Introduction

Good morning and welcome to the first Agricultural Advisory Committee (AAC) meeting of 2022 under my sponsorship.  The AAC fortifies the strong connection between the CFTC and its historic responsibilities in ensuring that America’s farmers, ranchers, manufacturers, and other commercial end-users continue to have cost-effective access to CFTC regulated markets to manage risk, and provides an active forum to discuss and address emerging issues and impacts to the agricultural markets in near real-time.

Before we move into the substance of today’s meeting, I want to thank Commissioners Johnson, Goldsmith Romero, Mersinger, and Pham, for participating today and for their contributions to this discussion.

I also want to thank today's presenters and panelists.  We have gathered a distinguished group of speakers, and their readiness to participate is greatly appreciated and critical to today's discussion.

I want to thank Brigitte Weyls, the Committee's Designated Federal Officer.  Brigitte joined the Commission in 2008 and brings a wealth of market knowledge and experience to the AAC.

I also want to thank the AAC members.  Today we welcome many new members to the Committee which was recently reconstituted following its September 2021 expiration.  You are here today representing a broad range of interests and perspectives, which illustrates the diversity of our agricultural markets.  From producers to consumers, credit servicers, major market participants, including derivatives market intermediaries, and exchanges, and representatives from the U.S. Department of Agriculture, our 35 members will draw on the depth and breadth of their market expertise to provide diverse and invaluable insight into the issues of greatest impact and concern.  I understand that your service on this Committee is in addition to many obligations at work and at home.  I appreciate your commitment to ensuring the CFTC remains fully informed as to what is affecting members and participants in our agricultural markets so that as we consider regulatory and policy steps aimed at addressing issues and improving market structures, our efforts are targeted and effective.  I look forward to continuing the important work of this Committee.

Agenda

The Committee last met in June of 2021.  At the time, we were beginning to recover from the pandemic and examining the uncertainty and significance of supply chain disruptions.  Since then, significant volatility has remained a fixture in many of the agricultural and related markets due to the ongoing recovery as well as growing impacts of extreme weather events and geopolitics.  To provide baseline for us to consider throughout today’s meeting, we will begin with a presentation by Dr. Cynthia Nickerson, Deputy Chief Economist with the Department of Agriculture, on the agricultural economy with a focus on the impacts of weather-related and geopolitical events.

Extreme weather events in the U.S. and across the globe continue to impact crop and livestock production resulting in supply shortages and price increases on everything from butter to baby formula.  For example, at the AAC’s last convening, David Rossen, Global Hedging Manager for cotton at Louis Dreyfus, reported that global futures and cash prices for cotton had plummeted when the textile industry ground to an abrupt halt during the pandemic.  Now, droughts worldwide are causing the smallest cotton yields in over a decade with prices increasing, but tempered, in part, by warehouse supplies.  However, the loss in crops is devastating.  While crop insurance helps farmers, thousands of jobs throughout the supply chain will be affected from farm workers and truckers to cotton gins and warehouses.[1]  It all then trickles down through the economy to the small-town business where impacted employees spend their paychecks to the regional banks that hold their mortgages and auto loans.  Even if crop yields rebound, affected regions such as the Texas High Plains will take years to recover, especially in small towns whose economies are especially dependent on cotton.[2]

The livestock markets are also being hit hard by extreme and unpredictable weather and the impacts will likely be felt for years to come.  With ranchers making the difficult choice between bringing in expensive feed to supplement pasture loss or thinning their herd, this year the livestock market has reportedly auctioned off nearly 20% more cattle than it did at this point last year.[3]  With so many ranchers selling animals ahead of schedule, predicted cattle shortages will likely mean higher beef prices in the future.  There are, however, sustainable agricultural plans and programs being implemented by stakeholders across the agricultural community to address these issues. And we will explore sustainability in the agricultural supply chain with a presentation by Scott Herndon, President of Field to Market.

