appears that the new forecast
will place overall food-price increases for 1988 in the 3- to 5-percent
range. In other words, it appears that the drought will add about 1
percentage point to 1988 food price inflation. We could see price
run-ups in certain foods, for example, pasta products made from
durum wheat and oat-based cereals, but overall food price inflation
in 1988 will be held to moderate levels.
The upward adjustment of our food price estimate will have a
negligible impact on the overall rate of inflation in the United
States.
Food accounts for approximately 16 percent of the Consumer
Price Index for urban consumers—the most widely used measure of
inflation. Food prepared at home accounts for about 10 percent of
the overall CPI while the remaining 6 percent reflects food pur­
chased or consumed away from home, mainly restaurant meals (see
attached table).
[The table referred to can be found in the appendix.]




9

Meat, poultry and fish consumed at home accounts for almost 3
percent of the index, and fruits and vegetables 2 percent. Dairy
products, cereals and bakery products each represent a little over 1
percent, and fats and oils, less than Ys of 1 percent of the index.
Since food accounts for 16 percent of the overall CPI, a 1 percent
boost in food prices translates into an increase of less than 2 of 1
/io
percent in the overall CPI. However, inflation is a monetary phe­
nomenon dependent upon monetary policy. There is no reason to
believe that a one-time, drought-induced boost in farm commodity
prices will lead to higher overall inflation.
Higher farm commodity prices this year will bring about a pro­
duction response next year. More than 78 million acres of U.S.
farm land have been removed from production this year under Fed­
eral programs, 24 million acres of which are in the long-term Con­
servation Reserve Program. Some idled land will be released for
planting under the 1989 wheat program, and the remainder serves
as a buffer against serious crop short-falls in this country. This
country has an enormous capacity to increase food and fiber sup­
plies by returning idled acreage to production.
It is still too early in the crop production cycle to assess the full
extent of the drought damage. The Department will issue a crop
report on July 12 that will reflect the impact of the drought on pro­
duction based on July 1 conditions. If drought conditions persist,
yields on this year's spring-planted crops will be further affected.
However, the impact on 1988 food prices and supplies will be
modest for a number of reasons:
Accelerated marketings of livestock will add to already record
supplies of meat and poultry.
Large feed grain stocks can help mitigate the damage to live­
stock and poultry feeding operations.
Diverse production areas and irrigation mean fruits and vegeta­
ble prices will be largely unaffected, even though production in cer­
tain Lake States will be down.
Soybeans and wheat will be affected, but the farm price of these
commodities accounts for a relatively small share of the retail
value of their products.
Record-large global supplies of vegetable oils will moderate the
price impact on cooking and salad oils.
The most seriously affected crops, such as oats and durum wheat,
will have a retail impact, but products made from these crops rep­
resent only a very small component of the CPI.
The immediate problem is not one of food shortage or food price
inflation, except in certain specific instances, but rather the prob­
lem is one of the responding in a compassionate way to the losses
faced by American farmers.
Madam Chairman, that concludes my testimony. I would be
pleased to respond to any questions you or other Members of the
subcommittee might have.
[The prepared statement of Ewen Wilson can be found in the ap­
pendix.]
Chair O a k a r. Thank you.
I think we will go on to Mr. Seale and then we will ask questions
afterwards. Thank you.
Mr. Seale.




10
STATEMENT OF HON. WILLIAM E. SEALE, COMMISSIONER
COMMODITY FUTURES TRADING COMMISSION

Mr. S e a le . Thank you, Madam Chair. I am William E. Seale. I
hold a Ph.D. in economics and I am a member of the Commodity
Futures Trading Commission since 1983.
I have with me today Dr. Paul Tasini, the director of the Division
of Economic Analysis at CFTC and John Melki, chief of the CFTC
Market Surveillance Section.
Normally, the responsibility of testifying before committees and
subcommittees of the Congress falls on the chairman of the CFTC.
However, Dr. Gramm was unable to be here today and asked me to
appear in her place and provide the views of the Commodity Fu­
tures Trading Commission.
I will briefly explain how the Commission's surveillance of the
agricultural futures markets has responded to the drought-induced
price volatility in those markets, and I will be pleased to answer
any questions you may have.
As the Federal regulator of commodity futures markets by en­
couraging their competitiveness and efficiency, by ensuring their
integrity, and by protecting market participants against manipula­
tion, abusive trading practices and fraud. Through the mainte­
nance of fair and freely competitive markets, the CFTC better en­
ables the futures markets to perform their economic functions of
price discovery and risk shifting.
During the past 2 months, but particularly in June, agricultural
futures markets have been buffeted by the changing prospects of a
severe drought in this country's most productive croplands. Prices
of grain and soybean complex futures rose rapidly until about the
third week of June. Although prices have retreated somewhat in
response to some rainfall, cooler weather, and ample near-term
supplies, the markets have remained quite volatile.
For example, from May 22 through June 23, 1988, new crop corn
futures prices increased 53 percent, soybean futures prices in­
creased 48 percent, spring wheat futures prices increased 43 per­
cent, and oat futures prices increased 108 percent. As market par­
ticipants collectively try to assess the severity of the drought, its
impact on U.S. production, and the effect of higher prices on the
export and domestic demand for these commodities, the markets
react swiftly to new information—particularly weather reports. We
expect this volatility to continue until the extent and impact of the
drought is better known.
In response to the drought and ensuing price volatility, the CFTC
has intensified its surveillance efforts on several fronts. Our
market surveillance staff is monitoring the markets for any indica­
tions of price manipulation and for violations of the CFTC's specu­
lative position limit rules. The CFTC financial surveillance staff is
monitoring the financial condition of futures commission mer­
chants with respect to the minimum capital requirements and the
segregation of customer funds. In addition, the CFTC's contract
markets staff has expanded its monitoring of floor trading prac­
tices. Chairman Gramm also is participating in the Presidential
Interagency Drought Policy Committee.




11

At weekly surveillance briefings and on a special request basis,
the Commission has been advised by senior staff of ongoing devel­
opments in agricultural markets. Our surveillance emphasis has
been on these markets since the prospects for a severe drought
emerged. The Commission has been advised of large trader posi­
tions, price trends and significant market news regarding these ag­
ricultural futures markets. Representatives of the U.S. Department
of Agriculture have attended these meetings as part of our inter­
agency liaison activities and have provided insights regarding
market developments.
Our surveillance of the agricultural futures markets during this
period of rapidly rising and volatile futures prices has not disclosed
any evidence of price manipulation. Nor has our surveillance staff
encountered any unusual problems enforcing the Commission's
speculative position limit rules. It is worth noting that the largest
individual futures positions in the grain and soybean markets
during the major price advance were short rather than long.
During this volatile period these positions were held by large grain
merchants to hedge their grain inventories and forward purchases.
For the near term at least, the current high levels of trading
volume and widespread participation tend to reduce the potential
for the activities of one trader to affect the market. Furthermore,
the Commission does not have any serious concerns over the avail­
ability of deliverable supplies.
While the drought may significantly reduce this year's crops, it
should not affect free market supplies until late this year or next
because of the large supplies carried into this crop year from prior
harvests. In addition, to the extent that higher prices attract grain
from Government stocks or farmer-owned reserves, free market
supplies may be augmented significantly in the near term.
The Commission's market surveillance staff will be monitoring
closely the deliverable supply situation as well as the activities of
large traders in these markets in the coming months to detect any
evidence of a threat of manipulation or of any other form of major
market disruption. The Commission also will continue its review of
these markets through its weekly surveillance briefings and special
briefings, as circumstances may warrant.
As I previously mentioned, during this period the Commission
also has intensified its financial and trade practice surveillance, as
is the normal practice whenever volatile markets develop. Specifi­
cally, based upon preset parameters the Commission's financial
audit staff initiated its “ major market move" surveillance and
oversight procedure to ensure that the exchanges are conducting
adequate financial surveillance of members and to contact individ­
ual firms where necessary to verify the collection of margins and
continued compliance with the Commission's segregation and cap­
ital requirements.
While cash-flows at the clearing organizations of several futures
markets have increased significantly due to the increased price vol­
atility in their agricultural futures and option contracts, no finan­
cial problems have developed. Commission staff has confirmed
through frequent contacts with the respective clearing system rou­
tinely. In this connection it is useful to note that the two largest
futures exchanges routinely assess intra-day margin settlements on




12

their clearing member firms, which tends to reduce settlement
cash-flows and to alleviate potential strains on their clearing sys­
tems.
In addition to increasing their financial surveillance, the grain
exchanges also have increased margins in response to the increased
price volatility prevailing in the grain and soybean complex futures
markets. Initial speculative corn futures margins, for example,
have increased from $750 to as much as $1,800 per contract, and
soybean futures margins have increased from $2,000 to $5,250 per
contract.
The Commission's contract markets staff also expanded its moni­
toring o f floor trading practices by establishing an increased pres­
ence on the trading floors. Specifically, the Commission staff has
been monitoring the opening and closing periods of trading in the
grain markets in addition to observing other periods during each
trading session. During floor surveillance, Commission staff observe
trading for possible illegal activity, converse with market partici­
pants about trading activity generally, and follow up any informa­
tion they may obtain on rumors or problems which may require
further investigation. To date, no problems have been identified.
Thank you for the opportunity to appear before the subcommit­
tee. I would be pleased to answer your questions at this time.
[The prepared statement of William Seale can be found in the
appendix.]
Chair O a k a r. Thank you very much, commissioner. I want to
submit for the record a Department of Agriculture graph that
shows what the farmer gets from the food sales in grocery stores. I
am sure you are familiar with it.
[The Department of Agriculture graph referred to above can be
found in the appendix.]
Chair O a k a r. For example, fats and oils are 18.5 percent. Proc­
essed fruits and vegetables are 24.2 percent; eggs, 53.9 percent, and
it goes on. Cereal and bakery products are only 7.6 percent, yet we
see this fairly substantial rise in those prices I mentioned, such as
Kellogg and General Mills.
Isn't it, to either who want to answer, and Mr. Wilson, maybe
you would want to answer. Is it too soon for companies to be expe­
riencing the effects of the drought, and are these companies pass­
ing on these higher prices to consumers in anticipation or is it, you
know, because of the sort of feeling that maybe it is the right time
to raise prices?
Is it justified, all these increases that we are seeing lately?
Mr. W ils o n . We have a situation in some very specific commod­
ities where prices have risen more than in all other commodities.
One of those commodities is durum wheat that is grown in this
country. About 80 percent is grown in one State, the State of North
Dakota. That is where the drought has been particularly severe. So
the market has reacted very strongly in recognition of the fact that
we have suffered a major loss in that durum wheat crop in North
Dakota.
Another crop that is in a similar condition is oats. Oats are
grown in several of the Northern Plain States, but the Dakota's,
Minnesota, and Montana tend to be the States where most oats in




