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tighter, I expanded my farming operation to keep efficient and make better use of bigger and more productive farm machinery. I increased to 450 acres of potatoes and 60 acres of sugar bets and used the New York Mercantile Exchange every year to hedge a portion of my crop of potatoes when prices reached a level that was better than my cost of production.

In 1970, I was offered a proposition that I felt I should take and I sold my farming operation to Potato Service Inc. and went to work for them as a farm manager.

I farmed that in a small way. If this bill is killed, I anticipate perhaps going back to my own farm operation.

I raised seed potatoes and sold this seed against prices on the futures market. If, for an example, the March board price was $2.50/cwt. FOB, I would ask $2.75/cwt. FOB for my seed potatoes and in most cases I received these prices as the buyer could protect his price by selling on the board if he thought these prices were too high.

The potato business in Aroostook County, Maine, is in serious trouble, and I firmly believe that the Maine farmer has a real advantage over the other potato producing areas by having available the futures market to hedge his crop on against the extremely low potato prices that have prevailed these past few years. He has got to get his head out of the sand and use the mercantile exchange to his advantage. As an example, the following prices were available to the Maine farmer this year-March $2.45/cwt. FOB, April $2.65/cwt. FOB, and May $3.25/cwt. FOB. Now the cash market stayed in the $1.80/cwt. to $2.00/cwt. range to March 1. The figures that I have used for the three shipping months average $2.78/cwt. FOB, and I maintain that every farmer can stay in business and make a profit with these prices. Today the potato business is in keen competition with other fresh fruits and vegetables all winter long and Maine has got to promote and market their product efficiently to get consumers eating more of a better quality fresh potato.

Mr. Chairman and members of the committee, the New York Mercantile Exchange is a valuable marketing tool for the Maine farmer. I urge you not to vote in favor of this bill.

Mr. FOLEY. Thank you very much.

The next witness will be Mr. Stewart Smith, farmer and former president of the Maine Potato Council.

STATEMENT OF STEWART SMITH, FARMER AND FORMER PRESIDENT, MAINE POTATO COUNCIL, EXETER, MAINE

Mr. SMITH. Mr. Chairman, members of the committee and, if you will allow me to indulge in a little speculation, Senator HathawayMr. HATHAWAY. Thank you.

Mr. SMITH. I am Stewart Smith, a potato farmer from Exeter, Maine. I started farming in 1961 and now grow about 250 acres of potatoes annually. I would like to explain how I have used the futures market to advantage in my own farming operation and why I am opposed to H.R. 7287, as well as discuss some work I did as a graduate student in agricultural economics.

I might not have attempted potato farming if there had not been available some form of forward pricing. In my case I bought the home farm from my grandfather in 1961 and grew potatoes under contract for Snow Flake Canning Co., a local french-fry manufacturer, who used the futures market to establish the contract price. Under this arrangement I contracted my potatoes to this processor at any price I chose on the futures market, adjusted to delivery to the plant, for the month of delivery. The processor would then either sell a similar quantity on the board if he believed the price was going down, pay that price directly to me if he felt the market would rise, or more commonly, he would have already purchased on the futures market and he would sell a similar amount on the futures market when it reached the price I had requested.

To illustrate, suppose that when the March contract was trading $2.50, which would convert to $1.60/cwt. FOB bulk at the plant (a 90 cents discount for freight and bagging), the processor felt that this would be a favorable price for him to purchase potatoes in March. He therefore buys a portion of his March requirements at that level, intending to sell that amount at the price the growers request. I feel at the same time that $2 FOB would be a satisfactory price for the potatoes I deliver to the plant in March. This would convert $2.90 futures price, adding on the 90 cents difference. I request that price from the processor. When the March contract reaches that price he sells that many future contracts at $2.90. The net result is that the processor pays $1.60/cwt. FOB for his potatoes, yet I receive $2/cwt. FOB for the same potatoes delivered to his plant. This includes his $1.60 plus the 40 cents gain from the futures market. We're both happy and we haven't had to fight over price. This is one way the futures market has been of benefit to Maine farmers. A similar method of using futures trading, and one I still employ occasionally, is in the purchasing of seed from another grower. There are times when I want to buy a lot of seed and the seed grower wants to sell that particular lot to me, but we have trouble getting together on price. It usually is because the seed grower thinks the market will be up by the time the seed is delivered, and I feel it will be lower. In this case we use the futures market. W first agree on the price difference between potatoes meeting the mercantile contract delivered New York, and seed potatoes FOB Presque Isle. Then we merely select the prices we each want and give these to the same broker. When the futures market reaches one of the prices, one side of the transaction is completed. The opposite transaction is made when the market moves to the other price.