As severe drought continues to cut river traffic through vital transportation arteries like the Mississippi River basin, half of all U.S. grain exports and roughly 500 million tons of goods annually are estimated to be impacted, which could cost the economy $20 billion in damages and losses. [4]  With a majority of food distribution in the U.S. being tied to the river at some point, this suggests that cost increases to shipping companies will ultimately reach consumers at the grocery store.  And again, there are impacts to cities all along the river whose workers and businesses depend on that steady flow of traffic.  Since droughts historically occur less frequently than floods, it has been pointed out that federal resources and alternative compensation are simply not available to businesses that are equally harmed by drought.  As the frequency of these extreme weather events picks up, there is an increasing call for policy solution at the national level.[5]  On these issues, we will hear from Jessica Stephan, Chair, National Grain and Feed Association Waterborne Commerce Committee, and former CFTC Commissioner Tom Erickson, of Erickson Law & Consulting, on the increasingly critical domestic and international shipping, freight, and storage impacts on the grain trade.

The impacts of weather and the fallout from the pandemic have been amplified this year by geopolitical events.  Russia’s aggression against Ukraine has led to extreme uncertainty in the global markets for energy, agriculture, and metals, often leading to unanticipated movements in commodity prices because of shifting market sentiment: any decision, at any time can and could move markets in extreme ways.  This is coupled with shifting monetary policy tightening by the U.S. Federal Reserve and other principal economies around the world, aimed at slowing inflation levels, and, in doing that, resulting in macroeconomic effects on the same commodities and associated consumer and producers more generally.  Price movements in these markets are, for those outside of this country, further affected by exchange rates, with the U.S. dollar recently rising to a 20-year high against many other major currencies, putting additional upward pressure on price increases.  While this trend may provide an offset to inflationary pressures, for companies that rely on overseas sales and exports for revenues, a strong-dollar environment can mean lower earnings, compounding the negative impacts of higher U.S. interest rates and inflation.[6]  Supply-side decisions bring us to a final factor in energy price pressure and uncertainty, with OPEC’s recent decision to decrease production by 2 million barrels per day even while the Ukraine invasion continues having knock-on effects across all commodities.

According to the OECD, Russia’s aggression against Ukraine has undermined the latter’s capacity to harvest and export crops, sunflower seed and wheat among them.  Russia plays a key role in global energy and fertilizer markets, acting as the world’s top exporter of natural gas and nitrogen fertilizers, and the second and third leading supplier of potassic and phosphorous fertilizers, respectively.  Since the agri-food sector is highly-energy intensive, the reduced export capacity and rising energy and fertilizer prices translates to higher production costs, further increasing food prices and threatening global food insecurity.[7]  What does all this mean for our agricultural derivatives markets when it comes to the potential for market disruption?  Later this morning we will hear from Tim Andriesen, Managing Director for Agricultural Products at CME Group, with an overview of how the agricultural derivatives markets have addressed the impact of these geopolitical events through evolving price limits in the agricultural markets.

Understanding and discussing the impacts of extreme weather events and geopolitics, and the ongoing recovery from the pandemic and how these market forces will continue to impact American farmers, ranchers, and other market participants throughout the agricultural supply chain is crucial and highlights the importance of this Committee.

We have an aggressive agenda for our short meeting today, and I look forward to hearing from all of you during the discussions that accompany each presentation.  I also look forward to using our last session of the day to scope the AAC’s agenda for 2023.

Closing

Before moving forward, looking back on the last several years of historically high volatility in response to the global pandemic, various extreme weather events, and geopolitical issues, the agricultural futures markets have continuously provided transparent price discovery and accurately reflected supply and demand fundamentals with convergence at expiry.  Our goal should not be limited to ensuring that the derivatives markets continue to serve their risk management and price basis functions.  We should examine and explore ways that we can build even greater resilience, usability, access, and availability into our markets and market structures so that the benefits can reach the widest breadth of potential users and market participants.  If there are ways in which our coming together can benefit the agricultural community beyond direct derivatives market participants whether through developing policy recommendations or through strategic partnerships, then we should explore those opportunities.

Again, I wish to thank all of our participants, all of our distinguished guests, and, of course, my colleagues at the CFTC who worked in front of and behind the scenes to bring this meeting together.