COMMISSIONER DAVID D. SPEARS, Chairman
KENNETH ACKERMAN
DAN AMSTUTZ
ROBERT BOLD
WILLIAM DODDS
LEN FEDERICO
GARY HELLERICH
SUSAN KEITH
BILL KUBECKA
CHUCK NELSON
RON OLSON
STEPHEN OMAN
LARRY QUANDT
ROBERT L. WHITE
LEMMY WILSON
TODD VANHOOSE

PANEL MEMBERS:

CARL ANDERSON, Texas A&M University

PAUL ARCHITZEL, Commodity Futures Trading Commission

BILL BIEDERMAN, Allendale, Inc.

STACY CAREY, House Agriculture Committee Staff

DR. PETER GRIFFIN, American Feed Industry Association

KENDELL KEITH, National Grain & Feed Association

WALT LUKKEN, Senate Agriculture Committee Staff

PHILIP OLSSON, American Feed Industry Association

BEV PAUL, Senator Bob Kerrey Staff

MIKE SEYFERT, Senator Pat Roberts Staff

SCOTT STEWART, National Introducing Brokers Association

OTHER PARTICIPANTS:

CHAIRPERSON BROOKSLEY BORN

COMMISSIONER BARBARA HOLUM

COMMISSIONER JAMES NEWSOME

- - -

C O N T E N T S

AGENDA ITEM PAGE

I. Welcoming Remarks, David D. Spears 3

II. Panel Discussion - Risk Management 10

Strategies for Producers of Agriculture Commodities

III. Risk Management/Crop Insurance Legislative Review 62

IV. Panel Discussion - Agricultural Trade Options Pilot Program 113

V. Meeting Adjourned 170

P R O C E E D I N G S

I. WELCOMING REMARKS, DAVID D. SPEARS

COMMISSIONER SPEARS: Good afternoon. My name is David Spears and I want to welcome you here to the 26th meeting of the CFTC's Agricultural Advisory Committee. First, allow me to state the commission's sincere thanks to the committee members and organizations that they represent for being here. We are all well aware of your commitment of time and resources, and we certainly appreciate your efforts to be here.

As you have noted on the agenda today, the meeting is primarily focused on risk management tools and issues. The CFTC is determined to work with the agricultural industry to help educate farmers on how to better manage their risk. Today we'll here a variety of views on effective risk management tools already available and other innovative programs.

Before opening today's program, I'd like to recognize my fellow commissioners and allow them to make a couple of brief comments. To start with, I'd like to recognize Chairperson Brooksley Born. Thank you for being here, Brooksley.

CHAIRPERSON BORN: Thank you very much, David, and I would just like to extend the welcome of the commission to all of you here. Our Advisory Committees are critically important to the commission's operations. You are the way that we learn about the industries affected by our regulations and get practical feedback and advice. The fact that you are all willing to contribute your time and expertise to helping the commission be the best regulator that it could be really means a lot of us, and I would like to personally extend my deepest gratitude.

COMMISSIONER SPEARS: I would also like to introduce Commissioner Barbara Holum.

MS. HOLUM: Thank you, David. I, too, would like to welcome everyone for coming and participating, and you have all already given a lot of input into this Ag Options Pilot Program, and I know a lot of us in this room have been very concerned over the last year about the program, and I'm pleased that Commissioner Spears and this Advisory Committee are taking the lead to put together a program that works well for all of us. Thank you.

COMMISSIONER SPEARS: Thank you, Barbara. And finally, our newest commissioner on the commission, Commissioner Jim Newsome.

MR. NEWSOME: Thank you, Mr. Chairman.

I appreciate the opportunity to make some comments. I'd like to thank everyone for taking time out of busy schedules to be here to provide assistance to us as we address ag trade options. Certainly, in my mind, from an agricultural standpoint, nothing is more important than addressing the risk management issues that we all face given low commodity prices, the phase-out of the price support program. So this is extremely important to me in the background that I come from. I believe that the more risk management tools that we can provide to industry, the more opportunities that we make. The more competition in this area, I think the better--I think all of us will be better off. Certainly, I think the agricultural sector will be.

I just want to reiterate that I am committed to working with you to make this program a reality. I'm committed to making necessary changes to the program to make it beneficial and I'm committed to doing that now. So I look forward to your comments, and I look forward to working with you.

COMMISSIONER SPEARS: Thank you, Jim.

I want to thank each of the commissioners for being here. I know their schedules are full, yet recognize the importance of this group. I certainly appreciate your time and your efforts.

I also want to recognize a special guest in the audience, former Commissioner Joe Dial. He is the former head of this committee, and I thank you, Joe, for being here. I know Joe continues to have a lot of interest in this area and provides leadership on these issues across the country.

I'd like to continue on around the table and have the individual committee members to quickly introduce themselves and the organization they represent. So with that, I might start with you, if you would introduce yourself. There are still people arriving, and they will be here a little bit late, but if you would introduce yourself.

And then, a housekeeping issue, if you would speak into the microphone. When you're done speaking, push the button and turn it off. I think only two or three microphones can be on at any point in time. So if you would just remember to turn your microphone off as you finish speaking. Thank you.

MR. WILSON: I'm Lemmy Wilson from Newport, Tennessee, and I represent NCBA.

MR. HELLERICH: I'm Gary Hellerich from Valparaiso, Nebraska, and I represent the American Soybean Association.

MR. OMAN: Steve Oman from Findlay, Ohio, and I represent the American Farm Bureau.

MR. BOLD: Robert Bold, Lewistown, Montana, and I represent the National Association of Wheat Growers.

MS. KEITH: Susan Keith. I'm on staff at the National Corn Growers Association. I'm at the table today because it did not rain in eastern Iowa last night or Glen Miller would be here.

MR. QUANDT: Larry Quandt, Mason, Illinois. I represent the National Farmers Union.

MR. DODDS: Bill Dodds from Toledo, Ohio. I represent the National Grain and Feed Association.

MR. NELSON: Chuck Nelson. I'm representing the National Grain Trade Council. I'm with Bundy Corporation here in Washington.

MR. OLSON: Ron Olson from Minneapolis, Minnesota, representing North American Millers' Association.

MR. FEDERICO: Len Federico, representing the U.S. Rice Producers Group. I'm with Louis Dreyfuss Corporation in Wilton, Connecticut.

MR. BIEDERMAN: I'm Bill Biederman. I'm with Allendale. I'm not a member. I'm just a speaker here today.

MR. ANDERSON: I'm Carl Anderson from Texas A&M University.

MR. AMSTUTZ: I'm Dan Amstutz from Washington, representing the North American Export Grain Association.

MR. WHITE: I'm Robert White from the Kenton, Ohio, and I represent the National Grange.

COMMISSIONER SPEARS: On my left is Paul Architzel who is also on the CFTC staff and will be part of the program later on.

As most of you can tell by the agenda, we have broken the program into three different parts. The initial session of the meeting will be a panel discussion on risk management strategies for producers of agricultural commodities. We have asked a couple of individuals to make presentations to help provide some food for thought for discussion. As my fellow commissioners have said, this commission fully recognizes the value of this type of advisory committee. We certainly want to encourage an open dialogue and discussion among committee members. In order for our commission to be effective, we need to have industry input -- your input is essential. I encourage any comments or questions to the speakers on the first panel.

The second panel will be primarily made up of congressional staff giving us committee updates of what's going on on the Hill in legislation and issues, as well as a presentation on proposals by the American Feed industry and how that may impact regulatory and legislative issues. Then, finally, we're going to have a discussion on the commission's Agricultural Trade Options Pilot Program. There will be a couple presentations to generate some food for thought. We will then get into an open dialogue about scenarios or possible changes to the pilot program.

II. PANEL DISCUSSION - RISK MANAGEMENT STRATEGIES FOR PRODUCERS OF AGRICULTURAL COMMODITIES

COMMISSIONER SPEARS: I'd like to recognize the first panel members. We first have Bill Biederman who recently testified before the Senate Ag Committee on this topic. Bill will discuss his organization's risk management program. Bill is the vice president and director of research and co-founder of Allendale, Inc. His organization is based in Illinois and provides research and consulting services on agricultural issues to major food companies, the U.S. Department of Agriculture, the U.S. Department of State, and foreign governments among others.

Also joining Bill today on the first panel is Dr. Carl Anderson from Texas A&M. Mr. Anderson will speak about risk management programs designed by his team at Texas A&M. He has an extensive background in price risk management and price discovery processes. His research projects have focused primarily on developing new hedging strategies.

I want to thank both of these gentlemen for traveling to be with us here today. Each member's materials have been included in the committee member's packet, which include Mr. Biederman's speech and Mr. Anderson's slides along with several pamphlets published by Texas A&M. We look forward to hearing more.

Mr. Biederman, I believe you're first on the agenda. Will you go ahead and proceed with your presentation?

MR. BIEDERMAN: Good afternoon and thank you, Chairman Spears and the entire Ag Committee, for giving me this opportunity to present today. My name is Bill Biederman, vice president, director, and co-owner of Allendale, Inc. Allendale is, as Chairman Spears said, a research and brokerage firm located in McHenry, Illinois. We are a guaranteed introducing broker with R.J. O'Brien. We have approximately 2,000 clients throughout the U.S. and Canada.