13

this country are grown. So we have seen a run up in oats prices as
well.
In the case of oats, we came into the season with very low stock
levels, so the price run-up that has occurred in those commodities
reflects a real situation in the market.
Chair O a k a r . Well, soybeans, am I not correct about this? I am
from the greenhouse capital of the country, Cleveland, OH, but I
don't pretend to be an authority on agriculture. We do an awful lot
of soybean growing in my State of Ohio, not too far from my con­
gressional district, and soybeans are said to be the most drought
resistant.
Is that correct, am I correct about that?
Mr. W ils o n . Soybeans is a fairly drought resistant crop, but we
do need rain on the soybeans in the month of July when they start
flowering and then in the month of August when the pods start
forming. If we don't get rain in that period, we are in bad trouble.
Chair O a k a r . Why is the price shooting up so much from $6 last
year to $10.30 this year?
Mr. W ils o n . Soybean stocks, which were fairly large as of 2
years ago have been drawn down substantially. Government-owned
stocks have been virtually depleted. We have a very, very small
amount of stocks left in Government hands now. However, we did
do a survey of total soybean stocks as of June 1, and that survey
indicated that we have 655 billion bushels of soybeans in stocks in
all positions in this country as of June 1.
That amount of stocks would be enough to carry us for 4 months
and satisfy all our domestic and export needs. That stock level will
get us to the next harvest. The only question is, what kind of yield
can we expect on this next harvest? That is why the price has gone
up.
Chair O a k a r. Well, the Government had—it has embarked on a
massive sell-off program. Apparently the idea is to dampen the ex­
pected increases in prices of the commodities that would result
from reductions in supply. What precautions are being taken to
ensure that major food processors and food companies, as well as
overseas trading partners are not buying U.S. Government-owned
grain in order to hoard it or sell it off later at inflated prices?
Mr. W ils o n . Where the Government has had a fairly aggressive
policy of releasing stocks from commodity credit corporation re­
serves, we have done that mostly in the case of feed grains. The
immediate impact of this drought is on the livestock sector. It has
been felt particularly in dairy producing areas and where there are
beef cow herds that don't have enough forage or grass and water
levels are down. So, they are having to sell off those cattle.
The secondary impact is on the feeding operations—cattle feed
lots, poultry, and hog finishing operations. What is impacting that
sector is high corn prices and high soybean prices. To the extent
that the Government has stocks, the worse thing we can do would
be to hold those stocks back from the market.
We have to get those stocks out there to try and meet the needs
of those livestock feeding operations and try to contain the damage
to that livestock sector.
Chair O a k a r . Dr. Seale, in the past 2 months we have seen in­
credible price swings in the commodity markets. You alluded to
86-824 0

-

88-2




14

this somewhat in your testimony, and I wanted you to elaborate a
little bit, because of the severity of the drought or possibly not be­
cause of the severity of the drought. But is this simply individuals
profiteering from other's misfortune, or are there signs that prices
on the soybean and corn futures are indeed being manipulated, and
if there are any signs of that, what can you do, what authority do
you really have to halt this kind of manipulation?
Mr. S e a le . The answer to the latter question, first, we have a
great deal of authority, but we see no evidence of a market manip­
ulation in the grains at this time.
Chair O a k a r . What could you do if you did see evidence of it?
Mr. S e a le . Well, certainly there are—the CFTC has the author­
ity up to and including stopping trading, that is closing of a
market. That would not be the normal kind of response to a manip­
ulation. The more normal type response would be an administra­
tive enforcement action which the agency has brought on occasion
over the years.
Chair O a k a r . Well, you know, there have been these terrific
swings, in prices. I mean, aren't you a little surprised at the ups
and downs?
Mr. S e a le . The market places tend to react to stress with volatil­
ity, and what I think we are seeing essentially is a market place
that is trading on expectations of traders and weather is an enor­
mous unknown. Remembering all the time that this is a commodi­
ty trading is a net zero sum game.
One person's gain is another person's loss. We see again no evi­
dence of any individual or groups of individuals who are pushing
this market and causing prices to be higher than what we would
view as a reasonable equilibrium price.
Chair O a k a r . Can you give me a for instance? What would be
some signals if there was manipulation? Can you give an anecdotal
example?
Mr. S e a le . If I were to—generally speaking, text book manipula­
tions would occur as follows: One would have a marketplace in
which was fairly lightly traded, where the individual who is going
to manipulate the market place on the long side could in fact con­
trol the underlying, physical, deliverable supply.
That would be an entry level, necessary condition for a manipu­
lation. Then in fact you would see a price that was unsupported by
fundamentals. And you would at that point be into the entry level
area of manipulation.
Chair O a k a r . Well, yesterday, on the Board of Trade—there was
a tremendous plunging of the soybean futures area as a result of, I
guess, of possibly the weather forecast. But as the drought persists
are we going to witness these artificially high price tags that are
attached to a futures contract?
Mr. S e a le . Madam Chairman, I am not sure that the prices we
are seeing are artificially high. I think the prices we are seeing are
the equilibrium prices at the moment for sometime in the future
based upon the expectation of traders. I think certainly as the
drought continues that we would see continued high volatility.
Chair O a k a r . When you see prices go up from $6 to $10.30 for a
crop that does not—or a commodity that really isn't as affected by
the drought as others, it seems to me that what I think the Chair




15

is interested in is how this is impacting on the consumer and
whether or not there is some manipulation going on, and frankly, I
look forward to the report of Mr. Wilson.
You mentioned it is coming out July 20, but you seem to give the
idea that we are not going to see tremendous increases in prices,
and yet, when you take a look at the exchange, you know you are
seeing all this activity and increases in sales in the amounts of the
commodities.
So I am just wondering how all this fits together. Obviously we
are in a state of crisis, but we don't want to see the consumer vio­
lated upon just because there is sort of an advantage taken at a
time when people are very aware of the effects of the drought and,
yet, I am not so sure that some of what is going on is really justi­
fied.
That is why I thought maybe you would come today and give us
some idea of what we can anticipate in that report.
Mr. W ils o n . The real key question is what is going to happen
from the weather from here on out. As we watch these markets,
they have reacted very strongly to changes and perceptions about
the weather.
Last Wednesday, I believe it was, there was an indication that
there would be some rain up in the north central areas and the fol­
lowing day we saw the nearby soybean contracts drop by 83 cents.
There are no limits on that contract because it was a nearby expir­
ing contract.
The previous few days we had seen the market raise the limit
because the forecast had been for dry weather. Every time there is
a weather forecast the market reacts to it. We saw that again yes­
terday.
We put out three times a week, on Monday, Wednesday and
Friday, a short-term, 6- to 10-day weather outlook. The USDA and
the National Weather Service do that jointly. The report they put
out yesterday indicated that we might get a little bit more rain
over this 6- to 10-day period and I noticed this morning that the
markets were down quite sharply in response to that.
So the markets are very, very sensitive to what the weather fore­
casters are saying.
Chair O a k a r. Let me ask you this: I mentioned examples of
prices going up fairly dramatically in the last few weeks in the
cereal industry. Do you think those markups were justified?
Mr. W ils o n . Based on what we know about those specific com­
modities, the oats and the durum wheat, in particular, that there is
no reason to think that those price increases were too high. I think
they are reflecting what is going on in the market place.
Chair O a k a r . Let me call on Mr. Roth.
Mr. R o th . Thank you, Madam Chairman.
I appreciate the good testimony we had here this afternoon. I
think we are all looking for answers and sometimes there are no
answers to some of these questions.
I know Mr. Wilson is sensitive to the problems that are taking
place in the dairy industry, especially, and I would like to ask what
is being done to mitigate the effect of the drought on our dairy
farms.




16

Mr. W ils o n . Let me go through a list of some of the things we
have done, Mr. Roth. The immediate problem is that we don't have
enough hay for the dairy people and feed prices have gone up. As
far as hay goes, we have allowed hay to be cut from land which
normally we wouldn't allow hay to be cut from. We are doing that
on a county-by-county basis.
As of yesterday, we had 1,819 counties, in 36 States where we
have approved emergency haying and also allowed livestock cattle
farmers to run their cattle on that land. Normally they wouldn't
be allowed to do that.
Mr. R oth . If I may interrupt, Mr. Wilson, you have an emergen­
cy feed assistance program. That is what you are referring to,
right?
Mr. W ils o n . Yes. That is a separate program. We also have ap­
proved 323 counties in 20 States to participate in that emergency
program.
Mr. R oth . I am more or less interested in Wisconsin and we have
only four counties in Wisconsin which have been approved and
what I would like to know is are you expanding that program and
how is that developing?
Mr. W ils o n . That program has been expanded, or is being ex­
panded every day. It started off slow. The immediate action was to
free up additional hay supplies. This emergency feed program is
the second level of response. We are seeing more counties coming
in every day applying for that program.
We are turning around those applications on a 1-day basis. So
they are building each day.
Mr. R o th . I didn't mean to interrupt the answer you were giving,
but since you stopped, I will throw this other question in. I am in­
terested also in the 50-cent proposed cut as of January 1 in the
dairy price support.
Are you advocating that we do not implement that price sup­
port?
Mr. W ils o n . Well, that is something of a different question. The
law, as currently, written says that we should estimate how much
the Government is going to buy from the dairy producers in the
calendar year of 1989, how much we will remove and put in CCC
storage.
If we estimate that we will take more than 5 billion pounds off
the market, the law gives us no flexibility there. There is no discre­
tion. The Secretary has to cut 50 cents off the support price of
milk.
Mr. R oth . Well, we are going to hopefully change that law. The
other thing is you are not going to have 5 million pounds because
the dairy industry is down in Wisconsin 5 percentage points and it
is going down lower.
Mr. W ils o n . The question is will we even hit that 5 billion
pounds next year. Everybody thought we would but, under current
conditions we have a very different picture and the prospects are
different.
Mr. R o th . A s Madam Chairman mentioned, the price of certain
commodities going up, the American consumer is going to be lucky
if they have dairy products after a while because there is not going
to be enough production to take care of the need as I see it.




