By JANE HOUIN
Ohio Correspondent

WASHINGTON, D.C.— While financial and risk-management decisions always have been challenging aspects of farm and ranch work, extreme volatility in commodity markets in recent months has made these jobs even more difficult for farmers, even as prices have soared.

During a Capitol Hill hearing last week, American Farm Bureau Federation President Bob Stallman told lawmakers that farmers are contending with unusual degrees of financial risk and exposure as futures markets have become increasingly volatile.

While sky-high futures contract prices cause many Americans to believe farmers are bringing home the proverbial bacon, the reality is that few farmers benefit directly from the contracts advertised by commodity exchanges.

Stallman cautioned that because of the disparity between futures contracts and cash, or spot, prices, farmers could find themselves exposed to more risk as time goes on. He said the role of speculative and commodity-index-related trading in agricultural futures markets, while growing for some time, has reached historic levels and contributes to market uncertainty.

Local cash markets traditionally look to futures markets for “price discovery.” Stallman said one role of the Commodity Futures Trading Commission is to ensure that markets offering commodity futures and options help farmers manage price risks and assist in the discovery process for cash prices.

“The futures market mechanism is, at least, bent at this point in time, and the fact that several major grain and oilseed marketers are only offering firm crop-price bids 60 days into the future is a rather ominous sign the breaking point might not be far away,” Stallman said.

Rodney Clark, vice president of CGB/Diversified Services, appeared at the hearing representing the National Grain and Feed Assoc. (NGFA). He attributes the deteriorating frequency of genuine convergence on higher and more volatile transportation costs, demand for storage created by biofuels growth and the futures market running ahead of cash values as a result of the infusion of passively managed, long-only investment capital.

“One of the bedrock fundamentals on which hedging strategies are predicated is consistent and reliable convergence between cash and futures prices during the delivery period,” said Clark, who calls Mt Vernon, Ind., home.

“Today, that previously stable relationship between cash and futures has deteriorated to a point where many commercial grain hedgers are questioning the effectiveness of hedging using exchange-traded futures.”

Clark called for a moratorium on all hedge exemptions for long-only, passively managed investment capital entering agricultural futures markets.

“Today, we believe action by the CFTC (commodity Futures Trading Commis-sion) is urgently needed to allow agricultural markets to ‘take a break’ and adjust before additional large amounts of investment capital find their way into agricultural futures,” Clark said.

For the two funds already approved by CFTC for hedge exemptions.
Clark said the NGFA is asking the Commission not to expand their hedge exemptions beyond already-approved level.

They are also recommending the long-only, passively managed investment capital participate in futures on a dollar-for-dollar, unleveraged basis. That is, a participant’s positions in agricultural futures contract should be backed by an identical amount of investor funds held in an account by the fund.

Stallman said farmers right now are challenged with developing and implementing risk management programs for their crops – a problem compounded by the fact that as prices for supplies such as seed, fertilizer and fuel rise, producers feel pressure to lock in what they will pay for these inputs months ahead of knowing how their crops will fare and what prices they will receive for them at harvest.
“In some instances, farmers are even being asked to pre-pay for inputs they will not utilize until the next crop year,” Stallman said.
“This results in the uncomfortable position of producers locking in future input costs without similar opportunities in future crop prices.”

Other witnesses testifying at the hearing included Jeff Harris, chief economist of the Commodity Futures Trading Commission; Terrence Duffy, executive chairman of the Chicago mercantile Exchange; Gerry Ramm, president of Inland Oil Company on behalf of the Petroleum Marketers Assoc. of America; James Newsome, president and chief executive officer of the New York mercantile Exchange; Laura Campbell, assistance manager of energy resources at Memphis Gas, Light and Water on behalf of the American Public Gas Assoc.; Gary Niemeyer, a corn and soybean producer on behalf of the National Corn Growers Assoc.; Layne Carlson, corporate secretary and treasurer of the Minneapolis Grain Exchange; Thomas Farley, president and chief operating officer of ICE Futures U.S.; and Adolph “Andy” Weil, III, president of the American Cotton Shippers Assoc.