Allendale provides a daily research product, the Allendale Advisory Report, which is subscribed to by producers throughout the breadbasket of the U.S. Our average producer farms approximately 1,500 acres and has 89,000 bushels of unfarmed storage. Allendale nor myself nor any associate or related partner have received payment or compensation or is contracted to receive payment or compensation with regard to statements or opinions expressed today.

Mr. Chairman, I would like to just get right to the point, and therefore I'm not going to read through my statement. The 1996 Farm Act is expansionary and is likely the most bearish policy ever adopted. In addition to being bearish, it strips the market-based income support from the producer by eliminating the target price and deficiency system, thus we knew the producer had to either manage risk or face financial losses as the market reacted to the increasing supply.

But the '96 Farm Act is not all producer negative. The Farm Act opened the door for new risk management products like revenue assurance and other regulated products that, when combined, can help the producer manage risk even better than old farm program; thus Allendale put together a risk management program based on the premise that, number one, no one knows where the market is going and therefore we do not base the program on trying to sell at the high.

Secondly, no one knows their cost per bushel, but everyone knows their cost per acre, and therefore we base our marketing on dollars per acre rather than dollars per bushel.

Third, we make the program easy to understand. In other words, we made it similar to the old farm program. In 1998, Allendale, Inc. announced a complete risk management package called Allendale Risk Management Program or ARM. Corporate alliances were established with Rain & Hail, one of the nation's largest crop insurers, and Amcore Bank, the third largest lender in Illinois. This year, Allendale has expanded and improved the ARM program to include American Agri-Insurance, the third largest insurer, and we have opened the door to other banks.

The ARM program combines revenue insurance with marketing. Through the ARM, we bring the insurance professional, the banker, the broker, and the elevator operator to the producer's table to establish a management team focused on the same goal, to lock in a profit based on normal yields. Let me demonstrate how this program now works. For the last 20-some years, we have been marketing grain on the farm in the following manner: The red line that you can see on the graph represents the target price. In fact, this represents the target price in the county that I was farming in, and the way we would market grain is when the price would exceed this target price, we would just continue to sell into that so that we would end up with an average price represented by the black line.

In this case, it was 283. We knew that when the market would go down, there would be a deficiency payment, the target price minus average farmer price, and we knew that we could take that deficiency payment and add it on to the average price we sold at. When we would do so, it would raise the price we sold from 283 up to 313. This was called farming for the farm program, and this has been done over the last 20 years by every farmer in America, whether he was conscious or not conscious of it.

What we did with the new tools that are available to us is the exact same thing. We no longer have the target price by the government, but now we have target prices established through private enterprise through the different assurance programs. We can set up a target price, but as you'll note, it's no longer in dollars per bushel. It's in dollars per acre, and there are some big advantages to this.

So we establish a target price, let's say, of $261 based on the different CRC products that are available. Then we do our marketing on dollars per acre above this. So let's say in this case we end up with a average of $287 an acre revenue. In the fall, there would be one of four or two of four deficiency payments that we can now collect. These deficiencies, however, are not from the government. They're from private enterprise. Those deficiency payments are then added onto the price we sold at, and instead of $287, we end up with a net gross income of $347. So we end up having the same marketing plan, the same marketing program, as we've had from the last 20 years. It's something we're very familiar with and something that we can trust.

These tools are, however, better than the old farm program for the following reasons: First of all, there are no payment limitations. Secondly, it pays on every acre. Third, the components of the program are fully regulated, thus we've eliminated the risk associated with unregulated cash contracts. And fourth, the ARM program is being used by many banks to collateralize operating and margin loans.

Now I'm going to turn to the ARM program itself and show you two client examples of how the program worked in 1998. The program is split up into four quadrants. And I know you can all see this. I'll blow it up in just a minute, but I wanted you to see that we have an input section here, an analysis section just to right of it. Down on the left-hand side, we have a settlement sheet, and on the right side, it's bank analysis. So now I'll blow this up, now that you can see the overall image. I'm going to skip over to the right so that you can see the graph, as I know what all the inputs are, and I'm going to point out to you that this program does respond to each and every farm, as you can see the graph respond accordingly.

The lines that you see in the graph, the dome-shaped line represents farm income under the new farm policy. Under a free market policy, farm income is optimal when we have a decent yield at a decent price. In other words, if we go way to the left, and we lower yields dramatically like we did a few years ago in 1995 and '96, it doesn't matter how high prices go. If we don't have bushels to sell, income declines dramatically.

If we go way to the extreme right, and we have 500 bushels per acre like we all did this year, and the markets go down, we end up with reduced income. It's not as reduced because bushels are always better, but it does decline. So optimal income occurs in a free market environment when we have a decent yield with a decent price. The income curve under the ARM program is the exact opposite. When we have a normal yield, our income is going to be less in the arm program than if we were not in the arm program. The reason is because there's costs to the insurance. There's costs to options. There's costs to forward contracting in futures. When we absorb those costs, we still have a profitable income, but it's less than if we did not have to go through those expenses.

But what it does do is, when we go way to the left, and we lower yielding dramatically, theoretically prices should respond by rising. So we can collect up to two deficiencies. First of all, if yields are down dramatically, we'll collect on our insurance policies. That will get added on to our target price which is represented by the green line. Additionally, if prices do rally, we have tools built into the system that will take advantage of that rally. So that would be the second deficiency, and as we add those deficiencies to our target levels, the further to the left we go and the more extreme we get, the higher the income on the farm.

If we go to the right side like we did this last year, we have more bushels than we planned. More bushels means that every bushel is worth something, and that means that we're going to exceed our budget. Those additional bushels are looked at as a deficiency payment, and the farther we go to the right, the more we have to add on to our target price; and if the market goes down, that inventory has been hedged, and there's been a value assigned to it. So the lower the market goes, it is more money we have the add to our target.

The red line represents the cost of farming per acre. This particular client is from west central Illinois. He has 148 bushel APH. He has a 20 under basis in the fall and a 5 over basis in the spring. He has on-farm storage and pays nine percent on his money. Last year we employed a 75 percent CRC policy. We can employ other policies like multi-peril and things like that, but it does change revenue curves dramatically. The cost of the insurance was $22 an acre. We were able to collateralize operating loans and guarantee the banks $255 per acre, no matter what the problem.

This individual ended up with an actual yield on $185 bushel per acre, and the fall price was established at $2.19 for CRC. Under that scenario, this individual made $451 per acre net gross income. Well, let me define net gross income for you. Net gross income is gross income less the cost of the options employed, insurance, storage, interest, and commissions.

We had another client in west--excuse me--eastern Indiana who last year got caught in that green snap from the strong winds that went through. Let me show you, without changing the inputs above--he actually did better than what I'm going to show you--but he only had a 40 bushel yield.

So let's put in a 40 bushel yield. Prices are still at 219. In this case, he only had 40 bushel to deliver when we had forwards sold at about 111 bushels. On those 40 bushels, he only had a $123 income, and on the 71 bushels, since he sold higher than where the market was in the fall, he collected an extra $70 of income from that. The options that we purchased were worthless because they were calls and the market had gone down last year. The insurance we bought for $22 now paid $227. After storage, interest, and commission fees, he made $356 per acre.

On top of that, all of these gentlemen collect transition payments, deficiency payments, and disaster payments. The total gross income under this scenario was well over $500, according to their bankers, per acre which is tremendous in last year's environment.

And I can see most people, when I talk to them about this program, they understand how this works in a down market, but what would have happened if we would have hedged low and the market would have gone up? Let's put in $3.50 just to show you that example. This is a typical situation that I have experienced more than once using cash contracts. We're involved in them, and now we only have 40 bushel to deliver, 71 bushel that were committed on that we can't get out of.

In this case, you would lose $46 on those 71 bushel that you can't deliver on because the market went up from where we sold, but because we have options, they're now worth $66. The insurance recalculates at the higher price, $248, and we ended up netting $348 for net gross income. The total income would have been over $500 in this case.

In any case, whether the market was at $2.19 or $3.15, this individual from eastern Iowa would have made about $350 in net gross income under this program. So the program works whether the market is up or down, and the program works whether yields are good or bad.

I want to point out that these tools are better than the old farm program because, number one, there's no payment limitation; number two, it pays on every acre; and three, they're fully regulated.

Concerns have been expressed that the insurance industry is reducing the need for the futures and options. As of today, I can tell you that the effect is actually the opposite. Now, for the first time in agricultural history, the producer can use the futures and options in a manner that will not force him or her out of the market when margin calls occur. Due to the bushels guaranteed in the new assurance programs, we can hedge 100 percent of the insured yield without collateral risk to the bank. As a result, we can provide the banking industry with a collateralization model that allows them to make all margin calls without threatening the operating line of credit. This is a major milestone in the use of the exchange.