17

Mr. W ils o n . I don't think there is any fear we will run out of
dairy products. We have enormous capacity to produce. I don't
want to minimize the damage to certain areas of the country and
your State has been very hard hit by this drought, but there is no
way that we are going to run out of dairy products.
In fact, fairly recently there was a national commission on dairy
policy which was made up of 18 dairymen, dairy operators, and
they reported in that report that we should see some tremendous
new technology in the years ahead which will result in additional
supplies of dairy products.
Mr. R o th . I am sure that is going to take place because of
growth hormones and so on. We have the question that we in Con­
gress are going to be asking and others will be asking, how much
corn do we have in storage? How much wheat do we have in stor­
age and dairy products. We get a lot of information and I have
never been able to talk to anyone and pin them down and say this
is how much corn we have.
Mr. W ils o n . I can tell you the precise numbers. We did a survey
on June 1 and nationwide we have 5.8 billion bushels of corn. That
would be enough to carry us through the next 8 months and satisfy
all our domestic livestock industry, all our other domestic use and
all our export customers.
Mr. R o th . So if the drought continues, we have 8 months supply.
That means we are going to have a shortage sometime next spring.
Mr. W ils o n . We will start harvesting a new crop September 1
this year. At that point, we will-----Mr. R oth . If we have a crop, of course.
Mr. W ils o n . We are not going to lose the entire corn crop. We
will go into that year with at least 4 billion bushels, which would
keep us going 6 months.
Under the worst possible case scenario, we may see a crop that
was 4 to 4.5 billion bushels. That would still be over 8 billion bush­
els total, which is more than we have ever used in a year.
Mr. R oth . We are not sure. I have been out in these corn fields. I
don't know if I would agree with that assessment, but that is my
opinion.
Mr. W ils o n . I think in certain areas of the country there will be
people losing their entire crop, but we will harvest a smaller corn
crop this year and combined with the huge supplies that we have
on hand today, we have enough to carry us over the next year.
Mr. R o th . My fear is that what is going to happen to corn in
Wisconsin and Iowa is pretty much the same thing that happened
to durum wheat in North Dakota.
Mr. W ils o n . Corn is grown in many more States of the Nation.
The big problem with this drought is that there is a terrible impact
in the heart of the Corn Belt, and if we don't get rain in the Corn
Belt, then we will suffer tremendous losses.
Mr. R o th . Thank you very much. Thank you, Madam Chairman.
Chair O a k a r . Let's just talk a little bit about the corn issue. Last
year the corn crop approached approximately 7 billion bushels.
What do you anticipate from this year's corn harvest we will have?
I took a little ride out in Ohio's corn crop area, and my gosh, usual­
ly at this time of the year you see those corn stalks really high,
and it doesn't look like it has grown at all.




18

What do you anticipate will happen to the corn crop? Do you
think we will have any?
Mr. W ils o n . The crop looks terrible in your State, I know that.
Earlier this year we made an estimate, projection, of a 7.3 billion
bushel crop prior to the onset of the drought. We know now that
we are not going to reach that level. Next Tuesday we will be put­
ting out a new estimate of what we think that crop will be. I don't
know what that estimate is going to be.
Let's just take a look at some possibilities. If we were to suffer a
25 percent cut in yield, which would be catastrophic by historical
terms, we would still have a 5.5 billion bushel corn crop. If you get
an even greater loss in yield, 33 percent, which I don't think we
have ever suffered in history, we would still end up with a 4.9 bil­
lion bushel crop.
If you said the worse possible thing you can imagine would be a
40 percent cut, you would have a 4.4 billion bushel crop.
Chair O a k a r. Well, how many bushels are there in storage right
now?
Mr. W ilso n . 5.8 billion as of June 1. Now, we have used some of
that, so it is less than 5.8 today.
Chair O a k a r. How much are you selling off a day?
Mr. W ils o n . Out of the Commodity Credit Corp., it has varied,
anything between 20 million bushels up to—the week of June 22,
we did 72 million bushels. That was for the week.
Chair O a k a r. Well, see, my staff gave me the figure of 4.2 billion
bushels of corn in storage. Your's is slightly higher than that.
Mr. W ils o n . I think that 4.2 billion would be the figure for Sep­
tember 1 of this year. They are projecting ahead which is—it may
be a little low, but I think it will be a bit more than that.
Chair O a k a r. If you took that rate as of September then, and
you sell it off at 20 to 45 or 25 million bushels a day, then you
would drop to 1.1 billion bushels in July, and—or in the future, and
you would really exceed the minimum level of the law; am I cor­
rect about that?
Mr. W ils o n . But we will be harvesting a new crop before we get
to that point.
Chair O a k a r. Aren't you anticipating that the new crop is not
going to do so well?
Mr. W ils o n . Yes, but even if you assume the worst possible re­
duction in yields, we will still have enough with that 4.1 or 4.2 bil­
lion bushels to get us through the next year.
Chair O a k a r. Why are we on this big selling spree? I mean,
aren't we on kind of a selling spree at a time when we can't afford
to be on the selling spree?
Mr. W ils o n . The worst possible-----Chair O a k a r. You really make it sound so optimistic and yet to
be honest with you, when you talk about prices increasing 3 to 5
percent, and we haven't gotten into the revised estimate of retail
prices, are you just being overly optimistic and yet you are selling
off at sort of a record pace?
I guess I am trying to get a handle on what the Government's
philosophy of what the current situation really is, and how you
really are trying to address this problem. I don't think there is a




19

real rhyme or reason in terms of how you are trying to address the
problem.
Mr. W il s o n . Well, the immediate problem is the livestock sector.
The livestock sector has been adversely effected by higher feed
costs. The Government owns a lot of corn which is the primary
livestock feed. The worst possible thing wr could do right now
e
would be to hold that corn off the market when there is such a
need to try and get it out to the livestock sector.
If we were to hold it back, we would only worsen the damage to
the livestock sector. We can contain the damage to the livestock
sector. That then will result in maintaining herd sizes and we
won't have the big run up in meat prices in 1989 and 1990.
Chair O a k a r . Let me ask Dr. Seale or you, Mr. Wilson, what
warning signals you see in terms of profiteering and speculation.
Are there any, and what factors do you think will go into having
an inflationary triggering take place?
Do you see that happening at all with respect to materials that
are processed by food processors and will consumers then decide
that they might have to stockpile certain commodities themselves?
How do you fit the whole picture in or are there any futuristic
kinds of views about the possible inflationary triggering that might
take place and what we can do to prevent this?
Mr. W il s o n . I don’t think there is any need or any fear that we
are going to run out of food. We have large grain stocks. We have
record large supplies of meat and poultry which will actually be
bigger this year because of the drought than if we hadn’t had the
drought. There simply is no way that we can run out of food.
There will be some items where we see some shortages, things
like oats, where the crop has been hard hit, durum wheat, but
across the board it is very unlikely that there will be any major
impact on the food prices or any widespread shortages.
Chair O a k a r . Y ou don’t think that consumers should be appre­
hensive and because of this apprehension, act in such a way as to
produce inflationary impact? You don’t see that as a possible sce­
nario, I gather?

Mr. W il s o n . N o , because we have large enough stockpiles to get
us through this year and then we have a huge acreage of land that
is not in production this year that can be called back into produc­
tion next year.
We already have announced that we will allow farmers to plant
12 million more acres of wheat next year. If the corn crop comes
down, we could allow them to plant more corn next year. So we
have an enormous capacity to produce and I have no doubt that we
will see supplies increasing again next year.
Chair O a k a r . Well, it doesn’t seem if that is taking place,
though, Mr. Wilson. I mean I am glad you are optimistic, the Chair
doesn’t see where you are basing your optimistic views. Can you be
more specific about all these enormous supplies, because my fig­
ures are a little different than yours to begin with, and you are
really selling off a lot of the storage materials, and I am just won­
dering on what basis you can be so optimistic.
Mr. W il s o n . I am only optimistic in the sense that we are not
going to have runaway food prices. There is no indication that that
will happen because we have large supplies.




20

As we look at the stocks on hand and we look at the livestock
numbers and look at poultry production, there is just no reason to
assume that we are going to be in an inflationary situation in food.
Chair O a k a r . So the consumer should anticipate, based on your
optimism, that the prices of food commodities will not be dramati­
cally increased; is that— there won’t be the justification for in­
creases that some might like to have?

Mr. W il s o n . We are estimating that the impact of this drought
will be a 1 percent increase on food prices this year.
Chair O a k a r . S o about a penny on every loaf of bread or that
would be the most-----Mr. W il s o n . The wheat situation is fairly stable. We are now
well into the winter wheat harvest. Over % of all the wheat we
grow in this country is winter wheat. As of last Sunday, we had
harvested 65 percent of that crop, so that the crop harvest is well
ahead of normal, one of the reasons is that in this dry weather you
can get the combines out into the field and get the crop off.
In Oklahoma they have got an excellent crop. In several other
States the wheat crop looks fairly good. Now, the problem in wheat
is related to the spring wheat crop which was planted this spring
and is now developing up in the Northern Plains States and there
is no question that when you look at the spring wheat crop, there
will be some substantial losses.
Chair O a k a r . Let me ask you, are there any conditions currently
severe enough to warrant Federal emergency relief to the drought
stricken areas?
Mr. W il s o n . The Department of Agriculture has implemented a
lot of emergency programs. Essentially those programs are provid­
ing additional hay and forage. We are doing that in over 1,800
counties.
We also have an emergency feed program and an emergency feed
assistance program, one of which provides cost sharing when the
farmer buys feed, another of which provides Government owned
grain at a subsidized price. Those programs have already been put
into effect.
Chair O a k a r . Well, how do we protect the consumer if we see
that there aren't emergency needs that need to be remedied, other
than what you have described, and we shouldn't be overly appre­
hensive about the increase in places, that it will be somewhat
modest increase based on the situation, then who protects the con­
sumer from possible food companies and food processors? How do
we avoid those individuals overtaking the market in such a way as
to increase their prices without the justification?
Mr. W il s o n . The food processing industry is a highly competitive
industry. If we had situations where we had one company or a
small number of companies controlling the entire markets, then
there may be reason to be fearful. But that is not the situation. We
have a lot of companies engaged in the business and there is very
vigorous competition between those companies. So, I just don't see
any real threat of food prices being driven up by profiteering of the
food processors.
Chair O a k a r . Mr. Seale, would you want to comment on this?
Because on page 2, you talk about—let me just read the section,
because I think I have to go through the whole section.