This method has worked satisfactorily for me when buying seed potatoes. It allows two parties to get together on a transaction without having to haggle over price.

The third way I have used the futures market is the conventional hedging of tablestock potatoes. I have not grown potatoes for the fresh market since 1968, but when I did I hedged part of my anticipated production. If I return to producing tablestock potatoes, I would again use the futures market for hedging purposes.

It is only reasonable that a farmer should know the price he is going to receive on at least part of his production before he invests

in it fully. I might add that several of the farmers in my area growing for the fresh market use the futures market either directly or indirectly. By indirectly, I mean they buy fertilizer on credit pledging part of their potato production, which the dealer in turn hedges. If farm suppliers could not hedge their customers' potatoes, I'm afraid credit terms to the farmer would worsen.

For 2 years during 1966-68, I served as president of the Maine Potato Council. This was at times an uncomfortable position, for although I personally believed the futures market was of benefit to our industry, I nevertheless had to take the Maine Potato Council's position of opposition to futures trading when I was representing the council. This caused me to take a hard look at my own thinking, and I made an effort to reevaluate my position with respect to this issue. While reviewing the arguments opposing futures trading, I found one I thought reasonable and might prove detrimental to the industry. This was the argument that the futures market causes Maine potato shipments to be delayed later into the season. This is a trend that has been developing over the years. Some people have said that it is the futures market that has done this. It seems reasonable that a grower holding potatoes in January would be reluctant to sell at that time if he could see a March or May futures price which was considerably higher than the cash price. Conversely, the smaller the premium of the futures price over the cash price, the less reluctant he would be to ship.

During this period of time I was also doing graduate work in agricultural economics at the University of Connecticut. I had the opportunity to look into this question: Does the futures market have an effect on the rate of shipment of Maine potatoes? I found nothing in a review of the literature to indicate anything had been published on this question. In fact, I am quite surprised that so little has been done on the questions and charges raised by this entire mercantile elimination movement. As far as actual studies proving some of the things that are being charged. I therefore developed my own project.

I tried to determine what effect certain supplies and certain prices have upon the shipment of Maine potatoes. I considered stocks on hand outside Maine, stocks on hand in Maine, Maine shipments to date, cash price in Maine, May board price for the current month, as well as other variables. The study considered the months of December through March for the years 1952-67.

The results were quite startling. The only significant variable for 3 of the 4 months was the stocks on hand outside Maine. In no case was the futures market price significant nor did it increase the coefficient of multiple correlation greatly when added to the regression equation.

One must conclude that in spite of the charges made, the futures market has very little, if any, effect on the rate of shipping of Maine potatoes. I have never summarized the study, but if it would be of benefit to the committee, I would be happy to do so and get it to

you.

I would like to make a brief comment on the argument that the futures market depresses cash prices. There has been some work on

this question. Peter Emerson and William Tomek writing in the August 1969 isue of the American Journal of Agricultural Economics conclude that shipping point prices are mainly related to per capita production and not to future prices.

I did some price analysis work on a consulting basis from 196265. Building upon work started by Aaron Johnson, now professor of economics at the University of Wisconsin, I developed a prediction model using various seasonal production and stock-on-hand estimates, population data, and processing trends, which explained nearly 95 percent of the Maine cash price, and I did not even consider things like disposable income or other grand type variables. The conclusion from this is that the futures market can affect the cash price only in a very minute way, if at all.

I am confident that if more study were done, the charges against futures trading of potatoes would be found to be lacking. I cannot find any proof that potato futures trading does any real economic harm to the total Maine potato industry. I readily admit it does cause irritation and frustration to some who are in it. The potato industry in Maine and nationally is in a period of hardship. Growers are hurting; some are losing their farms. It is only natural that they strike out at something that is highly visible, yet quite impersonal. The potato futures market fits that description. This striking out is not getting at the root of our problems.