Things that can be done to improve the program: After working with the producers from all over, I think what we can do in Washington is help the America farmer and level the playing field without completely changing the farm bill. First of all, I believe we need to further improve the APH formula. The success and profitability of a farm is higher dependant on the APH formula. Narrowing the spread from actual yield to APH would be helpful.

Secondly, work on a basis product that would establish benchmarks. For instance, there would be a risk management tool that is based on freight rate, that is it would limit the adversity that basis has on a local area.

Third, create a short-term set-aside program to temper LDP exposure of the bearish impact of the expansionary policy and keep this within the context of freedom to farm. The idea could be of a one-year CRP program where producers could voluntarily bid acres into the program. Fourth, continue to subsidize the insurance premiums 30 percent. When Congress approved the 30 percent premium subsidy, we saw an immediate response and producers today are employing a higher level of insurance than earlier anticipated.

Fifth, continue to raise the percent coverage of the APH to 85 percent in all states. Nearly every client we interviewed who qualified for the 85 percent coverage was able to substantially increase income versus the 75 percent program.

And sixth, continue to protect the public from unregulated contracts by monitoring and enforcing the rules that require full registration of parties offering contracts and derivatives.

In conclusion, the 1996 Farm Act is accomplishing exactly what it was intended to do. Producers are being forced to become more efficient and are using regulated risk management tools like the insurance, futures and options, to manage risk. As stated by John Hansen, director of the financial services for Farm Credit Service of America, he said, and I quote, By using safe regulated marketing strategies with the federally subsidized crop insurance, we can guarantee the farmer revenue per acre. I'm very aware of the comments we've received from our clients that it was--and it was referring to the arm program--very well received, end of quote.

But the key to the producer's success is a level playing field and the ability to afford these tools. The more effective APH program, a limit of only basis adversity, a minor set aside program, and continued premium subsidies for CRC, as well as a move toward greater percent coverage, will allow producers to manage risk with the confidence that the tools they are using have the integrity of a regulated product provided by the CFTC and the FCIC. It is this type of contract they desire and seek. It is this kind of product that will allow them to remain in business for years to come.

We realize that the CFTC cannot address all these issues I bring before you today, but we do look to you to clearly communicate to those in Congress that the products offered on the regulated exchanges and offered through regulated insurance vendors are providing complete risk management products and in fact are providing more risk protection for the producer than old farm bill.

We also look to you as our financial regulator to provide public assurance and confidence that the contracts offered within the industry have the integrity and financial backing. Just as the banks count on the FDIC; equities markets, the SEC; and the insurance industry, the FCIC; we count on you, the CFTC to maintain a fair, legal, and orderly market.

As Congress continues to address the issues of risk management, I urge them to strengthen the CFTC's role in monitoring derivative market activity. As long as we offer the producer regulated tools, those who are managing their risks will thrive in the years to come.

Thank you very much.

COMMISSIONER SPEARS: Thank you, Bill.

I think we will probably hold off on questions until after Dr. Anderson gets a chance to make his presentation, and then I'd like to have the committee pose any questions to the two of you at that time together.

While Dr. Anderson is getting ready, I'd like to go ahead and recognize three members who is just arrived after the introductions to our meeting. I'll start with, on my left, Bill Kubecka, with the National Grain Sorghum Producers Association, Ken Ackerman at the end of the table with Risk Management Agency, and then Todd Vanhoose with Farm Credit up here on my right. So thank you for coming, gentlemen; and Dr. Anderson, whenever you're ready, you may begin.

DR. ANDERSON: Thank you very much, Chairman and Commissioner Spears. It's indeed a pleasure and a privilege for me to have the invitation to visit with you and discuss risk management as we are handling our educational programs from Texas A&M University.

We have two unique programs that I want to highlight today, and I'm going to skip a lot details because any time you get into intensive--

CHAIRPERSON BORN: Can you use a microphone? I think it has to be--

DR. ANDERSON: Is this okay? All right. Thank you. I'll try--if anyone can't hear, please raise you hand, and I'll talk a little louder.

The risk management--I want to give you a little background, a little history as to where we're coming from. The Texas Risk Management Educational Program which I have been involved in since the beginning of time, I want to go back and say a little bit about my futures trading. I've had a lot of experience working with the exchanges and working with my futures trading commissions and with individuals over the years, and I want to compliment you for the work you do and the regulatory emphasis you place on a complicated issue, but it's very important today.

I go back--I, of course, worked with the Federal Reserve Bank of Dallas for some time, and at that time of the stage of growth in Texas, we were putting in the cattle feeding industry in the panhandle a great risk on our agricultural lenders, and there was a lot of concern on the part of the federal reserve system that if they bring that risk and dump it into the panhandle of Texas we might have some banks that could not handle the risk.

So how were we going to do this? I did the surveys, and the interesting thing was that as the lenders moved in, they were very cautious in putting up a little bit of collateral or a lot of collateral against a little bit of the borrowing capacity, borrowing about 30 cents on the dollar when cattle and feed is going kind of slow. We learned how to do hedging effectively on cattle and feed, and that lending went up to about 80 cents on the dollar, a very key factor to expanding the cattle feeding industry in Texas, a great experience for me.

Then as we move along, we come along with these options in 1984. I worked then more in cotton with the New York Cotton Exchange. We went into Memphis, Tennessee, went with Joe O'Neil, president of the New York Cotton Exchange, and we started the options training.

And then another good thing that happened from USDA was a pilot program in the late 1980s. We had counties in Texas that were picked for the options program, and this is where we really started our intensive training. As in crops, as you well know in Texas we have a lot of yield variability, and straight futures hedging was a very risky business, or in other words, you could hedge a very small portion of your control because you're not sure if you're going to make 25 percent of your expected yield; and so that was not working well.

Well, with options, the whole picture has changed. We then came along and worked with the options programs. We started teaching two-day intensive programs. We learned very quickly that the detail for producers involved in understanding and implementing the use of futures and options was overwhelming. People that had not been thinking about this sort of way of hedging had a hard time. So our two-day programs really didn't get us very far.

We then started marketing clubs. We found out that these people would meet once or twice a month. Then we could move on. So with that, we did a little training and soon our better people said, well, this is basics, A-B-C. We want something more advanced, and so that's where I start today.

This is our advanced training program for our Texas risk management. We started what we call a master market program. As far as I know, in ag education, this is--how can you get people who are mostly producers in agricultural to attend an eight-day, 64-hour intensive training program? That's what our master market program is dealing with, and of course, as you well know, with farm policy changing, price risk is great, the educational resources are then putting a lot of pressure on us, and here we're then saying how are we going to get this master market program started? How are you going to--because we figure you take eight days, at least 64 hours to get producers just warmed up to understanding what Bill is talking about. So they could realize and evaluate what Bill is talking about. They need to know about the market.

So with this, we did our programming with our master market concept and educational programs that deal with master marketing clubs, and what's unique here is master volunteers. We require the people who attend this 64-hour training to go out and start a marketing club or become a part of a marketing club. So it multiplies itself in chain reaction, and this we have found to be very successful.

We put our program together. We're believers in that we must have the advice of the grass roots folks. So we use advisory committees just as you are here with the Commodity Futures Trading Commission. We use these to put our programs together. We also use peers, our own associates, to help us evaluate our program. The first thing we came up on was how are you going to pay for this. Our first obstacle was it costs money to put on a workshop. If you're going to have a first-class workshop, and you're going to get the best teachers in the United States, you're going to most likely have to do a little bit of hiring some consultants; and our program, we try to make it at least 50 percent non-Texas-based educators.

So we have a registration fee, $250 per individual. We get grants. We seek grants. We have some grants. Our main grants come from, like, Texas Farm Bureau, Texas Corn Growers, Texas Wheat Producers, and from other agribusiness, and of course, then we have just the basic extension funding behind the resource of that, our budget. Our expected results, highly trained marketers, improved educational materials, professional development, and a marketing club multiplier. We have approximately 50 marketing clubs actively ongoing in Texas as we roll along and new marketing clubs develop and old marketing clubs kind of graduate.

So it's an ongoing result, but here is what we're most proud of: We started this program in eight days over six weeks, two days and then skipped two weeks and then two days and let a little time go, let the people talk to each other. In two and a half years, we go back to this original marketing club group in Amarillo, Texas, mostly grain and livestock folks, and ask them what do you think, and here are the results: 82 percent indicated an improved bottom line. The range was between six and almost $100,000 per operation. In averaging this out, it's about $33,000 per year added income by the added training these folks received in learning how to do a better job of using the marketing and using the marketing strategies and the tools.

The objective here is to develop a marketing strategy, a marketing plan for this individual operation. That is what's all involved. In eight days you start out with putting people in groups. You go find and tell me what's your cost of production per acre, and I want it per yield. I understand that we've got a problem with yield and we're going to do crop insurance on that, but I like to have a five-year average. I want to know if it costs--you know, if it costs 75 cents to grow cotton, and I can promise them 55 cents, we've got a big problem, and that's what's happening right now, and we have to try to work with that.

So we then come up at the end of the program, individuals have to tell us their marketing program. They are actively involved in this training session. So we've had six of these workshops. We will allow only 60 people. We just finished one up in Amarillo, Texas. We had 90 people wanting to get into that, 60 limitation at $250 each. So we're having a little bit of a problem serving our clientele fully.

