Mississippi Farm Bureau Federation
1997 Summer Commodity Conference
Remarks by Joseph B. Dial
Commodity Futures Trading Commission(1)
July 8, 1997
Holiday Inn Southwest
I am delighted to be with you today. I always feel at home whenever I
speak to Farm Bureau members, in as much as I was a member of the
Texas Farm Bureau for over 30 years. The information I will share with
you today comes from my 35 years of experience as a farmer, rancher,
banker, and exporter of agricultural products -- and from a multitude
of people that are actively involved in today's dynamic
agribusiness and futures industries. I am fortunate in that I have
been able to build up a network of contacts that seems to weave back
and forth around the globe like the cow paths that crisscross the King
Ranch. For the most part I stay in touch with these folks through
e-mail on the Internet -- the back yard gossip fence of today's
electronic global village.
I realize you are some of the most progressive farmers in Mississippi,
otherwise you wouldn't be attending this conference. That being
the case, in discussing the future of agriculture, the economic
importance of risk management, and agricultural trade options, I may
be preaching to the choir, like Jerry Clower speaking to his church in
Yazoo City -- except Jerry is a whole lot more entertaining.
Nonetheless, it is my hope that in the Q&A following each section
of my three part presentation we can have an exchange of ideas that
will make our time together worthwhile.
THE FUTURE OF AGRICULTURE
Whenever the subject of predicting the future arises, I am reminded of
the American official, around the turn of the last century, who
suggested closing the US patent office because everything mankind
could possibly need had already been invented. In fact, as we all
know, man's inventiveness continues to flourish and to assure us
of a future that is inherently unpredictable.
In order to avoid repeating the mistake of my predecessor, who so
grossly misjudged the extent of man's inventiveness, I will not be
making any predictions about what will happen to global agriculture in
the future. Rather, I will talk about several profound changes in
public policy and private sector business practices that I believe
will shape the future of global agriculture.
Changes in public policy usher in a new era for
On a beautiful cherry blossom spring day in early April 1996, the Federal Agricultural Improvement and Reform (FAIR) Act became law in the US. I think this legislation will have the same effect on public agricultural policy around the world that the collapse of the Berlin wall had on global public economic policy. Just as the fall of Communism encouraged both developed and developing nations to move toward a free market philosophy, so too has the fall of price supports and production controls pushed producers in many lands to make the transition to farming for the market and not the government. We have not seen agriculture rely this much on the market for almost 70 years.
A similar change in farm policy, from one of government control to a
new market-based freedom to farm, is underway in other countries too.
Three and one-half years ago I was invited by officials of the United
Nations Conference on Trade and Development (UNCTAD) to serve on their
Group of Experts. This advisory panel to the Committee on Commodities
met in Geneva, Switzerland, for three days. We were asked to prepare a
road map to the future that governments could use to facilitate
farmers' use of private sector tools to manage their risks. Even
back in 1993 there was an awareness that deficit reduction was a must,
and that governments around the world would need to gradually move
producers toward relying more and more on the market.
There are many specific examples of this process in action, from the
New World, where Brazil is transitioning toward a reduction in farm
subsidies, to the Old World, where the members of the European Union
have initiated various adjustments to their Common Agricultural Policy
(CAP). This window dressing of the CAP was discussed in part during a
conference I chaired in London, in October of 1996, on Risk Management
in European Agriculture.
Some of the other countries that are making major changes to their
governments' farm policies, include Japan, Australia, New Zealand,
Mexico, and Uganda. In April of this year, I gave the keynote lecture
at a "Forum on Risk Management" in Japan. The next day, I
met with government officials in Tokyo to discuss the role private
sector risk management tools will have under a different Japanese farm
policy. While I was in Sydney, in December of 1996, I visited with
senior management of several of the largest agribusiness companies in
Australia. There too, we discussed the adjustments their organizations
are making as a result of changes in farm policy there and
When you combine these paradigm shifts in public farm policy with the
GATT and NAFTA trade agreements, you change the dynamics of how the
agricultural sector has operated during most of the 20th
Furthermore, as China moves its public policy more toward a free
market philosophy, a realignment of global economic power is taking
place. One of the results of this turn of events is an increase in the
disposable income of millions of people in China. This translates to a
growing consumer demand for better diets -- a trend that is compounded
by more millions of wage earners in other Pacific Rim countries. All
of this adds an unprecedented new economic dimension to the
supply/demand equation for food and fiber.
