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At this point, Mr. Chairman, I would like to comment upon the Agriculture Department's report on H.R. 7287. While the report recommends the bill not be enacted, it does not address itself to the issue at hand, namely, the effect of futures trading on the orderly marketing of a perishable commodity such as potatoes.
Futures trading may be a valuable device for marketing storable agricultural commodities such as cotton and grains. Both as a hedge and as a credit mechanism, futures trading may be of value for crops which are held for marketing over a long period of time. For perishable commodities such as potatoes, however, the mechanism of futures trading presents special problems, and I feel the Department did us a grave disservice in failing to take note of this fact.
Congress has already recognized this problem of perishability by voting in 1958 to eliminate futures trading in onions, and apparently this has worked to the benefit of most growers since there has been no significant move by any sizeable segment of that industry to restore futures trading. Potatoes are the only perishable limited-season commodity currently being traded in the futures market.
Eggs, for example, are also of a perishable nature, but the fact that eggs are produced all year long and can also be stored for significant periods of time differentiates the perishability problem of eggs from that of a perishable crop such as onions and potatoes.
I urge your careful consideration of this bill and its implications, and I hope for your favorable report. It is my view that the elimination of futures trading in potatoes is a necessary first step toward the establishment of a healthy Maine potato industry.
Thank you, Mr. Chairman, and members of the committee.
Mr. Kyros, from your cosponsorship of this legislation and from the discussions we have had about it with Mr. Hathaway and you, I know you associate yourself with the remarks of your colleague, Mr. Hathaway, but we shall be happy to hear any additional comments you wish to make.
STATEMENT OF HON. PETER N. KYROS, A REPRESENTATIVE IN CONGRESS FROM THE STATE OF MAINE
Mr. KYROS. Thank you very much, Mr. Chairman. I certainly do associate myself with the remarks of the senior member of the complete Maine delegation, which is here before you today. I also am very happy to see my friends on this subcommittee, men for whom I have great admiration, here in the Congress.
I appreciate particularly having the opportunity to come before you, Mr. Chairman, to urge that favorable consideration be given to the bill introduced by Congressman Hathaway and myself to eliminate futures trading in potatoes. We do not pretend in any way that this will solve our total potato problem, but it will go a long way in the right direction.
I also would like to say that although I am from Maine and I represent the First District, most of the potato-raising, if not all of it, is done in Bill Hathaway's district.
I make no pretense of knowing all the technical aspects of the trading that does go on, but I am aware, from the many friends that I have in the Second District and from Maine farmers, that in the past 15 years, the futures trade has been regarded as a burden, really not as a help to them. Instead of creating favorable economic conditions, based upon a market of supply and demand, futures trading has resulted, actually, in disorder and unjustified price movements. With the apparent manipulation that is practiced and the lack of facilities to pack and deliver upon closing, the futures board cannot be used by growers as a true and beneficial hedge, as it was originally intended.
If volume and speculation increase, price movements are stimulated. Maine farmers know from bitter experience that such largescale gambling in their product creates wide price swings and causes recurring chaotic conditions in their market.
The daily price fluctuation has continued to be wide, wider than would be the case without futures trading.
Another point to be considered, Mr. Chairman, is that the perishability of potatoes, as my colleague has well pointed out, makes them unadaptable to futures trading. Many growers, unable to make delivery, are hurt through settlement requirements. Perishability encourages trading in futures contracts before final delivery, encouraging further price instability.
The Maine potato industry needs a stable economic market and this is not being provided by the current arrangement of futures trading. In 1958, as Mr. Hathaway pointed out, the Congress enacted legislation to abolish onion futures trading, and market conditions for that product have steadily improved. The futures trading noose should be lifted from the Maine potato farmers' necks.
I hope that this committee, Mr. Chairman, will consider carefully the merits of H.R. 7287 and approve this much-needed legislation.
I should say, personally, from my experience in the past 6 years with the chairman, I know that this bill will receive full and fair consideration.
Mr. FOLEY. Thank you very much, Mr. Kyros.
Before I ask the subcommittee members if they have any questions of our distinguished colleagues, I would like to assure those in the hearing room today that Mr. Hathaway and Mr. Kyros are very determined proponents of this legislation, and have been consistent in their urging its advancement throughout the past year.