So part of our Texas regional marketing program includes the marketing clubs. Another thing I've done and worked with is we're going across the south now with the marketing club. I teleconference with these clubs. If they want to meet at 7:30 in the morning, and they want to talk about the markets, I'll certainly talk with them; but I thought, well, why don't we get some real top experts. We want to use the industry involved.

So now we have, in working with J.C. Bradford & Company of Memphis, Tennessee, we have an 800 number so once a month, two days or so after the supply and demand forms come out, we bring out about 80 locations from Texas to Florida, to South Carolina, North Carolina where farmers can sit down. They will listen to, for 50 minutes, some outstanding grain person evaluate the grain outlook, someone do the same thing for soybeans, and the same thing for cotton and for rice.

Now all of this is just take your time. Most places have a banker or lender who will buy the coffee and the donuts, and they sit down, and they drink coffee, and they listen to these professionals talk about the cotton outlook or the grain outlook, corn or wheat, and then they will build their strategy. We talk about strategy. Included in our program is standardized performance handling. Those farmers do not know a whole lot about their business from a standpoint of accounting for management. Yes, you have records for income tax, but you and I know that that's only a start for really managing. So we have a package. We have software. We call it BudPro. You can work yourself down into getting the cost per acre, put in any kind of yields you want to, and you come up with the cost of production.

In addition, we have a curriculum guide. We're putting together a thick notebook, four pages, you teach a subject, what's a put option, call option, futures, short, long hedge. Each one of those is a teaching plan. They've got complete teaching plans. They're on our web address if any of you want to look, a thick notebook. I don't want to overpower you with a lot of detail, but that is sort of the follow-through that we've found.

Now we now have producers say we need more. So where we are today is individual old farm and ranch analysis. A software package that not only evaluates individual farms based on that farmer's record of yields and prices over the past so that we can look at the financial impact of alternative strategies of reducing risk, bringing in whether we use straight futures, whether we use options or we use a combination, and how we fit it crop insurance to work with this. And so we get a organizational structure of these farms.

Now this is a tax--this is where resources are really taxed. It's only through the fortune that we had one of our representatives in Texas attend our first master market program. So with his seeing what you can do through education to help people help themselves, he's been a very strong advocate, and he's gotten enough funding for us to hire some young men that can sit down across the table from a farmer or rancher and go through this software package. It's complex. It builds in, though, the organizational structure of that farm based on where it is today.

That evaluation then works with the land resource base, with the equipment base, and we're looking at leasing now versus owning equipment. It's very clear, in particular in cotton, a new six-row cotton spindle picker will run somewhere around $325,000. So then leasing may work. Marketing alternatives, crop and revenue insurance is brought out, the debt, whether we need to reduce debt, increase debt, how's the financial situation, and what we have then is a strategic plan running out for five or ten years. Most farm analysis will do zip. Here's the bottom line today. Because this has historical data, it will then carry out for five years, and even out to ten. Much as the food and agricultural factory program does for the nation in the evaluation for the outlook for crops, we do that same sort of thing on the individual farm. But this is a one-on-one basis, starting farmers out with their records. We're finding it challenging but very rewarding. And so that's where we are today. The package is here. Our plans are, as we develop these softwares, we'll make them a little more user friendly. They will be put on the internet so that farmers can call up on the internet and work with their future in that manner.

So I want to thank you for your time, and this is the end of my presentation. Thank you.

COMMISSIONER SPEARS: Thank you, Dr. Anderson. Again, as committee members recognize, the purpose of this part of the program was designed to educate the members of the committee on various tools, programs out there that are being presented to farmers and ranchers as they go about their risk management activities.

My lawyer tells me I have to say this. So for the record, and I'll read this per his instructions, but Bill, Mr. Biederman, you mentioned appealing to Congress concerning risk management issues. "I'd like to state for the record that the AAC is intending to advise the commission, and only the commission, and any appeals to Congress are outside the scope of the AAC's charter." I thank you for your comment, but my lawyer told me I had to say that. We cannot in any way be part of lobbying Congress on any issues. You can lobby, but we cannot.

I'd like now to open, for a few minutes, the table for discussion or comments or questions to the two speakers. Again, Bill and Carl, thank you for being here. I might start by asking Bill a question, and then I have one for you too, Carl in a minute.

But, in general, Bill, what has been the first reaction of the majority of the farmers that you have approached about your program, and were they familiar with those types of tools or different risk management tools available to them such as hedging, options, those type of things, and how much time do you have to spend educating participants in your program about those type of various tools, and what are some of the challenges you face there?

MR. BIEDERMAN: The reaction was overwhelming. We actually turned some customers away because we didn't anticipate the demand as large as it was. So I think there is huge market there for the industry to work with. Our process, we might be overextreme, but we required everybody to go through a marketing meeting, and we held several meetings a week around the country. We did this mostly in conjunction with another insurance company or with a bank or both.

As far as their knowledge, I found a wide variance from crowd to crowd of their knowledge of the tools, but we found an incredible willingness to use the program to its full extent. We had several people sign account papers before we even--they sign account papers before they do any analysis at all on their farm, and several had no experience at all. They're in the program. They're 100 percent committed, and I will tell you that the comments that I've heard just this last week is that this is great because I don't have to try to outguess the market. So they feel real good about it.

I hope that answered your question.

COMMISSIONER SPEARS: If anybody else has any questions, feel free to jump in.

I might just ask, Dr. Anderson, in your opinion, what is the biggest obstacle confronting farmers as they go about trying to undertake your program and the type of programs Mr. Biederman has offered?

DR. ANDERSON: I think that's a good question, and I don't know that I've really figured it out yet. Farmers are very reluctant to get into a lot of detail, and I find--and we find in programs that we're now offering it's the most educated folk that are coming out. Most of them have some college experience, and half of them have a college degree. So the biggest obstacle, I think, just the lack of farmers putting forth enough interest to move into learning or finding someone to work with them that they can trust. There is a little bit of the problem of finding trustworthy folks to work on the risk management side, and then I would say, secondly, probably if you're dealing with, say, a put option, it could be the up-front cost involved until they learn how to manage the options with other strategies.

COMMISSIONER SPEARS: Are there any questions from other committee members?

Mr. Wilson.

MR. WILSON: Dr. Anderson, on the Amarillo two-and-a-half-year evaluation, $33,000 average improvement, do you have a handle on what percentage of that was grains versus livestock?

DR. ANDERSON: I don't really have a percent, but being in Amarillo, we know that it's definitely between the grain and the livestock side, but we didn't look at the breakout, sir.

MR. BOLD: Bill, I would say your program is real interesting. In fact, we even had lunch discussing a parallelism to the program that you already have in place; and we're from wheat country, and to the best of our knowledge, the ARM program that you offer is not available in that commodity or that part of the world yet; is that correct?

MR. BIEDERMAN: No, sir, it's actually available. We just haven't had the time to go out into that part of the country.

MR. BOLD: So when will you?

MR. BIEDERMAN: Well, probably this fall because it is a fall crop. So we have to go out during the late summer. But we do have it written for corn, beans, hard red wheat, soft red wheat, durum.

MR. BOLD: So you feel by this summer or this fall you'll be in the hard red wheat country and probably the hard red spring country?

MR. BIEDERMAN: That's what our hopes are, sir.

COMMISSIONER SPEARS: Ken?

MR. ACKERMAN: A quick question for Bill. By the way, I enjoyed both of your presentations. I had the opportunity to attend a marketing club meeting in Seneca, Kansas a couple of weeks ago put on by Kansas State University, and it was a very interesting session and very useful meeting for the farmers involved. There were about 30 farmers in the local area who had been meeting for about eight or nine weeks and comparing notes and got quite a lot out of it.

My question for Bill is this: Your presentation is very interesting and presents a very interesting way of how to mix insurance and futures and options into a structured pattern, and your discussion about what can be done to improve things, one of the things you mention is APH, actual production history. This has been a very controversial area within the crop insurance world as something that needs to be addressed. You said generally we should find ways to further improve the formula. I just wondered if you had any thoughts on how you would go about it.

MR. BIEDERMAN: Actually, I think that would take a long time to discuss, and I don't think we have the time for that, but you know, the basic gist of what I'm trying to say there is that when there's a farm who can produce 150 or 170 bushel per acre, and the insurance APH is at 110, you have why by the insurance. By the time I take 75 percent of 110, like one farmer said, I can go out and throw the seeds in the ground and produce that kind of a crop.

So it really doesn't provide a service. So in specific locations around the country, that's an issue, a very big issue.

COMMISSIONER SPEARS: Gary.

MR. HELLERICH: Okay. I have a question concerning your data here you presented. I believe you had an average price up there of 283 in your computations that you used for this past year. Now as we look ahead for '99 and 2000, that 283 is substantially above what in reality is actually out there. Now are you proposing to use this program when you're in a guaranteed loss situation?