The changes I have just outlined in the areas of public policy --
freedom to farm, liberalization of global trade, and increased
reliance on market driven economies -- is a confluence of events with
far reaching consequences. Thus, as we approach the next millennium I
believe we are entering a new era for agriculture.
The need to reduce costs, manufacture safe, quality products and
satisfy customers is driving change in private sector business
As I said earlier, I believe profound changes in private sector
business practices will also help to shape the future of global
agriculture. I am talking about the kind of best management practices
that have been a catalyst over the last two decades for changing the
culture of many businesses, not only in the US, but around the world.
A few examples of business practices that have contributed to
reshaping the corporate landscape in the 80s and 90s might include
Total Quality Management, ISO 9000, Just-In-Time Manufacturing,
reengineering or reinventing companies, Electronic Information Systems
and Partnering or Virtual Integration.
I don't think there is any question that the winners in the new
era for agriculture will be market driven. Those enterprises that cut
costs, produce safe, quality products, and coddle consumers will be
profitable. I respectfully suggest that today's farmers, if they
would succeed in this new era, will have to become tomorrow's
business specialists in production agriculture. They will become part
of a system that will evolve by "cherry picking" the
relevant parts of the best business practices that have been perfected
by General Electric, Walmart, Sony and others. This process will
result in a business model for agriculture that will be radically
different than the structure existing today. It may well be a
"virtual integration" type of partnering. This model would
allow the business specialist in production agriculture to operate as
an independent businessman or businesswoman, while at the same time
doing away with the traditional, adversarial relationships found in
each step of today's food production system.
What I have described in this presentation is how I think certain
forces of change will shape the future of agriculture. I believe it is
a future with an abundance of challenges and opportunities for
farmers. The challenges will occur as we build new and different
business models that will reduce costs, produce safe, quality food
products, and satisfy a growing number of customers around the world.
By enhancing your business management skills you will meet those
challenges and thereby seize the opportunity to be profitable in the
new era for agriculture.
THE ECONOMIC IMPORTANCE OF RISK MANAGEMENT
The first part of my presentation covered what I believe to be the
forces of change that are moving us in the direction of a new era for
agriculture. You recall, no doubt, that I said changes in public
policy around the world, and changes in private sector business
practices, would shape the future of agriculture.
In this second part of my remarks to you today, I want to talk about
the economic importance of risk management. I intend to cover this
subject from three different perspectives. First, my experiences, from
1991 to 1996, with farmers' general views about risk management.
Second, some of the basic challenges all producers face as they
initiate and implement a risk management plan. And third, various
opportunities producers have to manage risk.
Today's situation regarding farmers' general views about risk
management is markedly different than the situation we saw only a few
short years ago. In making this assessment about risk management, I
would like to focus on the period from 1991, when I joined the CFTC,
to 1996 when the FAIR Act became law. This brief journey back in time
will give us a better understanding of why producers' attitudes
about risk management have changed.
Within a few days of being sworn in as a CFTC Commissioner, I was
named Chairman of the agency's Agricultural Advisory Committee
(AAC). It was a responsibility I welcomed, and one I have thoroughly
enjoyed. I undertook my duties as Chairman of the AAC with two goals
in mind. First, to follow the directive in Part 18 of the Commodity
Exchange Act which, among other things, directs the Commission to
establish programs to "assist in the development of educational
and other informational materials regarding futures trading for
dissemination and use among producers, market users, and the general
public." My second goal was to use the "bully pulpit"
of my office to raise the level of farmers' understanding of the
economic benefits they could derive from learning how to prudently
shift their production and price risks.
The first step I took toward attaining those goals was to convene
"A Forum on Futures and Options Education Programs for American
Farmers and Ranchers." The American Farm Bureau Federation (AFBF)
provided the facilities and lunch at their national headquarters in
Chicago. Dr. Bill Tierney served as moderator of that day-long
conference on January 24, 1992.