21

“ In response to the drought insuring price volatility, the CFTC
has intensified its surveillance efforts on several fronts. Our
market surveillance staff is monitoring the markets for any indica­
tions of price manipulation and for violations of the CFTC specula­
tive position limit rules."
Would you like to describe what that is?
Mr. S e a le . Madam Chairman, in the grains there are limits to
the size of a position, either long or short, that a speculator might
hold. These limits are essentially 3 million bushels in soybeans and
wheat and in the spot month and in all months combined they are
somewhat larger than that.
Our staff, on a routine basis, weekly basis, looks at what we call
the Federal spec limits, those limits that we administer, and adopt
via CFTC rulemaking to determine if, in fact, any speculators are
in excess of those limits, either long or short. We have not found
violations of that nature.
Chair O a k a r . Y ou are closely monitoring, obviously from your
testimony, and your remarks today, you are really closely monitor­
ing this situation, correct?
Mr. S e a le . Madam Chairman, price volatility is a signal to us
always and that signal, in fact, triggers numerous things at the
agency, including increased market surveillance of those markets.
We will continue to do that until, in fact, the volatility looks some­
thing like normal, or what we would be used to in a normal year
and which would mean that we would be looking at these markets,
I would assume, for the ensuing 12 month period on a very, very
close basis.
Chair O a k a r. To what extent—for both of you gentlemen—to
what extent does the Agriculture Department, in terms of your
staff, for example, Mr. Wilson, relate to what Mr. Seale is doing in
terms of what he just described? Do you communicate? Are you
briefing each other? I would think that in a time like this you
would be more in communication than ever before.
Can you describe how you comprehensively have an overview of
the situation?
Mr. W il s o n . We do have a regular liaison between the Depart­
ment of Agriculture and the CFTC. That liaison is conducted be­
tween people who report to me and the surveillance people over at
CFTC. I know they communicate weekly and often participate in
the CFTC meetings. We exchange information. I talk to Commis­
sioner Gramm periodically, so we do have a fairly close working re­
lationship.
Chair O a k a r . Mr. Seale, on page 4, at the bottom of the page,
you talk about your surveillance and oversight procedures and that
the Exchange conducted adequate function surveillance of mem­
bers and they contact firms when necessary. Under what condi­
tions would you contact firms necessary to verify their margins
and compliance? What would trigger your wanting to contact a
firm?
Mr. S e a le . Madam Chairman, would you give me a second and
let me read the sentence we are referring to here?
Chair Oakar . OK.

Mr. S e a le . We would be interested basically in two things. The
first one would be concentrated positions; that is, if a carrying




22

FCM had extremely large portions of the market within that firm,
whether it is combination of customer accounts or propriatary trad­
ing.
The second thing we would be interested in is we have capital
requirements for our futures commission merchants who are our
registrants and do business with the public, and we are continually
monitoring these firms to see that they are in capital compliance
and have sufficient capital to carry the size of the position with
which they are carrying.
Chair O a k a r . Have you in the last month or so had to contact
any firms? You don’t necessarily have to go into who they are, but
I am just curious. Are there any firms that you have contacted?
Mr. S e a l e . Madam Chairman, I have Paul Bjarnson, who is our
chief accountant, with us. Let me ask him to respond to that ques­
tion, if I might.
Mr. B j a r n s o n . Generally, we follow what the exchanges do in
this regard. For example, in the case of the Chicago Board of
Trade-----Chair O a k a r . Would you like to just pull up a chair for a second
there? It would probably be easier.
Mr. B j a r n s o n . It is the staffs of the exchanges, such as the Chi­
cago Board of Trade, in this case where the markets that are so
volatile that follow the financial positions of the firms. In the case
where the market is moving against the positions of a firm, the ex­
changes can anticipate when there is a large margin call going to
be made, and what they worry about is whether or not the firms
are going to be able to meet the margin call at the clearinghouse.
There have been occasions over the last month when they have
been contacted. But in no case has there been any failure.
Chair O a k a r . Why did you contact them?
Mr. B j a r n s o n . Our records show what the capital, the size of the
capital positions is, and, for example, if a firm has $3 million in net
capital and they are anticipating that a $6 or $7 million margin
call will be made, then they would call a firm to find out who the
customers are that need to bring the margin in and whether those
customers are expected to meet the margin call.
Chair O a k a r . Are expected to what? I am sorry.
Mr. B j a r n s o n . T o find out whether the customers are expected
to meet the margin call.

For example, in the current market many of the large firms,
rather, many of the large customers that have to meet the margin
calls are large commercial firms. So where the customer is a large
grain processor, a margin call of $20 million wouldn’t be large for
that customer.
Chair O a k a r . When you—you are an auditor, is that correct?
Mr. B j a r n s o n . I am the chief accountant. We have a staff of
auditors at the Commission.
Chair O a k a r . Right. When you contacted these firms what con­
vinced you that everything is fine? How—what standards do you
have to monitor this? Can a Member of the Banking Committee—I
guess we are more aware of—not that it is totally comparable I
know the rivalry between Wall Street, Chicago and so on. But it is
a false one, but nonetheless, we are somewhat more familiar with




23

how that is operated and some of the problems we have had recent­
ly.
I am just wondering how—you don't hear too much about the
oversight of this exchange and how it is monitored. That is why I
think for the benefit of the committee, since it could have a tre­
mendous impact on the consumer and on prices, I just thought
maybe you would go through the process somewhat for us.
Mr. B j a r n s o n . OK. Well, over time, we have had many volatile
markets. These firms have a known history to our staff and the
staffs of the exchanges. We receive regular financial reports from
the firms. The annual financial statements are audited so we know
we can rely on the correctness of the financial statements.
We also coordinate with our Division of Economic—the Commis­
sion's Division of Economic Analysis, and look at who the large
traders are.
There is also a known history of certain large customers that
appear regularly as holding large positions.
So at any point in time, such as the recent volatile market, the
firms that have large margin calls to meet at the clearinghouse as
well as many of the large customers—or rather, large traders is the
correct term—who have to meet these margin calls, they are not
new actors. They are not new players.
So, through a learned history of experiences with these firms and
large traders, and our experience with the exchanges, we can de­
velop a feel for when there might be a problem.
Chair O a k a r . Have you ever—I don't know how long you have
worked at your present place of employment, but have you ever
found any that you felt were problematic?
Mr. B j a r n s o n . Well, we have had occasions when there have
been margin problems, such as the case in 1983 of Volume Inves­
tors Corp., which is not in the agricultural products. That was a
case in metals markets.
Chair O a k a r . Mr. Seale, what do you do in a case of any per­
ceived abuses? Do you try to profit or do you import it to another
agency or-----Mr. S e a l e . Well, Madam Chairman, the problems with what we
are talking about here is a problem of a clearing firm not having
cash to put in a margin call. That is pretty obvious. You are going
to know that overnight. The best of all worlds solution is basically
a transfer of those positions to another carrying of FCM and get
the fellow who doesn't have any money left, and has used his cap­
ital out of business.
It is pretty rare that we have had situations occur where there
hasn't been a voluntary dissolution of a business. Oftentimes a firm
will recognize its approaching financial problems and will say I
want to sell my customers. I want to transfer my customers. I want
to move someplace else, along with the original margin.
The marketplaces have been unique in the fact that there have
not been enormous customer losses, nor defaults. There haven't
been problems in these marketplaces. Over the years the problems
we have seen have basically been isolated, and have been fairly
small problems.
The clearinghouses that hold the money, particularly at the
larger exchanges, have become very, very sophisticated. At the




24

smaller exchanges they are very sophisticated in getting the finan­
cial integrity of the marketplace issue resolved on a daily basis. We
have not seen, and don't anticipate seeing, problems with collection
of margin on a day to day basis in these markets.
It is always in every clearinghouse's, every exchange's best inter­
est to see that the pot is right at night before you trade tomorrow,
because you really can't trade tomorrow, and, in fact, it is sort of a
self-destruction to allow yourself to fall into a situation where your
clearinghouse isn't collecting margin, has not been a problem.
The exchanges in the United States are unique in the fact that
they are old and they tend to know their customers to a great
extent. Some of the exchanges are 140-150 years old. Several of
them are over a hundred years old. They have become extremely
sophisticated in being able to identify what they think might be
problems and resolving those problems before they reach the level
of being a problem.
Chair O a k a r . S o you don't have any Ivan Boeskys in your ex­
change, is that what you are telling the Chair?
Mr. S e a l e . Madam Chairman, I don't mean to imply—let me say
that Mr. Boesky was a participant in the futures market, although
he was not a problem in those markets.
Chair O a k a r . I didn't know that, but you don't have that kind of
manipulation that—have you ever seen anything-----Mr. S e a l e . There have been from time to time manipulation
cases brought by the predecessor of the agency which was*at the
USDA before 1974, and there have been manipulation cases
brought by CFTC since 1974. They are not our bread and butter
kind of business at the CFTC. They are very, very rare occurrences
when you see one that a person attempts to manipulate a market­
place.
Chair O a k a r . Just one last question before I turn it over to my
friend, Ms. Kaptur.
The USDA report is going to come out in the near future. Are
you setting up—I would think in this climate you would be on the
alert, maybe a little more sensitive than you might be otherwise.
Maybe you are always monitoring with the full impact of what
monitoring is supposed to produce, but are you taking any special
precautions at this point in time in anticipation of that report?
Mr. S e a l e . Our Authorizing Act of 1974 provides for liaison with
the USDA. We have had for some 4 or more months now regular
participation by the USDA personnel in our Friday surveillance
meetings, and we look forward to continuing that, as long as the
market volatility remains, in the future.
Very frankly, I suspect that if you were to ask a surveillance
economist how you make a living, they would say we go to where
volatility is. There is volatility in those markets and as long as
there is volatility there there is going to be close scrutiny.
There is also the issue in these markets that we are dealing with
something that everybody has got to do, and that is eat, and as a
consequence, I think there is some overtone of urgency of our
taking a look at these and we will continue to do that over the next
few months as diligently as we have over the past few.
Chair O a k a r . Really, the futures trading really was completely
agricultural, as I recall, and now there is a tremendous diversifica­