MR. BIEDERMAN: No, sir, we're not. In fact, if we run the budgets for a particular farm and it doesn't meet or exceed costs to that there is a profit potential built in, we don't advise it. We just tell them not to do anything. But I can show that you that everybody in the program this year is locked in at a profit.

MR. HELLERICH: Yes, that might be at this year, but I'm talking about this coming year and the year after.

MR. BIEDERMAN: Yes, that's what I'm referring to, 1999, Year 2000. With a 240 price, we've got that built in. This particular example was for last year because we've closed it out. We know where we're out. This coming year, we do have examples of--in fact, there's four examples in your presentation out there of people who are looking at the 1999, Year 2000 crop year.

MR. HELLERICH: Okay. I guess I wasn't aware of where the market was in sufficient time to capture a $2.40 market. Because we're at--in Nebraska, we are typically running at a 20-25, 30-35 cent basis.

MR. BIEDERMAN: Right, and we do have--

MR. HELLERICH: And it makes it very difficult to come up with a profit at this type of a situation.

MR. BIEDERMAN: That's correct, and we take basis into account also, sir.

COMMISSIONER SPEARS: Susan.

MS. KEITH: Bill, I had a question about the graph that you showed. When was your X axis on that chart? It's the one that showed the income with ARM and without, that one.

MR. BIEDERMAN: The X axis was the revenue if you're not with ARM. So, in other words, you would be on this curve here. In this particular example, you'd make about $340 an acre if you're not with the ARM program and you have an average yield, average price. If you have an average yield, average price, and you're in the ARM program after you've consumed the costs of the program, you'd make about $300 an acre net gross income.

MS. KEITH: What's your other axis then?

MR. BIEDERMAN: This would be revenue if you're in the ARM program. So, in other words, you would go to match it with this, or you would go across to match it if you're in the ARM program.

MS. KEITH: I see.

MR. BIEDERMAN: But if you would like, Gary, I can show you that this particular farm here with a 240 price has a--this is using today's marketplace with 240 futures. We're looking at a collateral guarantee of $248 an acre, and if he has a normal crop of about 150 bushels--oops. I did that wrong--and if we have $1.90 price in the fall, he's going to make $338 net gross income. That's after taking out the cost of the insurance and options and everything else.

So you know, it's not a barn burner this year, but it is profitable. That's why people are doing it.

MR. HELLERICH: Okay. They will do it with that particular set of circumstances there. Soybeans are in a similar situation. We have in Nebraska, South Dakota, southern Minnesota, western Iowa, we carry some large basis in there, and these prices don't work for this year and, you know, it's--to explain to this group that here's a program that works, it maybe works in that situation, but let's don't apply it to all areas of the country.

MR. BIEDERMAN: Well, Gary, the other comeback to that is show me a risk management plan that does show a profit at this price in every location. There isn't one, whether it's regulated or non-regulated. This is the best program out there, and it is regulated, and it works in many places, and in fact in the soybeans--I don't want to start arguing with people, but when we use the CRC-plus product where the futures are at, we actually are showing a profit for a lot of customers around the country.

COMMISSIONER SPEARS: Bob.

MR. BOLD: Yes, Bill, how do you go about assuring or guaranteeing that basis line that you've got there around the country, because that's the real variable, and what do you do to lock that in or to take price risk management quotient out of that?

MR. BIEDERMAN: The only two variables that are left at harvest time are the spreads and basis, are the only two variables that are not locked in, or sometimes they are locked in if they reach our objective. We do have some customers in Colorado who have already locked in their 15 under basis, and they're done for the year. So it depends on, you know, as you know, spreads and basis going into the fall.

COMMISSIONER SPEARS: Larry Quandt.

MR. QUANDT: Yes. Bill, even under this scenario, though, if we stayed in this trend and the prices trend lower yet, this scenario will not be an adequate--at some point will cease to be an adequate risk management tool. In other words, we may still need to look at policy changes.

MR. BIEDERMAN: Sir, I think there's an economic problem whenever prices get below 240 across the country. There is not a risk management program out there that you could come up with that would work, but at this price level, it's still works, and it's being employed successfully.

COMMISSIONER SPEARS: Bill.

MR. DODDS: Thanks, Carl and Bill. I would just like to speak to the process that Bill described, because this is the process of tomorrow as we look at farm marketing. I mean, Bill's got a product. Others have products. We're moving towards, you know, dollars per acre and all the tools that are becoming available that's allowing us to do this in the industry, and it's coming fast.

COMMISSIONER SPEARS: Yes, I want to be understood that be no means are we endorsing Bill's product as a commission, but the idea was to, again, educate the members of the committee of the different type of programs out there.

Just quickly, both of you, I would be interested in your thoughts as to coming into the age of computers and technology. How are you finding the farmers that you work with, both in, Dr. Anderson, as far as your program and then, Bill, your program, what are their computer skills? Do most of them have PCs already? Are they buying PCs, or how are you seeing this world of internet and that technology playing into your programs? Dr. Anderson first and then Bill.

DR. ANDERSON: We're finding that the skills of using the computers has really improved tremendously in the last several years, and the farmers that we're dealing in our educational program that I just discussed, the majority of them, of course, are the top echelon of producers. They do have computers, and another thing that our educational program does, we have a basic program in how to use your computers as well.

So I think we're coming along very rapidly with producers who do have the computers in their business offices, and they have the skill to use them, and the internet is really, I think, may just open up a whole new avenue new. That's why we're thinking and all of our programs I discussed are on our internet site or will be in the just a short while.

MR. BIEDERMAN: My wife and I had the privilege to attend the Farm Bureau annual conference down in New Mexico, and it was a wonderful meeting, and we were talking to a real special group of people that were there, but they surveyed the crowd, and it was well over 70 percent were using computers and were on line, and I've continued to ask that to crowds when I go out and speak, and it's well over 70 percent, easily over 70 percent that not only have the computers but are on-line.

COMMISSIONER SPEARS: Gary.

MR. HELLERICH: As you visit with these people who are in these marketing sessions and so forth in developing these plans, they are having to dedicate a certain amount of time to these things. Now, I have found a lot of times being asked by people what do you do, or how do you answer if I need to dedicate time to this and how do I replace the time that I did prior to this time? In other words, the fellow or the individual or the lady or whoever it is has not been sitting around doing nothing, and now we have an additional workload here, as you mentioned eight sessions during a four-week time period and so forth. What adjustments have you seen in your clientele, both through the extension and through the private sector? What changes have occurred in the structure of how these people do business?

DR. ANDERSON: That's a very good question. One of the things we have to do is provide these in-depth programs, generally in January and February when other farm activities are not really demanding as much. The thing that I do, and we find our very best producers, I think the ones that are the most progressive in taking the 45 minutes or so to attend a marketing club, we simply argue with them that they'll make more money or try to convince them that they'll be making more money devoting that 45 minutes to thinking and planning than they can doing some other activity, and then we try to show them the dollars and cents; and one thing I emphasize, it's not an investment like going out and buying a new machine or investing in seed or chemicals. It's investing time, and we just need to get a better balance between the management of our time in the way of marketing and strategic plans for risk strategies as well as the production of the other activities.

COMMISSIONER SPEARS: Bob White, you asked to be recognized.

MR. WHITE: What is interesting to me is as a farmer, I've sat through three different presentations by three different professors with three different ideas on how to manage my risk, and that's kind of discerning and, you know, I'm sure that the gentlemen would agree that maybe there is not one single way that is best, that a farmer not only has to listen to four presentations and then decide what will work for him.

So it all boils down to the fact that a farmer still has the decide in his circumstance what will work for him. So that makes it even more difficult for a farmer in an area with different yields and different circumstances to come to the fact of how do I actually manage my risk, you know; and you know, the presentation is very interesting, but yet it still boils down that that individual that's successful in marketing is the same individual that's probably successful in growing the commodity. And I just wanted to make that point.

COMMISSIONER SPEARS: Thank you, Bob.

Dr. Anderson, I'd just be interested, just real quickly, I know that your university is very much involved in this as you've presented your program. As Ken Ackerman mentioned earlier, other universities across the country are involved in these type of programs. He mentioned Kansas State University, from my home state, and I've also attended and Ken has several--Ken attended one. I attended two of their--they call them risk management clubs. You call them marketing clubs. They call them risk management clubs. Can you just--do you know off the top of your head how many other universities are involved in those type of educational programs, and then I'd like to ask Ken Ackerman if he would just take just a second and kind of--you know, what we're talking about is risk management education, and I serve on the USDA Risk Management Education Committee with Ken, and maybe Ken can just kind of outline, just real quickly, some of his thoughts as far as what's going on across the country on risk management education. So Dr. Anderson first and then Ken, if you would comment.

DR. ANDERSON: I'm not aware of any particular number that says how many risk management or marketing clubs we have, and that's a good point. I call them marketing clubs, but that's not really any necessity. It could be marketing. It could be risk management or some other name. We're just trying to find a handle. We think that there are, I would say, maybe a third of the states in the nation have some form, but what the problem is is that it hasn't really been given the appropriate resources that are necessary. It takes a lot of concentration.

