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Mr. FOLEY. Thank you very much, Mr. Jordan. As soon as we have heard a few more witnesses, we will proceed with some committee questions.
The next witness will be Mr. George Wilkens of the Minneapolis Grain Exchange.
STATEMENT OF GEORGE WILKENS, EXECUTIVE VICE PRESIDENT, MINNEAPOLIS GRAIN EXCHANGE
Mr. WILKENS. Mr. Chairman, members of the subcommittee, I will respond to your invitation to submit my written statement for the record. You have it. I hope I will not be guilty of more than 2 minutes of your time.
The Minneapolis Grain Exchange board of directors asked that I appear in opposition to this proposal. Fundamentally, We believe freedom of trade is necessary for the advancement of economic welfare of people. That is what is embodied here: Why should it be necessary to impinge upon the rights of free people to engage in legitimate trade and commerce?
There is no question but what organized contracts and organized exchanges make it possible to draw money into the financing of inventories.
Congressman Denholm raised a question on two counts, and I have made notes of those, and I would just like to comment on them. How does a producer hedge profitably or at a favored price? I would like to cite two examples.
You heard reference to the blight in corn last year and there was a price at one time well over $1.50 a bushel on corn and some farmers made contracts at that time to deliver their 1971 crop. And as later developments proved, that was a very, very sound bargaining decision for them to make through their representative in a contract.
Like today, in our exchange, the farm bureau marketing organization is conducting seminars and one of the points they are emphasizing everyday with farm groups that are at the exchange is that soybeans for November delivery-not yet planted-could be contracted this week and last week in the range of $3.10 to $3.12 a bushel. Many a farmer standing at the edge of the pit said, that looks favorable to me and I am going home to contract my crop now for delivery in November.
Now, that is the way farmers do use these markets. It just seems to me in the development and changing of agriculture, there are going to be more and more people, more sophisticated, with greater and greater capital investments, that they are going to use these contract markets in precisely that way. That is what Dr. Hieronymus was pointing to in several of the situations that he referred to here this morning.
Trade helps people and we want to encourage trade, not discourage trade. Always remember, you talk about manipulating price. There can never be a sale in an organized market without both a buyer and a seller. And I would like to emphasize that. It is so easy to look at one side and think just of the seller at a particular situation
if that agrees with your thinking at the time, that the guys ought not to be selling. But every time there is a seller, there is a buyeralways, in every organized exchange. And this is open, competitive bidding, supervised by organized by a department of the government through these organized exchanges. If there are legitimate charges of manipulation, those certainly should be dealt with severely. So in summary, I just say permit your citizens to engage in legitimate competitive trade. That is the appeal from the Minneapolis Exchange.
(Prepared statement follows:)
STATEMENT Of George WILKENS, EXECUTIVE VICE PRESIDENT,
MINNEAPOLIS GRAIN EXCHANGE
My name is George Wilkens and I serve as Executive Vice President of the Minneapolis Grain Exchange. This marketplace has 420 members engaged in grain marketing and processing, and in the marketing of frozen pork bellies. The Exchange was organized in 1881 and has been an important cog in marketing since that time.
MORE TRADE NEEDED
With your permission, may I focus on the issue by asking the question, "Why do we have trade and commerce, both domestic and international?" My response to that question is, "To improve the standard of living of the citizens of the trading states and countries."
The most casual research proves, beyond doubt, there is a very postive correlation between the amount of trade, and the economic standard of the people. It is my belief, government should encourage expansion of trade, and should avoid measures which could limit or stifle commerce, either domestic or international.
Planning for the future involves "futures contracts" whether they be executed in an organized Commodity Exchange like the Minneapolis Grain Exchange or the New York Mercantile Exchange, or whether it is a contractor building a residence for a newly formed family, or a new structure to house the corporate headquarters. Contracting for goods and services to be delivered in the future permeates every phase of our daily lives.
Yes, it is proper for government to concern itself with rules and regulations that govern trading practices. However, the answer is positively "no" when legislation is offered to prohibit trade.