Terry Francl of AFBF gave Bill and me a ride to O'Hare airport at
the end of the day. During the 20 minute ride I thanked Bill for the
excellent job he did. He responded by saying that the day's
activities were productive, but he had participated in similar
exercises before and not much, if anything, ever came out of them. As
I flew back to Washington that evening I made up my mind that
something substantive would come out of the meeting we had just
So, from January, 1992 until March 1996, a period of some 50 months, I
spoke to more farm groups than I could count. My message was always
the same: (1) some day, in the not too distant future, Congress is
going to drastically reduce farm program expenditures; (2) over time,
trade barriers are going to be gradually reduced; and (3) when those
two public policy changes occur, bankers are going to require farmers
to cover their production and price risks before they loan them any
I would then go on to describe some of the tools available to farmers
for transferring their business risks, and the economic benefits
producers could reap by learning how to prudently use those tools.
Finally, I would urge farmers to set aside their mistrust of cash and
futures markets. I urged them to develop a written marketing program
that provided for the prudent use of forwards, futures and/or options,
as well as other types of contracts designed to manage their
For the most part, my words fell on deaf ears. Few farmers were
interested in practicing risk management. The reason was simple -- as
long as the government was doing it for them, they had little or no
economic incentive to do it themselves. Furthermore, 78.5 percent of
American farmers made more money off the farm than their net
income from agriculture. An official for one farm organization told me
to stop talking about the possibility that Congress might reduce
deficiency payments. He said his members liked the farm program just
the way it was.
I must admit I was frustrated by the lack of interest in my
suggestions. Nonetheless, I was determined to stay on message about
risk management. So I decided to reinforce my message with concrete
examples of how progressive producers, processors, merchandisers,
exporters and bankers were using prudent risk management techniques to
improve their profitability. In cooperation with the Farm Foundation
of Chicago, Illinois, the CFTC and its Agricultural Advisory
Committee, along with a distinguished group of 17 agricultural
economists, all worked together to put on the "Summit on Risk
Management in American Agriculture" in Washington, DC, on
November 29, 1994.
The 1994 Summit did exactly what I had hoped it would. All the
information that 45 speakers and panelists provided in that one,
action-packed day, was made available in a printed proceeding. We now
had a credible record, replete with specific examples, showing how
many of the shareholders in American agriculture were enhancing the
profitability of their operations by prudently managing their business
risks. For those producers who were willing to listen, the message
came across loud and clear -- if other farmers can do it, you can too.
After the Summit, I could sense an increase in farmers' interest
in risk management.
But the watershed event that really got farmers' attention about
this subject was the Federal Agricultural Improvement and Reform
(FAIR) Act, with its program for gradually weaning farmers away from
price supports. Now that farmers have just 5 years left to go on the
FAIR Act's "severance package," there is a marked
difference in their attitude about learning how to prudently manage
their production and price risks. In the time I have left, let me
cover some of the challenges and opportunities I think you will
encounter as you embark on this educational experience.
Let me start by stating the obvious. In order to manage your production and price risks, you must know what they are -- you need to quantify them. There are many professionals and service type companies that can help you do this. Or you can do it all by yourself. For example, take your Actual Production History (APH) and consider what the weather has done to your yields over all the years for which you have accurate data available. Study your records on local cash prices, local basis, and futures prices. There are a number of these kinds of data bases available from both public and private sector organizations. Analyze this information so you can put together three scenarios -- worst, average and best case projections, for yields and prices. Combine this factual information with your balance sheet, P&L statement and cash flow work papers. Now you are in a much better position to make an objective decision concerning how much financial risk you can afford to self-insure and how much you need to transfer to others. After making this decision, you may want to talk to your lender about your risk management plan and how you intend to incorporate it into your written marketing program.
Based on my own experience in agriculture, it is a given that
producers know intuitively that their livelihood depends on the
weather and the market. That sixth sense is all well and good as far
as it goes, but in business you need more than intuition. You need to
understand the difference between inherent risk and created risk. It
is very important, as you work through the process I have just
described, to keep in mind the difference between the two. If you
don't, you are just asking for trouble.