25

tion where you are dealing now with raw materials and currency,
foreign currencies, and commercial interest rates. I don’t mean
you, but the monitoring that you have to do is a little different
than it was 10 years ago. Am I correct about that?
Mr. S e a l e . Markedly, markedly different. But the agency’s roots
are in the Department of Agriculture and a number of individuals
that we still have on our staff in 1988 came to the agency when it
was formed in 1974 from the old CEA, which is at the Department
of Agriculture. We pay very particular attention to agricultural
commodities.
Chair O a k a r . But see, I think there is a relationship between the
agricultural commodities and the whole issue of trading, and possi­
bly the area of currencies and interest rates, which are now becom­
ing more and more obvious in terms of the Futures Trading Com­
mission—at least it should be more obvious.
I don’t know to the degree that you can compare it with Wall
Street in some of these areas, but I will tell you something. I am
guessing we haven’t done enough in this area to take a look at it. I
don’t even cast any negative aspersions at all on the work you are
doing. I am just saying that I think this is an interesting time,
where we really should be doing more oversight hearings on what
is going on.
Ms. Kaptur.
Ms. K a p t u r . Thank you, Madam Chair.
I first want to commend the Chair for being the first subcommit­
tee Chair on the Banking Committee to hold hearings in this ex­
tremely important area. I think our financial system is not only
being affected but will be affected by this and I appreciate the wit­
nesses being here today.
I wanted to ask Mr. Wilson—I read your testimony even though
I was not here for it. I am interested in worst case scenarios at this
point. I come from northwestern Ohio. We are in the extreme des­
ignation by the Department of Agriculture now, extreme to severe,
but believe me, it is severe. Everything is burned up. We have lost
our corn, at least in my district. I don’t speak for every area in
Ohio, but we have had no rain since May. This has never happened
in the history of our area. So it is becoming serious. Our lake has
dropped 18 inches. A lot of our wells are starting to dry up.
I am curious, first from a national standpoint. Let’s say that we
get no rain. How long do our supplies hold out before we have to
start importing more and paying for more imported goods, whether
they be beef or grains?
Let’s say that nothing changes this year. We continue to draw
down existing supplies and then we have a drought next year. How
long do we have? Not being on the Agriculture Committee, I am
not someone who follows that that closely. But could you set this,
drawing a worst case scenario, how long do we have in terms of our
built-up supplies? How long will it take us to draw them down?
Mr. W il s o n . We have pretty good stock levels right now for our
major commodities. Wheat stocks^reLplentiful and we are well into
the winter wheat harvest. Almost % of the winter wheat crop is
already in the bins as of this past weekend. So as you look at that,
we have today more than 2 billion bushels of wheat. If we didn’t
harvest a single additional bushel from here on out—and of course




26

we will complete the winter wheat harvest—we would have enough
to keep us going for 10 to 12 months.
Ms. K a p t u r . In other words, you might not anticipate a price in­
crease until sometime-----Mr. W il s o n . Y ou will see price increases if the market believed
we were never going to have another harvest, and certainly you
would have problems.
As we look at corn, we have plenty of corn. On June 1 we went
out and we measured that. We had 5.8 billion bushels then. We
won't start the new corn harvest until September of this year, but
even at that point we should have well in excess of 4 billion bush­
els left. At that point that would be enough to keep us going for 6
months, if we didn't harvest a single bushel out of this crop.
But as we look at history, we have never had a year where we
had a yield reduction of more than 28 percent. So you say, well,
this is the worst year on record, and what happens if we have a cut
of 33 percent? And we have taken a look at that. If we did that, we
would still have a corn crop of 4.9 billion bushels. So you add the 4
billion bushels we will carry into the new crop year with the 4.9
billion, you are up close to 9 billion bushels of corn. We have never
used that total amount in a year domestically plus satisfying all
our export customers.
So we are not about to run out. Now, we are going to see sub­
stantial losses in certain areas. Ohio has been very, very hard hit.
The Eastern Corn Belt is the area of the country that just hasn't
seen any precipitation for well over a month now, and that is a ter­
rible problem.
Chair O a k a r Will the gentle lady yield on that, because your
line of questioning was similar to what I asked. I guess the issue
here is that what we are trying to do really is establish a kind of
record on this whole issue. I know you can't predict every little
thing that is going to take place in the future, but I think this opti­
mism which we hope takes place, we hope is warranted I should
say, is terrific, but it is on the record.
So I think from time to time we are going to be having hearings
on these and other interrelated issues, and make some judgment
comparisons.
Ms. K a p t u r . I think that you are an excellent witness. You an­
swered my question and you gave me some outer time horizon to
look at. I hope it wasn't repetitive based on what the Chair asked.
Chair O a k a r . N o, no. It was an important question.

Ms. K a p t u r . Could you also give me some idea on what has been
happening? We have got the people here from the Commodity Fu­
tures Trading Commission. I have not been monitoring the prices
as closely as I could on the Chicago markets, but are we yet seeing
any reflection in the marketplace of a rise in a commodity like
bread? Is any of that happening yet?
Mr. S e a l e . I don't understand the question.
Ms. K a p t u r . Based on the market's anticipation of future draw­
downs in supply, are we yet witnessing any price inflation in any
sector due to—or is it too early?
Mr. S e a l e . That is Mr. Wilson's question.
Ms. K a p t u r . There is a relationship between what is sold over in
Chicago and what happens to bread in Toledo?




27

Mr. W il s o n . The latest price estimate we have—and these are
put out monthly by the Bureau of Labor Statistics—is for the
month of May. Price of white bread in the month of May was up
6
/io of 1 percent. That is prior to the onset of this drought, but
there had been some increase in wheat prices at that point in time
simply because our stock levels this year were lower than they
were a year ago.
There was no anticipation at that time in May that the drought
would be quite so severe. It was too early in the season.
Ms. K a p t u r . With the storage that we have, with the commod­
ities in storage now, would you anticipate that the markets would
reflect any price increase or are they going—from your knowledge
of what has happened in past years, are they going to remain fairly
steady through the rest of the year?
Mr. W il s o n . We think there will be some impact, but we think
the impact will be moderate. If we look at bakery products and ce­
reals, things that are made out of wheat, typically the farm price
of those products accounts for about 8 percent of the retail value of
those products. So if you have prices at the farm gate going up by
30 percent, that would be equivalent to about 2.4 percent at the
retail level.
We will see some of that price increase at the retail level, be­
cause of this drought, but I don't think it is going to be any case of
runaway prices. The overall inflation for food will be fairly moder­
ate this year.
Ms. K a p t u r . Would you expect that that would effect all food
categories equally or do you think it would reflect it more in prod­
ucts that have a lot of grain? It is obviously affecting livestock al­
ready. I haven't seen what has happened to beef prices but imagine
we are getting a temporary decline, temporary.
Mr. W il s o n . That is exactly right. The situation for beef people
right now is that they don't have any way of maintaining these
animals. They are short of forage.
Ms. K a p t u r . What about poultry?
Mr. W il s o n . Poultry we had seen some price run-ups prior to
this, but I don't think that was associated with the drought. Now,
to the extent that it is going to be more expensive to feed poultry
because corn prices have gone up, and soybean meal prices have
gone up, that is going to have an impact on future production of
poultry. It will discourage growth in that industry and by the end
of this year, we could see some increases in poultry.
Ms. K a p t u r . Thank you for that.
I did have one other line of questioning, Madam Chair, I would
like to pursue just a second here with the people who came from
the Commodity Futures Trading Commission.
Your chairman—is it Mr. Gramm? Chairman Gramm is on that
Interagency Drought Policy Committee, I believe. Is that correct?
Mr. S e a l e . Chairman Wendy Gramm is on the committee, yes.
Ms. K a p t u r . All right. Do they meet on a weekly basis?
Mr. S e a l e . I am uncertain of their meeting. They met—to my
knowledge, they are meeting weekly.
Ms. K a p t u r . I would like to give you an issue to take to that
group. We have our own Congressional Drought Task Force here. It
is an issue I am particularly concerned about, coming from the




28

Eastern edge of the Corn Belt. That is, if things don't get any
better, how we are going to provide liquidity to the markets in the
trading that is occurring?
I come from a district that sits on the Great Lakes and we have
many elevators. We have participants, companies that participate
in futures trading very heavily, because we store the grain, and we
ship it from my district. So we have very large elevators. Most of
these companies have to get their financing out of New York from
major financial institutions. Since May their margin calls have
been very heavy, multi-millions of dollars at this point.
I guess I haven't heard much from the administration on this,
nor from Congress, but I think, depending on how things go, we
will probably hear more. If you could do me a favor, from the exec­
utive side, that would be to introduce the issue of liquidity to the
markets in the weeks ahead, how are we dealing with that?
I am particularly concerned with the grain trade, obviously,
there. There is a national, I think it is called National Grain and
Feed Association or Feed and Grain Association, and most of their
members are getting caught in this. I think we have to look very
closely now at some of the financial questions that would involve
the New York Federal Reserve and at least anticipate a worst case
scenarios if we don't get rain, and what is going to happen to a lot
of these firms.
I think the banking system has a very important role to play
here. I think it is an issue that at least one could look at in the
context of an interagency task force. I think that really falls on
your shoulders, Mr. Seale.
Mr. S e a l e . I would be happy to bring the matter to Chairman
Gramm's attention. However, do be advised we have nothing to do,
as an independent regulatory agency with the cash marketing of
grain or the financing of grain. But I will bring that to her atten­
tion.
Ms. K a p t u r . Fine. I brought it up with the chairman of the full
committee today and I came here today specifically to do that, be­
cause when the October 19 situation hit, really it was the New
York Fed that operated with a cool head and they had anticipated
and they were prepared to keep liquidity in the markets.
So you are the first people I have been able to get to who serve
on the executive side, so that is why I am presenting it to you. I
think there may be difficulties. In fact, I think the gentleman in
the beige suit there—I didn't catch your name—the accountant,
you mentioned some calls had been made concerning margin calls
these past several days.
Mr. S e a l e . We have not seen a problem at this point with the
pace and collection. All margin calls have been met on a timely
basis, and are being met.
Ms. K a p t u r . Right. There is some screaming among the smaller
firms that it is really getting tight. I am saying even some of the
larger firms, they are really monitoring this now and they are wor­
ried.
Mr. S e a l e . I thoroughly agree, and it takes me back to my days
as a university professor when I would explain to the banking
sector vociferously that once a hedge was on, in fact you had to
hang with your commercial end and make money available for var­