HEDGING AND FUTURES
Forward contracting through organized exchanges is a system which brings necessary capital into marketing and especially into the financing of inventories. The professional risk takers, trading in organized Commodity Exchanges, make it possible for financial institutions, including the nation's banks, to participate in the orderly accumulation of inventory used to satisfy consumers' market demands on a day-to-day basis.
Marketing economists at our leading universities support future contract trading because they agree futures contract trading reduces marketing margins, marketing costs.
FREEDOM OF TRADE MUST BE PRESERVED
We live in a changing world. Intelligent, resourceful citizens must retain the right to participate or the right not to participate in the new scheme of things. Nothing exists today which compels individuals to use organized contract markets. However, if there are marketing and merchandising firms who wish to use the futures contract system available through organized exchanges, that service should continue to be available to them. So long as we retain open competition, there is no logical reason why one group should have a law passed, to force others to follow, the marketing procedures they choose.
BOARD OF DIRECTORS RESOLUTION
The Minneapolis Exchange supports open competition and a Resolution approved by the Board of Directors follows. They asked that it be included with the testimony presented by the Minneapolis Grain Exchange.
"The Minneapolis Grain Exchange believes it would be contrary to the spirit of growth of America for Congress to pass a law which would prohibit legitimate trade between its citizens.
"Futures contracts in various forms are essential in most American businesses. These contracts may involve construction of shelter, transportation facilities, accumulation of foodstuffs, or a multiude of other economic endeavors. "In the past there have been instances when it has been practical and desirable for government to regulate trade. The facts may dictate the need for such regulation in Irish Potato futures contract trading.
"However, it is inconceivable that Congress should find it necessary or desirable to enact a bill to prohibit trading of a commodity in an organized public commodity market."
The case against futures trading in Irish Potatoes is not sound, it is not reasonable. If this bill is enacted, it will impinge upon the economic welfare of people. That course of action ought not be pursued.
Our marketing system now has reasonable regulations and economic controls. Within this framework, practical businessmen have brought this nation to a position of economic leadership in the world. Please continue to allow businessmen in America the right of decision. Avoid legislation to prohibit futures trade in Irish Potatoes.
Mr. FOLEY. Thank you very much, sir; if you would like to remain we would like to have the opportunity to ask you some questions. The next witness will be Mr. John Clagett of the Association of Commodity Exchange Firms, New York City.
STATEMENT OF JOHN W. CLAGETT, PRESIDENT, ASSOCIATION OF COMMODITY EXCHANGE FIRMS, INC., NEW YORK, N.Y.
Mr. CLAGETT. Mr. Chairman, I would like to read my statementit is a relatively short statement-if it meets with the pleasure of the
Mr. FOLEY. Fine.
Mr. CLAGETT. Mr. Chairman, members of the committee, I wish to thank you for the opportunity given me to appear before you to make a statement with respect to H.R. 7287. My name is John W. Clagett, and I am president of the Association of Commodity Exchange Firms, Inc., New York.
First, let me furnish you a little background about the Association of Commodity Exchange Firms, Inc., and about myself so that you will be better able to evaluate my remarks and also so that you will know why the Association of Commodity Exchange Firms, Inc., is interested in this bill.
I have firsthand knowledge of the futures business based upon my years as an official of the Chicago Board of Trade, president of the New York Mercantile Exchange, official in the commodity department of a New York stock exchange firm, which did commodity business and that had offices throughout the country, and later as an official of the Commodity Exchange Authority.
Subsequent to that, I have been and am president of the Association of Commodity Exchange Firms, Inc., an organization devoted to improve economic usefulness and continue high standards of business conduct in a truly giant industry-the commodity futures business. I sincerely hope that this background description will qualify my testimony as being objective, as well as being based on experience in many aspects of futures trading.
The Association of Commodity Exchange Firms, Inc., is a nonprofit organization whose members handle a majority of the customers' orders that are executed on the 12 commodity exchanges in this country. Our purpose is to preserve and promote a high standard of ethics in the futures business. We are engaged continuously in educating individuals about commodities, on behalf of the commodity exchanges as well as for member firms.