Inherent risk is explained by Peter Drucker as "risk which is
coincident with the commitment of present resources to future
expectations." This simply means that when a person commits land,
labor, and capital to production agriculture, in anticipation of
making a profit, they automatically become subject to the vagaries of
the weather and the market.
On the other hand, as explained by Jim Paul and Brendan Moynihan in
What I Learned Losing a Million Dollars, "Created
risk involves the arbitrary invention of a potential monetary loss
which otherwise would not have existed." For example, just
because a football game is played or a horse race is run, doesn't
mean that a person must assume a monetary risk. Millions of people
watch these sporting events without incurring any financial risk at
all. But for those people who choose to wager money based on their
opinion as to the final outcome of the game or race, they have in fact
created a risk for themselves that they didn't have to take.
Some of the activities people undertake that put them into a created
risk situation are speculating, betting or gambling. These are
described in the book, What I Learned Losing a Million
Dollars, as follows:
Speculating in its simplest form is buying for resale rather
than for use or income.
Betting is an agreement between two parties where the party
proved wrong about the outcome of an uncertain event will forfeit a
stipulated thing or sum to the other party.
Gambling is to wager money on the outcome of a game, contest or
event, or to play a game of chance for money or other stakes.
It is crucial to understand the difference between inherent risk and
created risk because of a behavioral pattern that affects many
producers. For example, the first time a farmer sets out to manage
inherent risk he will probably only consider a hedging strategy that
will secure revenue. However, after doing this once or twice, he
naturally grows in self confidence. He may become bolder and decide
that his accuracy is so good in predicting the weather and guessing
price trends that it justifies a speculative strategy. Once he starts
down that perilous path, his risk management decisions will become
subject to the joy of pride when the strategy makes money and the pain
of regret when it loses money. Add to this state of mind the natural
human tendency to become greedy when prices go up and depressed when
prices go down. Once this roller coaster of emotions kicks in,
objective decision making is out the window and the farmer's
prudent hedging operation has mutated into a financial wreck just
looking for a place to happen.
Producers don't have to ride the roller coaster of emotions I just
described. Today they have some alternatives to managing production
and price risks that didn't exist two years ago. Tomorrow there
may well be other opportunities for securing revenue even better than
those available today.
Farmers now have an opportunity to secure revenue through revenue
insurance contracts like Crop Revenue Coverage, the Crop Income
Protection Plan, or Iowa Farm Bureau's Revenue Assurance product.
In 1998, there is a strong likelihood some grain elevators and
agribusiness companies will begin offering contracts that will also
allow a producer to secure revenue. The commercial firm would
guarantee the farmer a dollar amount per acre. The offeror would cover
the yield and price risk it takes from the grower by using some
innovative risk management strategies -- approaches that are in the
pilot stage this crop year. This type of contract would be in direct
competition with the revenue insurance coverage I just mentioned. The
reason why the companies are willing to do this is because they want
to secure grain origination sources and/or increase their market share
of the seed, fertilizer, chemicals, and fuel business.
As you already know, there are many other ways to manage your
production and price risks, in addition to those I have just
described. Likewise, there is no shortage of advisory services and
professional consultants who will assist you in selecting a strategy
that you and your spouse are comfortable with. Furthermore, in the new
era for agriculture, there shouldn't be any doubt about the
economic importance of risk management.
In closing, let me say that I am very "bullish" on the
future of agriculture. The FAIR Act has not only given you the freedom
to farm, it has also unleashed a flood of innovative, market-driven,
profit-centered ideas that farmers are developing for themselves. You
have a golden opportunity to take advantage of these ideas. If I may
borrow a line from the US Army -- you need to "be all that you
can be." To reach that goal, I urge you to expend more time,
money and energy in continuing education. It will be one of the best
investments you will ever make and the payoff will come as you get
better and better as a business specialist in production
AGRICULTURAL TRADE OPTIONS
The third area I would like to discuss with you today involves
agricultural trade options. A trade option is an off-exchange
commodity option offered to a commercial person or entity for purposes
solely related to that commercial's business. An option buyer has
the right, but not the obligation, to make or take delivery of
the commodity. Trade options have many potential benefits. The most
obvious is that they offer producers the ability to lock in downside
price protection without cutting off upside price potential. Thus, for
example, a farmer might buy a put option giving him or her the right
to sell a portion of their crop to the option grantor at the
"strike price." If the market price drops below the strike
price, the option is exercised and the producer can sell to the
grantor at that price, thereby covering the cost of production, or
some other level of price protection that he or she has selected. On
the other hand, if the market price goes up, the producer can forfeit
the premium, abandon the option, and sell the commodity in the open
The grantor, or writer, of such an option might be the local elevator,
which also could benefit from trade options in one of several ways.