29

iation margin payment no matter which way the market went. I
think—certainly I will be happy to bring that to Chairman
Gramm’s attention.
Ms. K a p t u r . Thank you kindly.
Thank you, Madam Chairman.
Chair O a k a r . Thank you.
I just want to ask one more question about this wheat issue.
First, let me ask you an easier question. Are we experiencing a
worldwide drought situation that could have an impact on our
trade with other countries?
Mr. W il s o n . The crop conditions in other areas of the world look
about normal. The Canadians, of course, are suffering from the
same weather pattern that we are suffering from, so if you look at
some of the western wheat growing provinces of Canada, particu­
larly close to the United States border, they are suffering and have
experienced some loss in their spring wheat areas. When you go
north in Canada, they do have pretty good rainfall. So it is fairly
localized.
Chair O a k a r . I am going to put in the record this map that
really in kind of a nutshell—I am not sure it is totally detailed—
but at least in general terms it goes into the drought’s worldwide
trade impact and shows India, for example, and China, are experi­
encing this kind of drought, and Africa—that our drought may
affect the famine in Africa because we may not be able to market
the grains that we potentially should have, but may not have.
That is why I want to get back to the spring wheat crop, winter
wheat crop issue. The drought, you mentioned, has severely dam­
aged the spring wheat crop. Am I correct about that?
[The map referred to above entitled “ Drought’s Worldwide Trade
Impact” can be found in the appendix.]
Mr. W il s o n . We will get a better assessment of that next week
when we come out with the July crop report, but based on what we
know at this point of the season, we would have to assume that
there has been some substantial damage.
Chair O a k a r . Well, the winter wheat crop is being harvested
now and as a result, it is not hurt yet, correct?
Mr. W il s o n . The winter wheat crop looks fairly good.
Chair O a k a r . That accounts for % of the Nation’s wheat produc­
tion, correct?
Mr. W il s o n . Yes.
Chair O a k a r . Doesn’t that then argue against these price in­
creases and shouldn’t that be reflected in the trading on the com­
modity exchanges?
Mr. S e a l e . Wheat futures have risen less than other futures,
that is, corn, oats and soybeans. We are not in a position, as the
CFTC, we don’t make absolutely price judgments other than does it
appear to be an equilibrium price, which is supported by funda­
mentals in the marketplace. Our visualization or our view of the
market is that that is the case.
Chair O a k a r . What is the case? I am sorry.
Mr. S e a l e . That the prices, the futures prices that one is current­
ly seeing in the marketplace are in fact not manipulated and in
fact are true equilibrium prices that are supported by fundamen­
tals.




30

Chair O a k a r . All right. I mean, if you feel that it is not being
manipulated, or you don't anticipate it being manipulated. But I
asked the question because to the extent we are able, we are going
to try to monitor these kinds of activities a little more closely. I
think we can be justly criticized—Congress—for not having more
oversight over these kinds of activities, to the extent that we have
more oversight over other kinds of exchanges. I think we should, I
really do, particularly now that we see the impact of a drought or
are beginning to sift through that impact.
So I am glad to hear you say that. I just hope it is accurate in
whatever the fundamentals are that you mentioned. Maybe for the
record you could just put in some standards or points that refer to
that kind of oversight.
Mr. S e a l e . I would be happy to supply for the record why we be­
lieve the price is an equilibrium price.
Chair O a k a r . Sure.
Mr. S e a l e . A s we see it, the current volatility is not without his­
toric precedent. The marketplace behaved the same way that it is
behaving now in the last drought, which was 1983. The impact of
that drought obviously wasn't as broad as this one, but I will be
happy to do that for the record.
Chair O a k a r . Thank you.
Thank you both very, very much. I appreciate your coming at
such short notice. It is deeply appreciated by the Chair.
Thank you.
[Whereupon, at 4:30 p.m., the hearing was adjourned, subject to
the call of the Chair.]







31
APPENDIX

WEDNESDAY, JULY 6, 19 88

32
Testimony of
Honorable William E. Seale
Commissioner
Commodity Futures Trading Commission
July 6, 1988
Before The
Subcommittee on Economic Stabilization
of the
House Committee on Banking, Finance, and Urban Affairs




33

Madam Chair and members of the Subcommittee, I am pleased to
be here today to provide the views of the Commodity Futures
Trading Commission.

I will briefly explain how the Commission's

surveillance of the agricultural futures markets has responded to
the drought-induced price volatility in those markets, and I will
be pleased to answer any questions you may have.

As the federal regulator of commodity futures markets, the
Congress has charged the CFTC with the responsibility of
maintaining the economic utility of futures markets by
encouraging their competitiveness and efficiency, by ensuring
their integrity, and by protecting market participants against
manipulation, abusive trading practices and fraud.

Through the

maintenance of fair and freely competitive markets, the CFTC
better enables the futures markets to perform their economic
functions of price discovery and risk shifting.

During the past two months— but particularly in June— agri­
cultural futures markets have been buffeted by the changing
prospects of a severe drought in this country's most productive
croplands.

Prices of grain and soybean complex futures rose

rapidly until about the third week of June.

Although prices have

retreated somewhat in response to some rainfall, cooler weather,
and ample near-term supplies, the markets have remained quite
volatile.




34
2

For example, from May 22 through June 23, 1988, new crop
corn futures prices increased 53 percent, soybean futures prices
increased 48 percent, spring wheat futures prices increased 43
percent, and oat futures prices increased 108 percent.

As market

participants collectively try to assess the severity of the
drought, its impact on U.S. production, and the effect of higher
prices on the export and domestic demand for these commodities,
the markets react swiftly to new information— particularly
weather reports.

We expect this volatility to continue until the

extent and impact of the drought is better known.

In response to the drought and ensuing price volatility, the
CFTC has intensified its surveillance efforts on several fronts.
Our market surveillance staff is monitoring the markets for any
indications of price manipulation and for violations of the
CFTC's speculative position limit rules.

The CFTC financial

surveillance staff is monitoring the financial condition of
futures commission merchants with respect to the minimum capital
requirements and the segregation of customer funds.

In addition,

the CFTC's contract markets staff has expanded its monitoring of
floor trading practices.

Chairman Gramm also is participating in

the Presidential Interagency Drought Policy Committee.

At weekly surveillance briefings and on a special request
basis, the Commission has been advised by senior staff of ongoing
developments in agricultural markets.




Our surveillance emphasis

35

has been on these markets since the prospects for a severe
drought emerged.

The Commission has been advised of large-trader

positions, price trends and significant market news regarding
these agricultural futures markets.

Representatives of the U.S.

Department of Agriculture have attended these meetings as part of
our interagency liaison activities and have provided insights
regarding market developments.

Our surveillance of the agricultural futures markets during
this period of rapidly rising and volatile futures prices has not
disclosed any evidence of price manipulation.

Nor has our

surveillance staff encountered any unusual problems enforcing the
Commission's speculative position limit rules.

It is worth

noting that the largest individual futures positions in the grain
and soybean markets during the major price advance were short
rather than long.

During this volatile period these positions

were held by large grain merchants to hedge their grain
inventories and forward purchases.

The largest share of the long

positions in the markets were held by smaller traders with
positions below the Commission's reporting level.

For the near term at least, the current high levels of
trading volume and widespread participation tend to reduce the
potential for the activities of one trader to affect the market.
Furthermore, the Commission does not have any serious concerns
over the availability of deliverable supplies.




While the drought

36

4

may significantly reduce this year's crops, it should not affect
free market supplies until late this year or next because of the
large supplies carried into this crop year from prior harvests.
In addition, to the extent that higher prices attract grain from
government stocks or farmer-owned reserves, free market supplies
may be augmented significantly in the near term.

In fact, the

current liquidations of July 1988 grain and soybean futures
contracts have experienced large deliveries thus far.

The Commission's market surveillance staff will be
monitoring closely the deliverable supply situation as well as
the activities of large traders in these markets in the coming
months to detect any evidence of a threat of manipulation or of
any other form of major market disruption.

The Commission also

will continue its review of these markets through its weekly
surveillance briefings and special briefings, as circumstances
may warrant.

As I previously mentioned, during this period the Commission
also has intensified its financial and trade practice
surveillance, as is the normal practice whenever volatile markets
develop.

Specifically, based upon preset parameters the

Commission's financial audit staff initiated its "major market
move” surveillance and oversight procedures to

ensure that the

exchanges are conducting adequate financial surveillance of
members and to contact individual firms where necessary to verify




37

5

the collection of margins and continued compliance with the
Commission's segregation and capital requirements.

Also, as

deemed necessary, on-site visits to firms are being made.

While cash flows at the clearing organizations of several
futures markets have increased significantly due to the increased
price volatility in their agricultural futures and option
contracts, no financial problems have developed.

Commission

staff has confirmed through frequent contacts with the respective
clearing organizations the timeliness of the collection of the
daily settlement cash flows during this period.
been identified.

No problems have

Furthermore, the exchanges have provided

reports indicating that the cash flows, although very large, have
been handled by the clearing system routinely.

In this connec­

tion it is useful to note that the two largest futures exchanges
routinely assess intra-day margin settlements on their clearing
member firms, which tends to reduce settlement cash flows and to
alleviate potential strains on their clearing systems.

In addition to increasing their financial surveillance, the
grain exchanges also have increased margins in response to the
increased price volatility prevailing in the grain and soybean
complex futures markets.