In Texas we're very fortunate to have a fairly sizable staff, and we have regional economists across the state, and they're the leaders for setting up the marketing clubs, and then that's why we're leaning on the producers as well to help us. We will not sponsor a marketing club ourselves from the university. It takes a local leader to make it successful, and so we lean heavily on our local leaders, and I think we have a number of states that have good programs and ours, though, is unique, and I don't know of any that have a 64-hour start-up program.

COMMISSIONER SPEARS: Ken, if you would go ahead and just kind of update us on your activity at the Risk Management Agency.

MR. ACKERMAN: Thank you, David.

We've been trying to maintain a very active program on risk management education, though with very limited resources. We issued a RFP for proposals last year out of which we funded 17 proposals from around the country. Commissioner Spears was involved in that process. We think it was a very good process. It included funding for the risk management clubs in Kansas. I believe we have one project in Texas and others around the country. We think it's been a very good program, although this year because of funding constraints, we've had to limit it.

I will tell you that as part of our legislative--or package of legislative proposals for the risk management safety net for coming years, we have proposed a substantial increase in financial investment nationwide to risk management education. This will require legislation. It's now before Congress. As Commissioner Spears mentioned before, we are not allowed to talk about lobbying, but just to know, the proposals have been put before Congress, and they are part of the risk management package, the crop insurance package.

I would emphasize also, as Dr. Anderson mentioned, our main experience is that the most effective programs are those that rely on local opinion leaders to get the message across and those that involve partnering with the private sector, with academics and with commodity organizations, grower organizations represented in this room, in order to get the message across. So we hope the level of activity will pick up in the future once we get a better funding source for it.

COMMISSIONER SPEARS: Thank you, Ken. Bill.

MR. DODDS: Ken, can I ask a question? Is your department, or I would guess it's your department, forming a new risk management committee, or is there one in place?

MR. ACKERMAN: No. Or excuse me. The committee that Commissioner Spears referred to is on the risk management education. It's a four-member steering committee overseeing that program, including the CFTC, the Risk Management Agency, the Extension Organization, and the USDA's Operation of Outreach. We are also setting up a crop insurance advisory committee separate from that.

We've recently put out a Federal Register notice and are taking names, I think through the end of April. That's a new advisory committee that we'll being setting up over the next few months.

COMMISSIONER SPEARS: Gary.

MR. HELLERICH: Thank you, David. I have a question of the panel there. We are talking here in terms of corn and soybeans and wheat. We haven't addressed alternatives, alternative crops. It might be pink corn or it might be a soybean that has a characteristic that perhaps becomes in demand by the worldwide trade for some reason or another. Now, how do we address the situation where we move into an area of production, a producer moves into an area of production where there's no methods out there to underwrite the exposure that he has while he's developing this crop? In other words, what we have in place basically programs everybody to stay in those shoes. There's no apparent method of rewarding entrepreneurship. So can you address that matter or speak to it a little bit, please?

DR. ANDERSON: I'll give you a quick response. I've had a little bit of experience in looking at niche markets and also looking at new crops, and of course I come from the marketing side, and what we almost always have to do there if we get into this thing commercially, whatever crop it's going to be, we're going to have to find--it's a contractual arrangement, is what it amounts to, kind of like the vegetable industry.

An example would be colored cotton. It came on as being, you know, really we won't have to dye it. It will be natural environmentally and all, and it's a great idea, but it has some draw backs, and it didn't take us but one year to get warehouse that's full of colored cotton that we couldn't market. So we learned very quickly. Those folks learned very quickly that you better have a forward contract, contractual arrangement, and we just have to bypass all of the other marketing systems, has been my experience.

COMMISSIONER SPEARS: I believe Dan, you asked to be recognized.

MR. AMSTUTZ: I just have a few comments, and first let me say I've enjoyed these presentations too, and I am enthusiastic about the development of new tools for risk management, which I think are important, but my comments really are going to camp on what Gary has said and what my Ohio friend here has said, Robert White, and part of this, I guess, is a bias, but I think you cannot eliminate this process of assessing the risk in order to manage it intelligently. We're living in an era of volatility in prices, not only in farm commodities but in others as well, and we have frequent examples these days, unfortunately, of so-called professionals in the financial instrument areas that are experts at using hedging strategies, and they've lost billions of dollars, one partnership I'm thinking of particularly; and if you ask yourself the question of where did they go wrong, and the answer has to be that they did not assess the risk or did not attempt to assess the risk.

And so I don't think in managing risks, I don't think you can avoid that, and sometimes it's more profitable not to do the business. Sometimes it's more profitable not to plant the seed. Sometimes it's more profitable not to take the position, and I think you have to recognize that this is a part of the process of dealing in an era of price volatility which I presume will continue.

COMMISSIONER SPEARS: Steve?

MR. OMAN: Yes, this is for Bill. In your scenario on the crop insurance side, the CRC side, would county posted prices have a lot of to do to improve that situation? That was a disappointment I think I've seen in the CRC program, was the fact that if we get dealt with county posted prices like we have at two FSA offices, there's no reason that harvest dates receipts couldn't be used for the same thing for crop insurance, and I just wondered if that's been looked at or thought about.

MR. BIEDERMAN: That's a good point. It could be used if they wanted to work it in there, but the way they have it set up, it doesn't. So there's a gap for basis that you have to account for, and so that we've worked that in, and I think anybody who comes up with a competitive product will, but the posted county price does come into play in, of course, calculating LDPs and loan deficiencies, and that, of course, if there is one, would be added on to the revenue which you saw.

COMMISSIONER SPEARS: Bill? I think we're going to make this the last question, and then we'll take a break.

MR. KUBECKA: One quick question to both you gentlemen, especially you, Bill. I represent Sorghum. Sorghum is grown in more of the--marginal crop. You know, where does this leave us? You know, our margins are so thin, and a lot of times they just don't work. All we're doing is adding to our costs. I looked at your graph there where they intersect, and you move up that profit line, and what do you have then?

MR. BIEDERMAN: I'm surprised nobody has asked about cattle and hogs too. To answer your question, Bill, I think that we have to realize that the agricultural sector is going through a huge transition time here, hence transition payments. Now, we're only the second year into it. I think that because of the success of this program and other programs that are competitive to it, we're going to see a huge amount of effort put towards creating new regulated contracts that can help industries like yours and the cattle--I know there's already a push in the cattle and the hogs to do it, and once we get those products put into place, we'll have a very well--great product that provides a lot of protection and security.

COMMISSIONER SPEARS: Dr. Anderson, did you have a response to his question?

DR. ANDERSON: I'll just agree with Bill that we've got a situation where a lot of commodities, the price today is below the cost of production and far below the cost of production, and it puts in a very delicate situation. It's one that I expect it would happen to us just as soon as we had two or three years of production, and I don't think we really had a backup plan to deal with having bumper crops or good crops for several years and get these low prices. I think it's something that we need to address as a agriculture industry.

COMMISSIONER SPEARS: With that, I'm going to go ahead and take the prerogative of the chair and call for about a ten to fifteen minute break. Let's get back together again about 2:35. There are coffee, soft drinks, and cookies out here. I know both Bill and Carl will be around just for a few minutes, just for a little while.

Bill, do you have something you wanted to say real quick?

MR. BIEDERMAN: Yes, because I do have to leave right this minute, but I would like to point out I here some confusion and some conflicts within the discussions here today. I'd like to point out that I don't think we should confuse risk management products and alternatives with where the economics of the market is, because that's a policy question on supply, acreage controls. That's for Congress to discuss and, you know, if they want the price to get back up to the profitable level, they're going to have to have more set-aside and things like that or pray for a drought. But the risk management tools that we have, they're really great, and they're being accepted well in the country.

COMMISSIONER SPEARS: I thank both of you for coming here today.

[Recess]

III. RISK MANAGEMENT/CROP INSURANCE LEGISLATIVE REVIEW

COMMISSIONER SPEARS: We're going to start on the second part of our program. This session is designed to update the committee members on risk management and crop insurance legislative review. We've asked representatives from the House Ag Committee, Senate Ag Committee, and also from a couple of Senators' offices, Senator Roberts and Senator Kerrey, to present. They will update us on what activities are going on in both the Senate and House Ag Committees and various legislative proposals on the Hill, including risk management and crop insurance legislative initiatives.

Following that, I've asked Phil Olsson and Dr. Peter Griffin from the American Feed Industry Association to make a presentation on their livestock revenue insurance program. It's received a lot of attention this past spring. That program has been a focus in various producer groups and the Administration. I thought it would be beneficial for the committee to hear about it; and at the end of their presentation, because it does raise some legislative, regulatory issues, I'm going to ask Paul Architzel from our staff to make brief comments and responses to some of the program issues.

But to start with, we're very fortunate to have representatives from the Hill here. We have Stacy Carey from the House Ag Committee, Walt Lukken and Marcia Askwitz from Senator Lugar's office, the Senate Ag Committee; and then, in a few minutes, we're going to here from Bev Paul and Michael Seyfert from the Senate, Senator Kerrey's office and Senator Roberts' office.