On the other hand, potato futures trading does offer a real economic benefit to those who use it properly. So it seems to me to boil down to this: If futures trading in potatoes is eliminated, no one will gain any real benefits, but some will lose some real benefits. If futures trading in potatoes is continued, a real effort should be made to make the benefits available to anyone in the industry. This will take some sort of education that we have not had before. It is not used widely now because of lack of knowledge or experience in the use of it. This should be helped somehow. I only ask that right prevail.

I thank you, Mr. Chairman, for the opportunity to testify before this committee.

Mr. FOLEY. Thank you, Mr. Smith. We appreciate your statement. Mr. Zwach, do you have any questions?

Mr. ZwACH. I have no question.

Mr. FOLEY. Apparently, we have no questions of the witnesses. We appreciate your coming and testifying.

Mr. ZWACH. I have some but I am not going to ask them.

Mr. FOLEY. I think Mr. Zwach and I would like to have some opportunity to explore with the witnesses who have testified some of the background of their experience, but again, we are trying to reach a conclusion this afternoon-a conclusion, not a decision.

I think we will, in view of the fact that the committee is not asking very many questions, proceed to take each witness individually. After he has testified, I will inquire if there are any questions of that individual so that any of you who might be trying to arrange to depart from Washington this afternoon will not have to stay unnecessarily long.

The next witness is Mr. Douglas B. Bagnell of Fairhope, Ala.

Off the record for just a moment. (Off-the-record discussion.)

(The following statements are from witnesses, who, in the interest of time, agreed to file their statements rather than read them :)

STATEMENT OF RICHARD T. KEENAN, FORMER MANAGER OF AROOSTOOK FEDERATION OF FARMERS, CARIBOU, MAINE

Having been asociated with the Aroostook potato industry for 8 years, the last 5 as General Manager of the Aroostook Federation of Farmers, a fertilizer, chemical, seed and petroleum supply co-operative, I have definite ideas on the New York Mercantile Exchange.

We, the Federation, along with other companies in the same field, utilized the benefit of the New York Mercantile Exchange to hedge our position for credit. To explain, with the withdrawal of credit by local credit agencies, the supply organizations were called upon to help carry the credit of farmers. To secure our investment that we had to extend, we needed security. Presently in Aroostook County, in many cases, the only form of security some farmers have to offer is their ability to raise potatoes. The supply industry's source of credit needs more than a farmers word, so consequently, we requested a futures contract from either a processor for processing bound potatoes or a bid for a Mercantile contract for Round Whites.

Round White futures contracts are seldom available unless they are in the form of a Mercantile contract or backed by a Mercantile contract. Without these contracts, the industry would be unable to finance many of the small family farmers having Round White potatoes

Another area in which we utilized the New York Merchantile Exchange was in selling Real Estate that we owned. For a successful grower who felt we had a future, but no cash, we have sold property based on a number of Mertile spec. cars delivered each year. These cars were then hedged when appropriate.

I feel that if the New York Mercantile Exchange is discontinued, many small farmers and some large growers of Round White potatoes may be put out of business.

Never have raised potatoes to sell, I have never traded a car of potatoes or any other commodity for my personal account.

This testimony is submitted for what I personally feel is for the benefit of the industry. I do not feel the New York Mercantile Excange is the cause of our problems. It is much deeper than that.

STATEMENT OF DONALD C. EISENSMITH, FORT FAIRFIELD, MAINE

My name is Donld C. Eisensmith, I am President of H. O. Perry & Son Co., a General Insurance Agency, in the Town of Fort Fairfield, Maine. For 22 years I have been in the Insurance Business and our particular agency is predominantly composed of farm clientele.

I wish to testify in favor of keeping the New York Mercantile Exchange for the following reasons:

1. The New York Mercantile Exchange provides a price market for the agency to establish insurance values for potatoes when insuring them in the fall. 2. The Exchange provides a price for actual sales contracts of round white potatoes and is used in the event of a fire loss.

3. I have used the New York Mercantile Exchange by urging farms, when prices are favorable, to hedge part of their crop on the Exchange to cover the mortgage and my indebtedness.

4. This year I have used the New York Mercantile Exchange in a different manner. I have attempted to use the Exchange to collect my insurance account with several farmers. The grower and myself agree on hedging contracts in months of March, April and May and how many to sell. The contracts are put on the Exchange jointly in the name of H. O. Perry & Son Co. and the account grower. H. O. Perry & Son Co. provides money for the hedge and all margin calls. By mutual consent the contract can be lifted from the Exchange but only in the event that an actual shipment is made in our joint names. The re

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