Initial speculative corn futures

margins, for example, have increased from $750 to as much as
$1,800 per contract, and soybean futures margins have increased
from $2,000 to $5,250 per contract.




38
6

The Commission's contract markets staff also expanded its
monitoring of floor trading practices by establishing an
increased presence on the trading floors.

Specifically, the

Commission staff has been monitoring the opening and closing
periods of trading in the grain markets in addition to observing
other periods during each trading session.

During floor

surveillance, Commission staff observe trading for possible
illegal activity, converse with market participants about trading
activity generally, and follow up any information they may obtain
on rumors or problems which may require further investigation.
To date, no problems have been identified.

Thank you for the opportunity to appear before the
Subcommittee.

I would be pleased to answer your questions at

this time.




39

Statement o f Ewen M. Wilson
Assistant Secretary f o r Economics
before the
Subcommittee on Economic S t a b iliz a tio n
Committee on Banking, Finance, and Urban A ffa irs
U.S. House o f R epresentatives
Washington, D. C. 20515
July 6, 1988
Madam Chairman and Members o f the Subcommittee, I a ppreciate the
opportunity to appear before you at th is hearing to d iscu ss the impacts o f the
drought on major commodities and p r ic e s , and the im plications f o r food
supplies and p rice s.
Overview
Unusually intense drought fo r th is stage o f the growing season has spread
over much o f the farm land.

The 30-day weather fo re ca s t issued la s t Wednesday

indicated continued dry conditions in the Eastern Com B elt.
caused great turbulence in the commodity markets.

The drought has

The drought a lso has

disrupted barge t r a f f i c , reduced power generation and increased the lik e lih o o d
o f fo re s t f ir e s .
Major Commodity Markets Reacting Sharply
As a result o f the drought, cash grain p rice s are up sharply sin ce ea rly
May--up a third fo r wheat, t h r e e -fift h s f o r co m and nearly double fo r oa ts.
Cattle p r ic e s , however, are down r e fle c tin g d is tr e s s sales because there is
not enough forage fo r herd maintenance in some areas o f the country.

At the

beginning o f June, pasture and range con dition s were rated at 68 percent o f
id e a l, the lowest rating f o r th is time o f the year since 1934.

Pasture

con dition s in the Northern Plains were p a r tic u la r ly poor with severe drought
reported in North Dakota.




40

-

USDA Response.

2

-

The Department o f Agriculture has taken action to a lle v ia te

the d is tre s s o f c a t t le producers.

As o f July 5, 1,819 counties in 36 states

have been approved f o r emergency haying and grazing of land idled under annual
commodity programs, that i s , acreage conservation reserve (ACR) and
conservation use (CU) acres.

Secretary Lyng also announced that producers in

these same cou nties s u fferin g from severe drought w ill be authorized to
harvest hay f o r a 30-day period on land in the long-term Conservation Reserve
Program (CRP).

A lso, 323 cou nties in 20 states have been approved fo r

p a rticip a tio n in the Bnergency Feed Program and the Bnergency Feed Assistance
Program.

The Bnergency Feed Program provides cost share assistance by the

Commodity Credit Corporation (CCC) fo r liv estock producers who must purchase
feed in excess o f normal purchases due to production losses.

The Bnergency

Feed A ssistance Program allows producers to purchase surplus, government-owned
feed at reduced p r ice s .

In addition producers in 54 counties in 12 states who

had previou sly en rolled in the 1988 wheat and feed grain programs are e lig ib le
to receiv e program payments on acreage which could not be planted because o f
dry co n d itio n s.
To a lso help c a t t le producers hurt by the drought, the Secretary announced
on June 27, 1988 that an add ition a l $50 m illion has been set aside under
S ection 32 a u th ority to purchase meat f o r domestic food assistance programs.
This w ill help sagging beef p rices as a result of d istress sa les. On the same
day, the Secretary announced that producers with farmer-owned-reserve (FOR)
loans could repay those loans without having to pay a penalty.

The reserve

was triggered on June 27 when the 5-day average national p rice o f com reached
$3.05 per bushel.

This la s t a ction w ill b en efit both crop and liv e s to ck

producers.




41
- 3 Livestock and Poultry.
c a tt le p r ice s .
e a rly May.
one-fourth.

Despite these a ctio n s , d is tr e s s sales have forced down

The p rice o f u t i l i t y cows is down sharply from $50 per cwt in

Cows are currently s e llin g f o r around $40 per cwt, down nearly
Continued liq u id a tion o f the c a t t le herd w ill add to beef

su p plies, p a rticu la rly processing grade b eef, and w ill lead to lower p rices
than otherwise would have occurred.
Overall supplies o f red meat and pou ltry are record large th is year and
the short-term impact o f the drought w ill be to add to these su p p lies.

Heat

stress could lim it rates o f gain of liv e s to ck and pou ltry on feed, but th is
w ill be more than o ffs e t by additional marketings.

Higher feedgrain and

soybean p rice s have a ffected liv e s to ck feeding p r o f i t a b i l i t y , and i f those
higher p rice s continue, w ill lead to a reduction in the size o f the national
herd.

Smaller c a ttle and hog numbers mean le s s meat production in future

years, but the re ta il price impact of such reduced supplies w ill not be f e l t
u n til next year at the e a r lie s t.

I f pou ltry flo c k s are reduced, the impact on

poultry p rice s could come sooner--by the end o f the year.
Feedgrains.

The impact o f the drought on the liv e s to c k and pou ltry sectors

depends, to a large extent, on the le v e l of feedgrain and soybean p r ic e s .
Currently, 10 o f the 17 major corn-producing sta tes have a fourth o r more o f
the co m crop rated poor or worse, compared with none la s t year.

Corn p rices

are cu rrently around $3 per bushel compared with about $2 in A p ril.

However,

p rojected stocks o f 4.1 b illio n bushels ca rried in to the 1988/89 marketing
year sta rtin g September 1, 1988--the second la rg est carryin stocks e v er--a re
expected to temper further price in creases.




42

- 4 The key to avoiding runaway p rice increases in the com market w ill be
access to CCC-owned and FOR stock s.

Catalogs lis t in g C C stocks availa b le to
C

the trade are p e r io d ic a lly being issued.

Stocks pledged as c o lla t e r a l fo r FO
R

loans are a v a ila b le through the use o f commodity c e r t ific a t e s at or b efore
loan m aturity.

I f CCC and FOR stocks continue to be made ava ila b le to the

market, then the damage to the liv e s to ck feeding and poultry sectors can be
contained.
On June 27, co m p r ice s rose to the level needed to allow farmer-owned
reserve loans to be repaid b efore maturity.

Over 1.2 b illio n bushels o f

reserve co m loans can p r o fita b ly be redeemed and brought onto the market.
Wheat.

The winter wheat harvest is well underway.

percent o f the w inter wheat crop had been harvested.

As of la s t Sunday 65
Normally 44 percent of

the crop is harvested by th is time. Winter wheat usually accounts fo r
th ree-fou rth s o f a ll wheat produced in the United States and the combination
o f an e a r lie r than normal harvest and carry-over stocks from la st year o f 1.27
b i l l i o n bushels on June 1 is an assurance of s u ffic ie n t supplies to meet
domestic and export needs.
The spring wheat crop , which normally accounts fo r one-fourth o f U.S.
production , has been damaged, and durum wheat and oats grown in the Northern
Plains have been e s p e c ia lly hard h it.
The prospect o f reduced wheat y ie ld s has driven up Kansas City wheat
p r ice s by more than a third since ea rly May.
have increased much more than th is .

Prices o f durum wheat and oats

Substantial increases in wheat p rices

were expected during the 1988 crop year, even p rior to the onset o f the
drought.

The Department's early-season estimates indicated demand would




43
- 5 exceed production by 450 m illion bushels, leading to a 10- to 25-percent ris e
in season-average farm p rices o f wheat.

With the drought, the drawdown in

stocks could be even greater than th is .
I f the drought p e rsis ts and wheat p rices go even higher, there w ill be
some additional pressure on r e t a il p r ice s o f bakery products and ce re a ls .
However, farm -level prices account f o r only 8 percent o f the r e t a il value o f
cerea l and bakery products.

If wheat p r ice s f o r the e n tire season average 30

percent above la st year, th is alone would tran sla te in to a 2.4-p ercent r is e in
the r e t a il price o f cereal and bakery products.

Actual p rice increases would

a lso depend on changes in other processin g and marketing charges.
Soybeans.

The soybean crop is g en era lly rated f a i r to poor.

Eleven o f 19

major soybean-producing states have a crop con d ition rating o f poor to very
poor fo r 25 percent or more o f the crop.

A year ago, no major-producing sta te

had more than 15 percent o f the crop rated poor o r worse.

Soybean p rices had

already been risin g fo r several months in a n ticip a tio n o f very low carryover
stocks f o r the 1988/89 season.
soybean p rice ris e .

However, the drought g rea tly a ccelera ted the

Since ea rly May, soybean and meal p rices in southern Iowa

have jumped about 50 percent and soybean o i l is up 25 percent.
The soybean meal price increase w ill push up protein co s ts in animal feed
ra tio n s.

The soybean o i l p rice increase w ill a ff e c t the e n tire fa t s and o i l s

p rice complex.

However, world o ils e e d production is expected to be record

large in 1988 and com petition from c o m , palm, coconut, and cottonseed o i l and
animal fa ts w ill moderate the impact at the r e t a il le v e l.
Food Price Increases to be Moderate
P rior to the onset o f dry weather, food p rice s were fo re ca s t by the USDA
to r is e 2 to 4 percent in 1988.




I f the drought con tin ues, food p r ice s w ill

44

-

6

-

increase at a s lig h t ly higher rate during the second h alf of 1988 and the
f i r s t h a lf o f 1989.

Even so, the outlook is fo r moderate rather than sharp

increases in the Consumer Price Index (CPI) fo r food.
USDA w ill release an o f f i c i a l food price p rojection on July 20, but based
on prelim inary a n a ly sis, i t appears that the new foreca st w ill place ov era ll
fo o d -p rice increases f o r 1988 in the 3 to 5 percent range.

In other words, it

appears that the drought w ill add about 1 percentage point to 1988 food p rice
in fla t io n .