But to start with, I will defer to the seniority and the 15 years experience of Stacy Carey to update this committee on activities on the House side. Then I'll defer to Walt to update us on the Senate side. So Stacy, if you would go ahead and start, I'd appreciate it.

MS. CAREY: It's a pleasure to be here with you today. It's not often that we hear that people are thankful to have Hill staff around. So it is an honor to be here, and we always enjoy the opportunity to come down to the Commission and particularly to chat with the Ag Advisory Committee. This is a very important body and, over the years, we've been dealing with issues relative to the Commission and such. It has been a very good source of discussion and information.

So the topic today is risk management and crop insurance, and by way of background, I work on the House Agriculture Committee, specifically for the Subcommittee on Risk Management Research in specialty crops, and as a part of that jurisdiction is included commodity futures trading, crop insurance, specific tobacco, peanut, sugar programs, biotechnology research issues.

We have a wide range of jurisdiction which we enjoy particularly with risk management. That is such a buzz word now days, and it means many different things to many different people, that it has allowed the committee and particularly Chairman Ewing and the members of the subcommittee to explore issues, many different issues in many different areas.

So two of our main issues that we will be paying a lot of attention to this year are crop insurance improvement--we are no longer saying crop insurance reform because we have reformed the heck out of that program for years and years and years as Ken can attest to. We're calling it improvement, short-term improvements.

The other issues that I'll just briefly touch upon, by way of time frame, is CFTC reauthorization because that has risk management implications as well, but particular risk management, like I said, it means many different things to many different people. It's an issue discussed very widely amongst many groups, but crop insurance is the one avenue now, one program that many of our members look to as sort of the domestic safety net for our agricultural sector, and I think the large belief of the chairman and many of the members is that they want to assure that there is a viable, working program in place.

And I think it's safe to assume after our many hearings that the program is so large and covers so many regions and areas and commodities of this country that we are sort of moving to the concept that it's not really feasible to actually fix this program once and for all because it's a constantly evolving program. Issues, many issues, change and are brought up over time, and I think although there's probably some criticism about Congress going, beginning with 1994 reform and the disaster bill and constantly going back to this program. I would argue that that's a good sign that government is being responsive to the program and trying to address the needs that are out there because it is not a monolithic program by any stretch of the imagination.

So we have been fortunate enough this year on the House side, and I know the Senate got a place marker to obtain $6 billion in new spending for crop insurance improvement. On the House side, that funding is parsed out over five years. There's no funding in the first year, but it will average out to $1.5 billion in years two, three, four, and five.

So we are tasked with the enormous burden of trying to pull together legislation to make what we're calling, again, short-term improvements to the program; and I say short-term because both Chairman Combest and Ranking Minority Member Stenholm have also talked about long-term improvements to the program, if you will, but that focuses more on an overhaul of the program, and I think their thoughts are geared toward almost a complete restructuring.

I know Mr. Combest has said that he wants to keep the long-term effort more of an insurance-type of reform, but he's really thinking long-term overhaul, more of an agricultural trust fund, for lack of a better term, type of approach, and I think he sees the long-term approach more as a funding cycle where any new money that would be obtained for agriculture would be put into this fund, paid out to producers in bad years. Reserves would build up in good years.

That's a very simplistic sort of description of what I think--or what he's expressed in various speeches about the long term. He says it needs a lot of work, and I think in the time right after we get through the short-term focus, that he will begin and Mr. Stenholm will begin to looking at long-term focus.

But for the immediate purpose on the short-term legislation, the subcommittee will be looking to mark up a bill by early June. So we are in the process and have been in the process over the April break of meeting with industry folks to get input as to what their priorities are for this legislation, what do you think should be the priority for improvement, what is problematic for you, and we're really in the mode right now of getting input and receiving input so that we can sort of put together a framework for this bill.

We will look to have drafting start--we'll probably do an initial framework of a bill by the end of this month, within the next couple of weeks. So this is really on a fast track, and I should just say if there's anybody that we've missed that has an interest in this program, please don't hesitate to give us a call, because, you know, we will start drafting very shortly.

But there are a number of issues involved with the program, and I think the philosophy of the subcommittee and many of the members is the role of government is to make available as much risk management tools as possible to the producers so that they can choose and make those decisions for themselves about which tools will help them manage their risk in the manner that they feel will achieve the best results, whether it's production risk, financial risk, operating risk marketing risk. We don't really view our role as directing a certain agenda or certain product out there, but rather because of the diversity of our farming operations in this country, there should be as much diversity in the products available to them, whether that is ag trade options, using the option; dairy options pilot program, expanding that per se for your regular catastrophic, you know, crop insurance; multi-peril coverage for fruits and vegetables. There's just such a wide array of diversity that we believe our role is to facilitate these products, the availability of these products to agriculture producers.

So I won't ramble on for much more. I just sort of wanted to give you a framework of where we're going on crop insurance, and I will just mention briefly CFTC reauthorization. It's Chairman Ewing's wish to try to get legislation pulled together this year earlier rather than later, and so we will shortly be working on that effort as well and obviously want input from everybody in this room here today.

So with that, I will turn it over to my esteemed colleagues in the Senate. It's nice to have the House go first for once.

MR. LUKKEN: Thanks, Stacy.

I appreciate being invited. It's always nice to come down to the Commission. Unlike the House, risk management is not lodged in one staffer. So we split the issue, and unfortunately Andy Morton, our chief economist at the committee who handles crop issues, was not able to come down and join us, although he wanted to. We had a hearing this morning--Ken was there testifying--and he had some follow up to that. So he's not able to come down and visit with you, but he has briefed me. So hopefully I can give some insights on what's happening in the senate on crop insurance. We began overviewing the crop insurance program, I guess the beginning of March. The Senator, as he often does with these large issues, starts out by posing a set of questions that go to the fundamental public policies of why we do these programs, why we should pay for them, what is the benefit for the society, agriculture in general. And so he did that. He released a dozen questions at the beginning of March. We held a couple of hearings, March 10th and March 17th, on the current program.

Today, of course, we had a hearing where Inspector General came out with a report that was critical to have current program, and that was something we reviewed today with Ken testifying on that.

The budget resolution that Stacy mentioned which sets out spending limits for Congress has given us $6 billion to spend on improving the program. So any sort of improvements and alternatives that we look at, of course are going to have to be overlayed over that $6 billion figure.

So with that, next week, I wanted to mention that we are having a crop insurance roundtable in the Senate which I invite you all to attend and participate in. Roundtable is sort of Senator Lugar's favorite thing now to get sort of an informal group of folks together, experts in the field to discuss these issues and the important topics of the day, and instead of a hearing format which is a little more rigid in structure, I think he enjoys the give and take of the roundtable format. So that's what's going to happen a week from today.

I think he sees the three different policy alternatives in this area to be, one, adding more subsidies to the current structure as one of them. You know, that's difficult given the $6 billion figure that we've been given, and also I think the Senator has some concerns given that economists have testified that, you know, this current program is inelastic, and we have sort of weigh that whether additional money is going to increase participation, if so, at what level. The other alternative is to add subsidies but also give some fundamental structural changes to the program. So that's something we'll look at.

And on the other side of the spectrum, some folks have talked about replacing the system entirely and just doing an ad hoc disaster assistance bill every year. So the reason they cite this is that participation levels can be increased every year. We do disaster assistance bills. Why do we do the program if it's always going to happen every year? So I throw those out there, not that he's advocating any of them, but those, I think, are the three things, the spectrum of different alternatives that everybody is looking at.

After this roundtable a week from today, I think, as Andy described it, we go into our legislative phase where we'll seriously be considering what legislation and what direction we'll be heading, putting pen to paper as far as legislation. So I encourage you, with that, to come next week and see the fireworks.

And as far as my issues, the Commodity Exchange Act issue, I mean, as Stacy mentioned, there's always risk portions to that. Again, we released a set of questions in, I guess it was December, a set of 48 questions and some of those dealing with agricultural issues and ag trade options, and we've been receiving those from folks from the industry and will publish that at our hearing shortly.

We held a roundtable in February that discussed ag trade options. We had some agricultural folks there, a farmer, Bob Kohlmeier from World Perspectives was there as well, and I think coming out of that, the Senator had a feel--well, he felt that there are three or four distinct issues that he felt that he could get into at additional hearings and be able to further that agenda, and one of them being agricultural trade options. So we're scheduling a hearing for the beginning of May on agricultural trade options to review the current program, what improvements can be made.

We're also go to try to look at the educational efforts surrounding the program, whether--you know, what is the demand for these types of tools; if so, what is the best way to put them in the hands of farmers and educate them, and so, you know, after we have this hearing, we'll look at different ways that we can improve the program, whether it's through regulation or whether it's through introducing legislation on our part. Those are the options we're going to have to look at.

So with that, I'll cease fire, and if there's any questions--like I said, I don't handle the crop insurance issue. So I'm not going to be able to answer anything specific, but I'll defer to Stacy, my expert next to me.

COMMISSIONER SPEARS: Are there any questions for Stacy or Walt before we move on? Gary.

MR. HELLERICH: Yes, thank you, David. I'm not clear on this list of 48 questions that you have proposed or put out or whatever. Could you explain that a little more?

