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percent change of that mean. During 1949-58, when there was an active futures market in onions, the range of average fluctuation dropped to approximately 31-percent change. After abolition of futures trading, since 1959 and through 1969, price variation about the season's mean rose again and averaged 84 percent. If this legislation regarding potatoes were enacted, I sincerely believe that the farmers, handlers and processors of Maine potatoes would in the long run be damaged the most.
The exchanges furnish another type of market stability. It is because of the concerted efforts of the commodity brokerage firms, the commodity exchanges and the Commodity Exchange Authority, that relatively few irregularities have occurred in futures trading, in spite of the tremendous growth in volume of trading from less than 5 million contracts per year traded before 1960 to well over 14 million contracts traded in 1971, as previously noted.
Gentlemen, futures trading in potatoes, as in other commodities, offers other unique advantages to the producer, handler or processor. (1) The prices of potatoes are common knowledge, made by open outcry in competitive bidding on the exchange floor. This method of establishing a price over the years has proved much more realistic and fairer, particularly to the producer, than by secret sales on a man-to-man basis of a commodity on a "to arrive" basis.
(2) The New York Mercantile Exchange, as other exchanges, acts as a focal point for the dissemination of statistics, weather data and other information which can be vital to all segments of the potato industry.
(3) This futures market provides an alternate market for the commodity, which in turn increases the liquidity of inventory.
(4) It generally allows such segment of the potato industry to borrow money and finance their operation at more advantageous bank interest rates. Banks and suppliers of fertilizer and seed potatoes often make larger loans and/or at lower interest rates to growers who have hedged their potatoes on the commodity exchange.
In short, commodity futures trading, for many reasons, helps various segments of our economy. I am not alone in this opinion. On the occasion of the Chicago Mercantile Exchange's 50th anniversary, President Nixon sent that exchange a letter which said, in part:
By fostering sound practices in futures trading and by encouraging active trade in an increasing number of commodities you continue to contribute meaningfully to the growth and well-being of American private enterprise and the national economy.
Gentlemen, I was born and raised on a farm a few miles from here, at Potomac, Md., where six generations of my ancestors were born and farmed. At the time that I helped my father with the farming, one of our major concerns was that the supply of livestock and grain would exceed the demand and that as a result the prices at the time of marketing would be low. Often they were much lower than the cost of production. We often heard it said during those years that economic depressions were farm led and farm fed. Because of my farm background, I have a sincere empathy with all farmers and particularly with those that are having difficulty in making ends
In summary, gentlemen, we content that futures trading in potatoes and other commodities is well regulated both by the exchanges and/or the Commodity Exchange Authority. We believe that because of the economic advantages and strength which futures trading gives to all segments of all of the industries which have commodities that are traded on the various commodity exchanges, this bill should not be looked upon favorably by this committee.
We respectfully suggest that favorable action by your committee on this bill is not warranted.
I thank you.
Mr. FOLEY. Thank you very much, Mr. Clagett. If you would like to remain at the witness table, we hope to have an opportunity to question you.
The next witness will be Mr. Fred Donald, banker, First National Bank of Aroostook, Maine.
STATEMENT OF J. FREDERICK DONALD, BANKER, FIRST NATIONAL BANK OF AROOSTOOK, HOULTON, MAINE
Mr. DONALD. Gentlemen, my name is Fred Donald. I live in Houlton, Maine. I am senior vice president, First National Bank of Aroostook.
The First National Bank of Houlton, now the Houlton branch of the First National Bank of Aroostook, has financed the sale of Maine potatoes on the New York Mercantile Exchange since 1952. Total assets of the First National Bank of Aroostook on December 31, 1971, were slightly over $32 million. It has a loan portfolio of nearly $18 million. We are the second largest bank in Aroostook County. I am a senior vice president.
My experience in financing the sale of potatoes on the New York Mercantile Exchange has brought to my attention some hazards which, if ignored, will cause trouble and probably financial loss. These habards are
(1) Inability to supply margin when the upward price trend calls for additional margin.
(2) Inability to deliver the potatoes in grade at delivery date. (3) Selling potatoes below cost.
I know of no other hazards in dealing with the New York Mercantile Exchange. Each of these hazards is easily recognizable and presents a small problem in comparison to the tremendous benefit of being able sometimes to sell potatoes at a profit. The farmer should make arrangements with his bank for margin calls. He should not sell more than 40 percent of his estimated U.S. No. 1's and he should know what his cost per barrel is.
A farmer is not obliged to use the New York Mercantile Exchange to sell his potatoes. However, if it is the best market available, he should not be deprived of its use. The New York Mercantile Exchange provides the best market available so often that it is very difficult for me to understand the position of those who wish to close it. The marketing of the 1971 crop, the crop now going to market, is a good example.
The New York Mercantile Exchange has been consistently above the street price. I cannot, for the life of me, see how it is a good thing for the Maine farmer to eliminate his best market. Its continuance will not cure the ills of his industry, but it may give him. time to solve these problems himself-the problems of supply and demand.
Gentlemen, although this prepared statement truly expresses my opinion and my point of view, I must admit I did not expect to come down and it is not properly documented. It is an expression of principle.
If I may be permitted-I realized this before I left home and I took a photostatic copy of just one transaction which comes over my desk. It is a typical one. If I may, I will be very brief.