I want to repeat my assurance, as chairman of this subcommittee, that this legislation will receive full and prompt consideration by the committee in this legislative year to assure that any decision that the subcommittee and the full committee and the Congress wish to make on this legislation can be made in sufficient time before the adjournment of the 92d Congress.
I want to personally thank both of my colleagues for their appearance today and their very helpful statements on this complex and difficult legislation.
The Chair wishes to recognize any members who have questions of our distinguished colleagues.
Mr. GOODLING. Thank you, Mr. Chairman.
Just very briefly, Mr. Hathaway or Mr. Kyros, this will apply to potatoes everywhere; is that correct, and not only in Maine?
Mr. HATHAWAY. That is correct, Mr. Goodling.
Mr. GOODLING. In my profession, we do not have futures trading. I happen to be a fruit grower and we have problems, I know. Would you please tell this committee-I am sure many members know, but I am frank to tell you that I do not know. Just how does futures trading in potatoes operate? What happens?
Mr. HATHAWAY. There is a booklet available called "Futures Trading in Maine Potatoes," put out by the Department of Agriculture Commodities Exchange Division, Market Survey Report No. 2, which answers your questions in more detail than I can answer them. If I do not answer completely, Mr. Bull and others are here who can do it for me.
People who are not necessarily potato farmers, or even want to buy or sell potatoes, can in the New York Mercantile Exchange, enter contracts through the exchange, such as you and I. I might be a person who wants to sell potatoes. I do not own any potatoes of my own. I really do not, in the long run, intend to sell them to you; you do not really want potatoes, either. Each of us is just out to make some money.
So, through the exchange, I agree to sell you potatoes, we shall say, at $3 for delivery in March, and you agree to buy them at that price. Then, the time approaches when we have to liquidate our contract. I am hoping, since I do not have any potatoes, that the price of potatoes will go down, say, to $2.50, so that I can make 50 cents on this deal. I am what you call a short seller. I am short of potatoes; I do not have any potatoes.
You are what is called a long, or you are a buyer of them. You are hoping the price will go up. Say, it goes up to $3.50, you can make 50 cents on the deal. So when the times comes around to March, say, the price has gone to $3.50. Instead of my actually getting the potatoes and delivering to you, I just give you the difference in what the contract would be. The contract was originally $3. It is $3.50. I give you the 50 cents.
This is per barrel. I am talking about. Naturally, we would be dealing in carloads, which would amount to a considerable amount of money.
If it has gone down, we shall say, the 50 cents, and you give me the 50 cents difference, we, in effect, tear up the contract. No potatoes have been bought and sold, but you and I have, through this mechanism, established a price for the future delivery of these potatoes.
The same thing is true with other futures markets, with respect to pork bellies, corn, grain, whatnot.
Mr. GOODLING. Who is responsible for getting the potatoes through the exchange?
Mr. HATHAWAY. Well, in the event that they have to be delivered, I would have to, if you were going to demand the delivery of these potatoes, go out and get Maine potatoes at whatever price I could buy them for and deliver them to you, where I had agreed to deliver
them to you. But in 99 cases out of 100, and maybe the ratio is greater than that, there is no delivery whatsover made.
This book does indicate, and I forget offhand just what the statistics are, as to the number of actual transactions that occur in relation to the number of potatoes that are actually delivered. The ratio is very, very high.
Now, that is a sort of gambling device which the Mercantile people say does establish a price for potatoes and creates a market for potatoes. Our argument is, or at least the argument I have made is, that because you have this future price of delivery for potatoes, this inhibits the farmers from doing what your people are doing, Mr. Goodling, selling their fresh produce on the fresh market from the time they first harvest it right through the time that it reaches the point of perishability.
Mr. GOODLING. That is all. Thank you.
Mr. KYROS. Mr. Goodling, I might add to what my colleague has stated that it has often been said that the Mercantile Exchange furnishes a valuable device, that it really protects the potato farmer, because by buying certain contracts and putting them on the market at certain times, or preparing to sell them, he can give a hedge as to the price he will get for the potatoes. But the facts do not show that. In this booklet about which Mr. Hathaway has spoken, put out by the United States Department of Agriculture, Market Survey Report No. 2, in May of 1971 it says of those traders covered by the survey: "The vast majority, 2,574 traders, 93.4 percent of the total, were classified as speculators, and a considerably smaller number, 183 traders, or 6 percent of the total, were classified as hedgers."