W could see p rice runups in certain foods, fo r example, pasta
e

products made from durum wheat and oat-based ce re a ls , but overa ll food p rice
in fla t io n in 1988 w ill be held to moderate le v e ls .
In fla tio n Largely Unaffected
The upward adjustment o f our food price estimate w ill have a n e g lig ib le
impact on the o v e ra ll rate o f in fla t io n in the United States.
Food accounts f o r approximately 16 percent o f the Consumer Price Index fo r
urban consumers--the most w idely used measure of in fla tio n .

Food prepared at

home accounts f o r about 10 percent o f the overa ll CPI while the remaining 6
percent r e f l e c t s food purchased or consumed away from home, mainly restaurant
meals (se e attached t a b le ).

Meat, pou ltry, and fis h consumed at home account

fo r almost 3 percent o f the index and fr u it s and vegetables, 2 percent.

Dairy

products and ce re a ls and bakery products each represent a l i t t l e over 1
percent, and fa ts and o i l s le s s than one-third o f 1 percent o f the index.
Since food accounts f o r 16 percent o f the ov era ll CPI, a 1-percent boost
in food p r ice s tran sla tes in to an increase of le s s than two-tenths o f 1
percent in the o v e ra ll CPI.

However, in fla tio n is a monetary phenomenon

dependent upon monetary p o lic y .




There is no reason to b elieve that a

45
- 7 one-tim e, drought-induced boost in farm commodity p rice s w ill lead to higher
o v era ll in fla tio n .
Many Factors to Restrain Food Prices
Higher farm commodity prices th is year w ill bring about a production
response next year.

More than 78 m illion acres o f U.S. farm land have been

removed from production th is year under fed era l programs, 24 m illio n acres of
which are in the long-term Conservation Reserve Program.

Some idled land w ill

be released fo r planting under the 1989 wheat program, and the remainder
serves as a buffer against serious crop s h o r t fa lls in th is country.

This

country has an enormous capacity to increase food and f ib e r supplies by
returning idled acreage to production.
It is s t i l l too early in the crop production cy cle to assess the f u ll
extent o f the drought damage.

The Department w ill issue a crop report on July

12 that w ill r e fle c t the impact o f the drought on production based on July 1
con d ition s.

If drought conditions p e r s is t , y ie ld s on th is y e a r's

spring-planted crops w ill be further a ffe c te d .

However, the impact on 1988

food p rice s and supplies w ill be modest fo r a number o f reasons.
o

Accelerated marketings o f liv e s to ck w ill add to already record
supplies o f meat and pou ltry,

o

Large feedgrain stocks can help m itigate the damage to liv e s to c k and
poultry feeding operations,

o

Diverse production areas and ir r ig a tio n mean f r u it s and vegetable
prices w ill be la rgely u naffected, even though production in ce rta in
Lake States w ill be down.




46

-

o

8

-

Soybeans and wheat w ill be a ffected , but the farm p rice o f these
commodities accounts f o r a re la tiv e ly small share o f the re ta il value
o f th e ir products,

o

Record-large global supplies of vegetable o i l s w ill moderate the
p rice impact on cooking and salad o i l s ,

o

The most se riou sly a ffe cte d crops, such as oats and durum wheat, w ill
have a r e t a il impact, but products made from these crops represent
only a very small component o f the CPI.

The immediate problem is not one o f food shortage or food p rice in fla t io n ,
except in ce rta in s p e c ific in stances, but rather the problem is one of
responding in a compassionate way to the losses faced by American fanners.
Madam Chairman, that concludes m testimony.
y

I would be pleased to

respond to any questions you or other Members o f the Subcommittee might have.




47

SUBMITTED BY EWEN M. WILSON
R elative importance o f food groups in consumer p r ice
consumers, December 1987

Food group

:

Weight
in CPI

index f o r urban

:
:

Weight in
food CPI

-Percent............. 16.06

100.0

FO D A A F O H M
O WY R M O E

6.19

38.6

FO D AT H M
O
O E

9.87

61.4

2.89

18.0

2.07
1.03
.62
.42
.43
.39

12.9
6.4
3.8
2.6
2.7
2.4

.15

.9

1.23

7.7

.26

1.6

1.15
.55
.60

7.2
3.4
3.8

Processed fr u it s and vegetables
Processed fr u it s
Processed vegetables

.64
.37
.27

4 .0
2.3
1.7

Sugar and sweets

.35

2.1

1.35

8.4

.82

5.1

1.03

6 .4

ALL FO D
O

Meat, poultry, and fis h
Meats
Beef and veal
Pork
Other meats
Poultry
Fish and seafood
Sggs
Dairy products
Fats and o i l s
Fresh fr u it s and vegetables
Fresh fr u it s
Fresh vegetables

Cereal and bakery products
Nonalcoholic beverages
Other prepared foods
Sources:

Bureau o f Labor S t a t is t ic s , U.S. Department o f Labor
Economic Research S erv ice, U.S. Department o f A griculture




What the Farmer Gets
From Food Sales In Grocery Stores




Source: Department of Agriculture

49

THE JOURNAL OF COMMERCE. Thursday. June 23. 1

Drought’s Worldwide Trade Impact

A R G E N T IN A -B R A Z IL
Increased crop plantings
could gain European
market share.




Mozambique, Ethiopia, Sudan,
famine. U.S. drought may
affect next year purchases
of grain.
JO VCNINAS/Jounwi o<Comm.
C

50

STATEMENT OF THE HONORABLE NORMAN D. SHUMWAY
Economic Stabilization Subcommittee
Hearing on the Drought
July 6, 1988
Thank you, Madam Chair.

As we are all too aware, the drought currently plaguing our
agricultural belt is one of the most severe in modern history. The
stories of crop losses are growing larger as each new week without
precipitation passes. As a member representing an agricultural
region of California, I am very sensitive to such circumstances, and
am deeply interested in how this will affect the lives not only of
the farmers in my district, but all farmers and all consumers across
the country.

As a member of the Banking Committee, I am also familiar with the
financial markets.

We have seen all too clearly in recent months how

disruptive market fluctuations can be —
the commodities futures markets.

particularly with respect to

As speculation on crop production

fuels speculation in the marketplace, prudence dictates that Congress
stay well abreast of negative trends which may begin to manifest
themselves.

Additionally, since rising prices of commodities are often used
as excuses for price gouging by manufacturers, it also behooves us to
keep a close eye on how market prices will affect consumer prices.
We must assure that financial futures continue to reflect actual




51

commodities values, and we must also take precautions to see that
actual pricing reflects the cost of commodities obtained, and nothing
else.

I

w ould like to extend my welcome to today's witnesses, and look

fo rw a rd to their testimony.




52

UNITED STATES OF AMERICA

COMMODITY FUTURES TRADING COMMISSION
2033 K Street, N.W.
Washington, D.C. 20581

July 22, 1988

The Honorable Mary Rose Oakar
Chair, Subcommittee on Economic
Stabilization
Committee on Banking, Finance, and
Urban Affairs
2231 Rayburn House Office Bldg.
Washington, DC 20515-3520
Dear Ms. Oakar:
When Commissioner William Seale testified before your
Subcommittee on July 16, 1988, representing the Commodity Futures
Trading Commission, he stated that he would provide for the
record a written response to a question that you raised. You
requested that the Commission elaborate on its view, expressed in
the written testimony submitted by Commissioner Seale, that wheat

futures prices were not artificially high despite the substantial
increases that occurred during June 1988 as the drought enveloped
the Midwest.
The Commission's response to your question is attached. If
you have any additional questions regarding the grain futures
markets, please contact Mr. Gary Madson at 254-3596.
Sincerely,

Attachment




53

In response to your question regarding whether,
wheat futures
prices in late June 1988 reflected artificially high levels, we
do not believe that such is the case.

Our conclusion is based on

an analysis of supply and demand conditions for wheat,
large-trader activity in the wheat futures markets, cash wheat
price movements, and historic experience with past droughts.
As Assistant Secretary Wilson pointed out in his testimony,
the U.S. winter wheat crop, which accounts for about half of U.S.
wheat production, was least affected by the drought.

While the

spring wheat crop was severely damaged, we have relatively large
supplies of most classes of wheat carried over from prior
harvests, and, as a result, cash wheat prices did not increase as
much as oat, corn and soybean prices.
Futures prices also generally have reflected this situation.
Between May 22 and June 23, 1988, for example, the prices of new
crop futures contracts for winter wheat in Kansas City increased
43 percent.

During that same period, new crop oat futures prices

increased 108 percent—
crop—

reflecting the major damage to that

while corn futures prices rose 53 percent and soybean

futures rose 48 percent.
Futures markets are anticipatory by their nature.

Through

the collective actions of a large number of traders in a
competitive arena, futures markets reflect prices today for a
commodity at specific future time periods.

At any given time,

futures prices attempt to take into account all known supply and
demand conditions affecting a commodity.




When considerable

54

uncertainty exists regarding supply and/or demand conditions --as
is the case now with the drought— futures prices become more
volatile and react to each new piece of information that reaches
the marketplace.

As the true effect of the drought gradually

becomes known, futures price volatility should diminish, and the
cash and futures markets are expected to stabilize at a price
level that rations reduced supplies among the various uses of
each commodity.

While no one currently knows what that price

level will be for any of the commodities affected by the drought,
our monitoring of futures trading provides no basis for
concluding that the prices reflected by those markets are
determined noncompetitively nor that they are subject to
manipulative pressures.
The Commission's market surveillance economists review
large-trader positions in wheat and all other futures markets on
a daily basis for evidence of price manipulation.

Surveillance

economists are specialists in particular commodity areas and are
familiar with the cash market conditions for their assigned
commodities, as well as with the large participants in the
futures markets.

These surveillance efforts have not disclosed

any evidence of price manipulation nor of any other disruptive
trading activity that could have caused artificially high prices.
In particular, the largest position holders in the wheat
futures markets during the periods when prices advanced the most
were commercial grain merchants holding large short futures
positions to hedge their inventories and purchases of grain.




55

Traders holding short futures positions, of course, did not
profit on those positions during the significant price increase
that occurred through late June.

Large speculators as a group

were net long during the period, but they held much smaller
positions than did commercial traders.




o