MR. LUKKEN: Sure. When we had a hearing in December on over-the-counter derivatives, we decided, and like I said, this is something that--this is the way that the Senator in his very logical mind approaches problems, is that he sort of surrounds it by asking questions, you know, what are the public policy reasons for subsidizing crop insurance, or what are the reasons that we do these laws this way, and we try to--we do this just to get people to sort of step back from the issue a little bit and think about, you know, the original reason that we are even involved in this issue; and a lot of people, they get to the rub, you know, whether we do this or don't do this.

A lot of times we have to step back and say, you know, why should we be involved in this business at all, and I think that's part of the exercise, but they're not--you know, he does not mean them as rhetorical. They're meant to be answered, and we've encouraged folks to answer them on our web site and at all the hearings we have been having, but the 48 questions you refer to were directed towards the Commodities Exchange Act. Crop insurance, we released a set of 12, I think in March, but the 48 are on our web site if anybody is interested in looking through those, and I can give you that afterwards if you're interested.

COMMISSIONER SPEARS: Bob.

MR. WHITE: I address this to Stacy, just maybe a comment that she may wish to comment on. The situation where disaster relief versus crop insurance, and we've been told off and on through the past few years that you buy crop insurance, we're not going to do any disaster relief, and so you've formulated a program through the Farm Service Agency that you will pay so much for crop insurance, and so farmers did that. Then there became a--along came a disaster, and so they passed money to pay farmers for disaster, and my only comment is that this program that you're going to build where you have this fund and this fund will build in good times, farmers for some reason--I guess maybe I'm guilty too--say if it's good times, why buy the insurance? So the fund doesn't build. Then a disaster comes along, and you don't have a fund.

I guess maybe there's not an answer for that, but I'd be interested in hearing how you're going to build this fund in good times. Is there an answer that you have?

MS. CAREY: I think that's still in formulation, because I think the whole concept of, first of all, the terminology in Agricultural Trust Fund will not work the way that Mr. Combest has sort of laid it out, because federal trust funds, you know, if you're in a deficit year, no money goes anywhere, even to agricultural producers.

So there's an issue with the accounting, if you will, but his thought, I think sort of really culminated after the disaster bill, and his thinking was we just spend $6 billion in one year. Was there a better use of that money in a more long-term cohesive effort, and if there is, is there a way to build that into a program that, you know, whether it's building up, again, reserves in good years, whether it's the producer premium gets socked away and builds up and accrues interest and what have you, so that you've got a pot of funding there for when there's a disaster year and payments need to be made out.

There's a lot of work that needs to be, you know, sort of flushed out in details, and a lot of discussion needs to occur on this issue. But I think that's sort of his general thought.

MR. WHITE: A follow-up comment, was there ever a fund established in Washington that grew to a certain size and was left alone for that purpose?

MS. CAREY: No. A very good point, and we are all acutely aware of that. There's the Federal Highway Trust Fund, Social Security. Yes, that's a point that we're well aware of. Thank you.

COMMISSIONER SPEARS: In the interest of time, I'd like to go ahead and call up Mike Seyfert and Bev Paul from Senator Roberts' office and Senator Kerrey's office to kind of outline the Kerrey-Roberts Bill, and then we'll have time to ask--go ahead, Stacy and Walt. You guys can stay there if you want to, to take questions in a minute, additional questions, but I wanted to make sure that both Mike and Bev had time to talk about the Kerrey-Roberts Bill, and I want to leave adequate time within this session for the proposal of the American Feed Institute.

I'm not sure, Mike or Bev, which one of you two are going to go first.

Mike, welcome, and I thank both of you for being here as well.

MR. SEYFERT: Well, lucky all of us. Three o'clock in the afternoon when most people are thinking about a nap, and you get to listen to us talk about crop insurance. I usually tell people, as most of you know, Bev has quite a bit of experience in the crop insurance program. So I'm kind of like the graduate student usually who is followed up then by the professor who will clean up all my mistakes.

Most of you, a lot of you in this room, I think have a pretty good idea of the Roberts-Kerrey legislation and how it was developed and what it does. So we thought we'd just summarize that real quick. I'll go through mainly how we developed it in the producer sections, and then Bev will talk more about the administrative provisions and the product development encouragement provisions and that that we have in there.

Basically, I think most of you know Senator Roberts and Senator Kerrey have been talking for several years about some form of crop insurance legislation, even prior to Bev and my arrivals on the staff, back when it was Brian Edwards and Theresa Gruber, and they've discussed it several times, but I think last year in the situation we got in with the disaster legislation and everything else really convinced Senator Roberts and Senator Kerrey that it was time to seriously consider looking at doing some legislation.

And so in November, Senator Roberts and Senator Kerrey requested from most of the major farm groups, commodity groups, and groups with an interest in town here to come to us with their top priorities for addressing needs in the crop insurance program. We had expected to hear from quite a few of those groups. I don't know that we expected to hear from as many of them as we did. We heard either in written comments or in direct meetings that Bev and I had or that our bosses had from other 20 of those groups, and what we consistently heard from most of the groups was that the program needed to provide policies which were affordable for producers and which gave them the coverage that they needed for the amount of money that they were putting in, that the program didn't address the needs of beginning farmers or producers who are trying to rotate crops under the new farm legislation, and that there were also obviously a lot of problems, as we've heard in the last few years from the northern plains, problems with producers suffering multi-year losses.

We also heard quite a bit about the possibility of livestock coverage and also the need for product development and just some regulatory changes. We took all of those comments together, spent several months going through them and in May introduced a bill, Senator Roberts and Senator Kerrey along with 12 other members of the Senate, the Crop Insurance for the 21st Century Act. Basically, what it does, in a nutshell, to address the need of subsidy or of coverage that we heard from producers. The current subsidy formula is inverted from the way it currently is, as most of you know, the highest level subsidies at the lowest level of coverage. It will change that to a 55 percent level of coverage at 75/100 or 55 percent subsidy at 75/100, 50 percent below that, and at 50/100 or below; 65-100 coverage, the subsidy will be 45 percent.

Also, the subsidy will be available for revenue policies, the same as it for MPCI and other policies that are out there. As most of you know, the revenue portion of a lot of the revenue products that are out there now do not receive the same level of subsidy. That would change under our legislation, and that's in response to comments that we heard from a large number of the commodity and the farm groups. We require the establishment of an APH credit program of some type for beginning farmers, those who have been farming for two years or less and producers that are rotating crops for farming new land.

As you know there has been a yield structure in place, and it's been tested with RMA. The comments we heard from people was that that didn't do enough, and so basically what our legislation does is instruct the board to develop--to work to develop some form of new system to address the needs of producers.

An important part of our legislation, we think, is trying to address multi-year losses. Basically, what we have done is said that if a producer has suffered a, quote, disaster for three out of the last five years which had resulted in a total development of a 25 percent or more in their APH, they'll be allowed to exclude the lowest year from their APH calculations so that they can get--hopefully increase the coverage and get rid of the problems that we're hearing from a lot of the producers of not--of losing their coverage levels when they have multi-year losses. They would be able to build that back up, and once it reached 25--that 25 percent was regained, the exclusion would be gone. There would be no cap on how quickly that would come back, and our hope is also that eventually products will be approved by the board which will be seen as addressing this problem and that the board would certify that, indeed, products have been developed to address multi-year losses, and this provision would sunset.

A couple of just short other sections in there is the authorization of disappearing deductible contracts to be authorized, something we heard from groups. Basically what that does, assume you have 75/100 coverage. A company could offer, for example, another contract which says for a loss above 50 percent, every 10 percent above 50 percent, your deductible will be reduced by 5 percent so basically you could have 100 percent loss and 100 percent coverage.

We've heard a lot of problems with rating systems, rating problems, particularly in the south. We have a pilot in there to hopefully address some studies, create some studies to develop a system which would be in place to address that.

And then we just removed the current exclusion for livestock that's in the current law. Basically, all we did is remove it at this time, something we had heard from several farm groups and also members that that was something we needed to look at. At the time we wrote the legislation, nobody had any sawed proposals on the table, and so we placed the waiver in there and have basically said let's see what we can come up with and then we'll like at it from that point. We do know just a simple waiver as it currently is will be very, very expensive, and that's why hopefully something more solid and concrete will come out of the discussions we've been having with the groups.

I think that summarizes that portion of our bill. I'll let Bev talk. We also have a summary of our bill, which we'll pass around, and also a side-by-side that the CRS has put together of the issues that are being discussed, current law, what our bill would do and also what the proposal which has been discussed by Ken and RMA would do in comparison.

COMMISSIONER SPEARS: Thank you, Mike. Now you referred to the Roberts-Kerrey Bill. I'll let Bev talk about the Kerrey-Roberts Bill.

MS. PAUL: That's right. Thank you, David. Well,

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United States of America Commodity Futures Trading Commission Agricultural Advisory Committee 26th Meeting

Wednesday, April 21, 1999

United States of America
Commodity Futures Trading Commission
Agricultural Advisory Committee
26th Meeting