In other words, sir, when he says it really results in a business risk by what we call speculation in futures contracts, that is what really happens, instead of promoting the stability of the potato market. Mr. FOLEY. Mr. Link, do you have any questions?
Mr. LINK. Nothing, thank you.
Mr. FOLEY. Mr. Zwach?
Mr. ZWACH. Just very briefly, may I just assure you gentlemen that we shall give this entire area very, very careful consideration? Congressman, you make in your statement on page 5 this statement, that futures trading is unquestionably of value for crops which may be held for marketing over a long period of time, speaking of more storable agricultural commodities. Now, you know, I really think the Congress needs to take a very careful look at all futures trading. In my area, corn plunged last fall, before a bushel was harvested, from $1.39 in my congressional district, to 88 cents, all caused by gamblers and speculators in the corn market.
I think the Congress needs to take an overall look at it. I would hope that you are not implying here that unquestionably, there is nothing wrong with the whole industry outside of potatoes.
Mr. HATHAWAY. Mr. Zwach, I shall ask unanimous consent to scratch "unquestionably" from my statement.
Mr. ZwACH. I would fully appreciate that, because I think this needs overseeing as to the real value of futures trading in agricultural commodities.
Mr. FOLEY. Off the record.
(Brief discussion off the record.)
Mr. ZWACH. Mr. Chairman, I would appreciate striking the reference to its value in other commodities. I do not believe it belongs
Mr. HATHAWAY. I would be glad to do that, Congressman Zwach. Mr. FOLEY. Mr. Matsunaga?
Mr. MATSUNAGA. I have no questions.
Mr. FOLEY. Mr. Bergland?
Mr. BERGLAND. No questions.
Mr. FOLEY. Again, I want to thank our distinguished colleagues for opening these hearings, and we are confident that we shall have the benefit of their continuing advice and counsel in this legislation. Thank you again.
Mr. HATHAWAY. Thank you, Mr. Chairman.
Mr. FOLEY. The next witness to come before the subcommittee this morning is Mr. Alex C. Caldwell, Administrator of the Commodity Exchange Authority, United States Department of Agriculture. Mr. Caldwell is appearing on behalf of the Department of Agriculture to state its views on the pending legislation.
Mr. Caldwell, we are glad to see you here this morning. I wonder if you would be kind enough to introduce to the subcommittee those who are accompanying you?
STATEMENT OF ALEX C. CALDWELL, ADMINISTRATOR, COMMODITY EXCHANGE AUTHORITY, DEPARTMENT OF AGRICULTURE; ACCOMPANIED BY ALEXANDER SWANTZ, ASSOCIATE ADMINISTRATOR; AND RONALD C. CALLANDER, DIRECTOR, TRADING DIVISION
Mr. CALDWELL. Mr. Chairman, members of the committee, I am pleased to appear here in behalf of the Department on H.R. 7287, a bill proposing to prohibit trading in Irish potato futures on commodity exchanges. I have with me, on my right, Dr. Alexander Swantz, Associate Administrator, and on my left, Mr. Ronald C. Callander, Director of the Trading Division of the Commodity Exchange Authority.
The Department has recommended that H.R. 7287 not be enacted. The bulk of futures trading in potatoes is conducted in Maine potatoes on the New York Mercantile Exchange. Therefore, this statement will deal largely with conditions in that market. Trading in Idaho potatoes on the Chicago Mercantile Exchange started again in 1968 after several years of inactivity. In the 1970-71 crop year, 86 percent of the futures trading was in New York and 14 percent was in Chicago. Trading in the potato futures markets was comparatively small, representing only about two percent of the trading on markets regulated under the Commodity Exchange Act in the 1971 fiscal year. There were 238,000 trades in the two markets combined compared with 2.7 million in corn, 2.7 million in soybeans, and 1.5 million frozen pork bellies.
Trading in Maine potato futures has shown a marked decline since 1966-67, falling from 692,014 carlots to 209,579 carlots in 1970-71.