For example, unlike exchange-traded options, these off-exchange
instruments can be customized to meet the specific needs of each
producer's operations, giving elevators more flexibility in
offering risk management opportunities to farmers. They also could
provide a chance to generate additional income from option premiums.
Finally, a trade option is more likely to be accepted by the farmer
for the very reason that it is being offered by the local elevator --
a firm he knows and trusts.
That's the good news about agricultural trade options. However,
there's one rather significant piece of bad news. Agricultural
trade options are currently subject to a regulatory ban. The history
of that ban, which can be traced to market and customer abuses dating
back to the 1930s, is long and convoluted -- too long and convoluted
for me to describe in any detail in these brief remarks. The important
point is that, for the present, trade options in the basic
agricultural commodities are legally prohibited. In recent years,
however, several ongoing developments have raised questions about the
continued wisdom of such a ban. These developments have included: (1)
the success of off-exchange trade options in non-agricultural
commodities; (2) the success of exchange-traded options in both
agricultural and non-agricultural commodities; and (3) farmers'
need for the widest possible variety of risk management tools in
today's highly competitive agricultural markets.
By 1994, I had become convinced that the Commission needed to take
another look at giving people in agriculture the same opportunities as
those in the metals, energy and financial fields -- the chance to add
trade options to their arsenal of risk management tools. In December
1995, the Commission hosted a public roundtable discussion of
agricultural trade options. The 17 participants represented a broad
cross section of agriculture, as well as academia and the futures
industry. While some still expressed reservations, there was general
support for relaxing the ag trade options ban, based on an increased
need in modern agriculture for a variety of risk shifting tools. The
Commission directed its staff to study the issue and report on its
The staff study culminated in a "white paper," published in
May of this year, entitled "Policy Alternatives Relating to
Agricultural Trade Options and Other Agricultural Risk-Shifting
Contracts." The white paper recommends that the Commission
consider lifting the agricultural trade option ban, subject to
appropriate conditions. The first step in that process is already
underway. The June 9, 1997 Federal Register included an
Advanced Notice of Proposed Rulemaking requesting comment on lifting
the ban and the appropriate conditions for doing so. The Notice
includes a list of some 30 questions and is subject to a 45-day
comment period. I would urge all interested parties to submit their
comments on time so that the Commission's deliberations can
proceed on schedule.
Also, the Commission plans to hold two public meetings to collect
first-hand testimony from interested parties concerning the issues
raised in the Federal Register Notice. The first of these
meetings will be held in Bloomington, Illinois, on July 10th. The
second will be in Memphis, Tennessee, on July 16th. We are hoping to
hear the views of a wide range of producers, processors, and other
In addition, on July 31, the National Cattlemen's Beef Association
will host an open forum at its Summer Conference in Reno, at which one
or more CFTC commissioners and agency staff will discuss the
agricultural trade options white paper and answer questions. The
session will give cattlemen an opportunity to learn more about the
Commission release and to express their views on agricultural trade
options. A transcript of the meeting will be submitted for inclusion
in the public comment file on the Advance Notice of Proposed
As the Commission and the agricultural community move through the
deliberative process regarding agricultural trade options, we need to
view this issue not only in the context of today's environment,
but also in light of the different business models that may be used in
the future. To illustrate my point, let me tell you a quick story
about one of the National Hockey League's all-time super star
players. When a reporter asked Wayne Gretsky why he was so good, he
replied, "other hockey players skate to where the puck is, I
skate to where the puck is going to be."
This concludes my three part presentation. You have been a great audience and I am honored that the Mississippi Farm Bureau has given me the opportunity to be a part of this conference.
1. *Please note: the views expressed herein are those of the author and do not necessarily reflect those of the Commodity Futures Trading Commission or its staff.