Mr. FOLEY. Please proceed.
Mr. DONALD. This farmer, whose name appears on this sheet, and I will give it to the committee, I knew him, I knew his father before him. They are honest people, have a small farm. This gentleman raises 80 acres of potatoes. On June 10, he came into me and asked if I would finance the sale of some potatoes on the exchange. I asked how, at this stage, the acreage is in doubt, if it does not come out until July, what?
I would like to sell a few. The board looks attractive to me.
I did not argue the point. He only wanter to sell three Novembers. I financed the sale of three Novembers at $2.25 a hundredweight. The summer passed, on November 3, we liquidated those three contracts at $2.67 and he realized very little profit, a matter of $30 or $40, something like that.
I did not see him again for several months. On February 7, 1972, he came in again and this time, he was concerned he is heavily financed by the Farmers Home Administration-his real estate, his crop, his farm machinery. We financed his father, but his working capital is gone, his equity capital gone to a great extent, the Farmers Home Administration had it. But I could finance these potatoes.
On February 7, he sold 15 cars. By that time, we knew approximately what the condition of the crop was and they are as follows: Five March's at $3.25, five March's of $2.32, one March at $3.25, two March's at $3.26 and two at $3.27. Those are hundredweight quotations delivered in New York City. Using $1.40 a hundred as cost to get them down there, which I believe to be adequate, it means roughly $3.10 a barrel in bulk in Houlton, Maine. That was February 7. On March 3, he decided to liquidate. He bought four cars at $2.80, two cars at $2.74, five cars at $2.73 and three cars at $2.74 and—oh, by the way, I forgot to mention the bank put up $3,750 margin to support these 15 contracts.
We charged him, our bank charge was 8 percent on the amount of money outstanding for the length of time that it was outstanding. Within a few days after liquidation of these contracts, I received a check from the broker, $7,010.
Now, this is a small farm, he is not particularly knowledgeable, very honest, a friend of mine I was a friend of his father's. Now,
ne farmer had a crop e New York Mercantile ril $4.15/bbl., and May ng the prices on the ex
York which is now 93 years ago when the freight an 18 cent increase or 28 Chat Maine is still in a lot spect to freight rate cost in roximately $3/cwt. to New
DA crop report came out anver last year, the prices on the bbl., April $3.45/bbl., and May mot blame the New York Mercanis a natural reaction when people as they immediately look for cheaper
is past marketing season as a good extile exchange helps the Maine farmer. ctober, the board stayed relatively inactive, on the cash market which many claim upWith the board prices below the cash market, edged a portion of his crop has two alternatives, hedges and take his profit, add this to the cash potatoes early, or he can ship a portion of his crop dged and hold his hedges for the actual month he ch, April, or May.
futures market led the cash market at times as much wt., therefore bringing the cash market along with it. growers considerably because the cash market had fairly dull all winter staying around $2/cwt. to $2.25/cwt. d of April the futures market was still strong and this ulti
have attempted to give information that would make farmers better understand futures trading.
I have written articles for local and State newspapers, have been on radio and have given speeches to civic, farm, and yes, even FFA groups explaining the principle of futures trading. I maintain they all should be using it for price protection.
I believe this year in Maine, more farmers are using the futures market than have for several years.
The New York Mercantile Exchange has sponsored a radio program in Presque Isle, Maine, that comes on the air at 6:30 in the morning and is called potatoes, problems, and people. In an effort to educate the farmer, we have taken futures prices and converted them to FOB prices per cwt. and then to barrel prices which every farmer can understand. As an example, I would like to submit these copies of this radio program as they were presented January 1418, 1972.
I am certain that many of the farmers who were here in January are using futures and yet they came to Washington for the sake of a free ride that was available. I might add, some who came are no longer farming.
I have very strong reservations about using potato tax funds that I, as a farmer, believe are acquired for a specific purpose and that is for promoting our marketing of Maine potatoes, to create more consumption and widen distribution, and establish a strong research program that will be a benefit for 100% of the Maine farmers. As I pointed out earlier, this is a controversial subject and has two sides to it, therefore, I maintain the opponents from Maine should have the privilege of being able to use some of these tax funds to express their views in Washington.
I believe sincerely that overproduction of potatoes all over the country is our major problem, and that by eliminating futures trading of Maine potatoes it will just take away one of our marketing tools that we need to stay in business in this rapidly changing potato industry.
I believe that judicious use of the mercantile exchange to trade Maine potato futures and good management practices on the farm must be combined to keep the Maine farmer in business.
I have watched this potato industry change very rapidly in the past 20 years and I am sure that it will change a great deal more in the next 20 years. With practically every State in the United States raising potatoes, the Maine potato deal has got to stay abreast of these changes or I am sure the Maine acreage and production will continue to shrink. We are the second largest potato producing State, but other sections are growing fast and could very easily surpass us in the near future.
The New York Mercantile Exchange gives the Maine farmer a chance to obtain sound credit by hedging a portion of his crop against his cost of production. This cost of production varies a great deal from farm to farm due to many factors, but every farmer should be a good enough businessman to know his cost. This is probably a second phase of potato farming that every Maine farmer should know more about. When he has reached a decision as to his investment in