July 28, 1976
Page 24280
HEARING OF THE COMMODITY FUTURES TRADING COMMISSION
Mr. MUSKIE. Mr. President, the Commodity Futures Trading Commission held a hearing Monday in Presque Isle, Maine, on proposals to change the futures contract for Maine potatoes. I was delighted that the new Commission agreed to my request to go to Maine, and I know they will value the strong opinions of Maine people expressed during the day.
I had the opportunity to testify in the morning session on the range of issues involved. To help my colleagues follow the continuing debate on these issues, I ask unanimous consent that my testimony be printed in the RECORD.
There being no objection, the testimony was ordered to be printed in the RECORD, as follows:
TESTIMONY OF SENATOR EDMUND S. MUSKIE
Mr. Chairman and members of the Commission, I would like to begin by welcoming you to Aroostook County and by thanking you for agreeing so readily to my request that the Commission hold a hearing in Aroostook.
Today's hearing will provide an important opportunity for the new Commission to explain its role and responsibilities to people whose lives and livelihood are profoundly affected by the decisions you make. And this hearing will give the people of Aroostook County and central Maine an important opportunity to present their views and to have a say in what is done with futures trading of potatoes.
The focus of today's hearing is the economic impact of the proposed new contract for potatoes on the New York Mercantile Exchange. This new proposal results from the defaults on 1,000 contracts last May. Every one here is aware of the developments in the May trading. And everyone here has heard that the May developments have resulted in depressed prices and nonpayment problems for potato producers.
Mr. Chairman, as I told you at the Agriculture Subcommittee hearing in Washington on June 21, when you agreed to my request to hold this hearing, many Maine farmers have for years said that futures trading has been subject to manipulation and has created a market which does not truly reflect actual supply and demand.
But trading has continued, for many reasons — not the least of which was the fear of representatives of other commodities that a ban on trading potatoes could endanger all exchange trading of futures. And problems have occurred. For example, there was manipulation of the price of May, 1971 potato futures on the Chicago Mercantile Exchange, involving some of the same principal figures involved in the defaults this May on delivery of Maine potatoes. Mr. Jack Simplot and Mr. Pete Taggares both were named in commodity exchange authority complaints.
But Maine producer opposition to trading has abated in the past few years because there has been a more consistently favorable market. Traditionally, Maine farmers counted on only an occasional year of favorable prices. In recent years, however, a stronger market has been maintained, so the suspicion of manipulation of the market by speculators has fallen off.
But because of the May contract developments, many of the worst suspicions of Maine farmers were confirmed. Massive violations of the rules of the exchange occurred along with many possible violations of the Commodity Exchange Act. And speculators, both short and long, have created a situation which has renewed Aroostook interest in a ban of trading. Testimony later today will detail the overwhelming votes in referendums over the years which have shown that Maine potato farmers do not favor the trading of their commodity on the New York mercantile exchange. As recently as last week, a referendum was conducted by the Maine Potato Council, which resulted in an almost 2 to 1 vote against trading.
Therefore, those here today will be glad to know that Chairman Bagley has said, "It is obvious that there is something drastically wrong with that marketplace. We have told the exchange that at the very least there will have to be major changes in their contract and very soon so that trading does not go on under present circumstances."
An important point to be covered at this hearing is whether the elimination of trading will play into the hands of speculators from the West or elsewhere. Congress has given the CFTC the power to stop all trading and eliminate the Maine potato futures contract. But many, including the commission, see dangers in that course of action. As an alternative pricing mechanism, a carefully controlled futures market is said to provide farmers with market protection against the concentrated economic power of a few large figures in the cash market. Many have suggested that the large shorts on the May contract actually meant their defaults to bring an end to the potato futures contract. It is for this reason that the commission is proposing to greatly change the potato futures contract, rather than eliminate trading.
But if the cash market can be manipulated by the concentrated purchasing power of a few large purchasers, and if it is best to guard against this with a sound potato futures contract, we must be assured that the futures market can never again be manipulated. So the proposed new contract should be carefully examined to determine if it is the best approach to the needs of Maine's potato industry, and to determine whether it will prevent problems like those experienced with the May trading.
The exchange's proposed contract calls for many changes in the terms of the contract for trading for future delivery of potatoes, changes which I know you will go into in detail at this hearing.
These changes include:
Allowing the contract to be fulfilled by delivery of potatoes from seven Eastern States other than Maine;
Requiring that shipments be made by truck rather than rail, and allowing the exchange to allow rail shipments if trucks cannot deliver;
Reducing the size of the contract to conform with truck weight regulations;
Tighter limits on price fluctuations;
And new obligations for delivery and payment for both buyers and sellers.
The economy of the Maine potato industry could be profoundly affected by these changes. So we need answers from this hearing on why the proposed contract is to the advantage of Maine farmers and the entire industry.
First, what was wrong with the old contract which requires these changes? Could better enforcement procedures for the New York Mercantile Exchange have prevented the May default problem? Will the new contract prevent similar problems, without tighter enforcement procedures?
Second, will the expansion of origins of deliverable potatoes to seven other Eastern States provide greater stability to the futures market? Will this mean steadier, but lower prices for Maine potatoes? Could it result in such a steady market that speculators will lose interest in the exchange trading of potatoes, thereby killing futures trading of Maine potatoes?
Third, will the change from rail to truck for shipments meet the transportation needs of farmers on a steady basis? Can the Bangor and Aroostook Railroad, reasonably be expected to maintain capacity for potato shipments if rail shipment is called for only in emergencies? Will the trucking industry be flexible in dealing with new developments, as the Bangor and Aroostook was in meeting the demands coming from greatly increased export sales this past season?
Fourth, should there be a May delivery month? Because the availability of deliverable supply has been a problem during May trading, and speculation has revolved around the month of May, will a contract expanded to include potatoes from other States assure supplies and reduce the possibility of manipulation?
I hope today's hearing will answer these and the many other questions which remain.
Additionally, I want to encourage the exchange and the Commission to act as quickly as possible to resolve the problems of the defaults on May's contracts. The largest immediate problem of Maine farmers is the problem of nonpayment to farmers for delivered cash market potatoes. Holders of long positions with defaulted contracts owe about $2 million to Maine farmers, and have been awaiting the release by the exchange of funds for liquidation of those contracts to pay their debts to farmers.
It is critical to the integrity of the exchange and the reputation of the new commission that the default problems be settled soon, so the Exchange's house can be put in order again, and so that the Maine potato industry will not be harmed further.
In closing, I want to stress that the Commodity Futures Trading Commission literally has the economic health of our potato industry in its hands. That is why it is vital that the Commission understand the concerns and needs of Maine, and that is why I am delighted you are here today.