This tends to insure a high degree of knowledge of exchange rules and to promote intelligent and ethical handling of futures business. We also assist exchanges in establishing self-regulatory rules for the benefit of the public, the member firms, and the exchanges themselves. We prepare and publish accurate and reliable information concerning trading in commodity futures.
This bill which you are considering is a tremendously important bill. It may be considered analogous to another potential hole in our free economic dike, an economic dike which we consider strong and getting healthier each year. To briefly illustrate, our statistics show that in 1968, 9,332,247 futures contracts were executed on the various U.S. exchanges. In 1969, 11,206,685 futures contracts were executed, which was 20.09 percent more contracts than in 1968. In 1970, 13,622,607 futures contracts were executed, which was over 21 percent more than the record preceding year and last year, 1971, 14,563,331 futures contracts were executed, which was approximately 7 percent increase over the preceding alltime record year.
It appears from the 1972 statistics at hand that the volume of trading in futures contracts on the commodity exchanges in the United States will again exceed by a good margin the tremendous volume of trading we have had in the aforementioned previous years. It is estimated that the value of futures contracts traded on the United States exchanges exceeded approximately $145 billion last year. This growth picture in an industry based on hedging needs is an implied endorsement that the industry must be serving an economic need and is doing so by doing a number of things that are right.
Of course, improper or weak administration or regulatory action on a commodity exchange can hurt all exchanges and some of the people who trade thereon. For this reason, we have recommended and supported stringent and fair-trading rules on the various commodity exchanges and have vigorously supported the very efficient and highly complex regulatory work of the Commodity Exchange Authority. Based on my firsthand knowledge as a former official of the Commodity Exchange Authority, there is no doubt in my mind that if any farmer, handler, or processor of potatoes or a speculator made a complaint to the Commodity Exchange Authority alleging manipulation or other violations of the Commodity Exchange Act on the New York
Mercantile Exchange or any other regulated exchange, the CEA would effectively and efficiently investigate the alleged violation and would be able to not only detect any violation, but would refer all of their findings through the proper channel for proper administrative, civil, or criminal action.
Our association believes that the CEA is not only efficient and effective but unbiased. For this reason, we endorse and applaud the statements of Mr. Alex Caldwell, Administrator, Commodity Exchange Authority, at your last hearing. He advised that the U.S. Department of Agriculture recommended that H.R. 9287 not be enacted. He also said that the problems facing Maine and Idaho potatoes are not to be found in the futures market, but arise from the supply and demand picture of potatoes.
Futures trading furnishes a possible solution to this problem. By having futures trading in potatoes the farmers, handlers, and processors are given an opportunity to hedge, which allows them to secure a good measure of price insurance against major adverse price fluctuations on the potatoes which they will grow, have grown, handle, purchase, or process. This is a very important economic advantage to them when they properly use it. Hedging can be of a significant advantage to the processor of dehydrated potatoes, potato chips, and other potato products, as these processed items are generally sold on a large volume, low markup basis. The price at which a potato processor sells his product must be competitive at the time he makes the sale and at times his profit or loss is guaranteed only by successful hedge programs in the futures market.
During later years, when I was president of the New York Mercantile Exchange, the original home of potato trading, I had innumerable contacts with potato growers in Maine who were both for and against commodity future trading in potatoes. In some instances, I found that farmers who were vehemently opposed to potato futures trading had, in fact, traded on the exchange not as a hedger, but as a speculator.
It appears now that with regard to potato futures trading, history is again repeating itself. No doubt, a number of the people who have testified in behalf of this bill are completely sincere in their support. Howver, I cannot help but believe that it is wrong to single out and try to abolish futures trading in any one commodity, and then deny these highly beneficial insurance features to potato users while retaining them for users of other agricultural and industrial commodities.
A prime contention that futures trading aggravates price fluctuations cannot stand in face of critical, unbiased examination. The sole example of a futures market being disbanded by Federal legislation refutes such an argument, as well as providing a sound testing environment where a futures market existed and comparisons prior to its introduction and after its departure can be made. I am speaking of onions.
Karl Hobsen's work indicated that during the periods of 1922-41 and 1942-49, when there was no actual onion futures market, the average fluctuation of price about the season's mean was about a 112