Opening Statement of Commissioner J. Christopher Giancarlo before the CFTC Agricultural Advisory Committee Meeting

December 9, 2014

Thank you, Mr. Chairman, and thank you for convening today’s meeting of the Agriculture Advisory Committee.

This Committee serves as a sounding board for the American farming and ranching industries that are the CFTC’s original constituency. It also reinforces the importance of agricultural commodity derivatives in our regulatory mission. Our official seal features the image of a field plow. It is a reminder that the well-being of American agriculture must remain foremost as we consider market regulation.

I commend Chairman Massad for his sponsorship, which I believe gives matters before this Committee the prominence they deserve. It is also highlighted by the attendance today of Secretary Vilsack. We are honored by the Secretary’s visit. I look forward to his remarks on the state of American agriculture.

Earlier this year, the United Nations Food and Agriculture Organization issued a report called “The State of Food Insecurity in the World.”1 The report makes fascinating reading. It estimates that about 800 million people around the world today are undernourished – that is, roughly, one in nine of the world’s 7.2 billion people.2 It is a staggering shortfall. Now, consider that the US Census Bureau estimates that there will be another two billion people on earth in the next 30 years.3 How will all of these people be fed?

American agriculture will continue to play a big part in feeding the globe in the decades to come. Just as the US is emerging as a self-sufficient producer and major supplier of energy to global markets – thanks to American ingenuity and entrepreneurship – the US is also a self-sufficient food producer and supplier to the world – thanks to the hard work and intelligence of the American farmer.

American agriculture and energy producers will respond to rising global demand with the vital support of US financial and derivatives markets. Efficient and well-regulated cash and derivatives markets will play an important role in controlling costs and facilitating return on capital to support essential investment in equipment and technology necessary to meet increased demand

The futures and swaps markets regulated by this Commission will serve at least two critical roles in helping to feed the world’s growing population. First, they will allow markets to resolve imbalances dispassionately and efficiently by providing reliable and fair benchmarks for prices.4 Second, they will reduce price volatility in a resource-constrained world by removing the economic incentive to hoard physical supplies.5 They will allow America’s farmers to quantify and transfer risks they want to avoid at a reasonable price to persons willing and able to hold that risk.6 Provision of this risk protection to the farmer, in exchange for a risk premium from the farmer, reduces earnings volatility and thus price volatility, benefiting all parties, including consumers who may never get involved in derivatives markets.7 In short, America’s farmers supported by America’s derivatives markets stand ready, willing, and able to feed the world’s growing population.

Yet, while these global trends are playing out, America’s farming community is itself undergoing transition. Approximately two percent of the US population is engaged in farming to feed the rest of us.8 Farming is a challenging endeavor that involves long hours, hard work, and thin profit margins. It relies on good weather, adequate water supply, and adequate financing. Fewer and fewer Americans are becoming farmers and ranchers. Yet, those that do are a hardy and resourceful lot.

There is not much that fazes them, other than the words “drought,” “frost,” and “flood.” However, there is one word that really makes farmers shutter: REGULATION. Federal regulations impact everything in farming from agriculture transportation to run off in small streams and ditches. Almost all regulation raises the cost of farming and ranching.

Here at the CFTC, I am hopeful that we will not impose regulations that harm American agriculture. I have been critical of regulations that threaten American jobs in the markets we oversee. I am pleased to have joined my fellow Commissioners in preventing an automatic shift in how futures commission merchants (FCMs) collect residual interest. The shift would have caused farmers and ranchers to pre-fund their margin accounts. It would have been tremendously expensive and would have increased risk exposure. It would have undoubtedly forced many smaller players out of the marketplace and left them subject to the price swings of cash markets.

Since 2008, there are approximately fifty percent fewer FCMs in the marketplace—many of which exclusively served the agricultural community. This is a troubling development that must be examined carefully. One small family-owned FCM from Iowa testified before the House Agriculture Committee slightly more than a year ago about the increased burdens of federal regulation. That firm has since gone out of business. The fewer the FCMs serving our farmers, the less farmers are able to hedge their risk.

The CFTC’s proposed position limits regime we will discuss today is of enormous concern. It must be carefully considered and re-examined. We will review the issue of deliverable supply numbers related to agricultural contracts, some of which were calculated years ago. I am interested to know whether the data remains relevant.

I am mindful that Congress directed the CFTC to impose position limits to curb “excessive speculation.” Yet, the vast majority of farmers, ranchers, and other agricultural participants are not speculators, let alone “excessive speculators.” Natural hedgers should be wholly excluded from any new CFTC position limits regime. They should not be second guessed on whether their agricultural hedges satisfy our concept of bona fide hedges. What do we know about hedging farm production? If we replace farmers’ commercial risk management decisions with Washington’s risk management decisions, we are all in a lot of trouble. Stock up on corn flakes. I look forward to hearing some fresh thinking from this Committee on the subject of position limits.

In closing, we must always ensure that the regulations we promulgate are smart and efficient. They must address real problems, not anecdotes of bad behavior. Our rules must support American futures and swaps markets, not restrain them.

When it comes to agriculture derivatives markets, our actions could have a larger impact than we realize – feeding the world – not only next month but thirty years from now. It is a hungry world and getting hungrier. Thank goodness for the American farmer and US markets.

I thank the Chairman and members of the Committee, and look forward to a productive meeting.

1 Food and Agriculture Organization of the United Nations, International Fund for Agricultural Development, World Food Programme, The State of Food Insecurity in the World 2014. Strengthening the enabling environment for food

security and nutrition, 2014, available at http://www.fao.org/publications/sofi/en/.

2 Id. at 8.

3 United States Census Bureau, International Data Base World Population: 1950-2050, available at http://www.census.gov/population/international/data/idb/worldpopgraph.php.

4 J.P. Morgan, Commodity Markets Outlook and Strategy: Nine billion bellies: Managing food, water, land, and air to 2050, at 12, Feb. 25, 2013, available at https://markets.jpmorgan.com/research/EmailPubServlet?action=open&hashcode=-macg0hs&doc=GPS-1061241-0.pdf.

5 Id.

6 J.P. Morgan, Is there a food crisis and why? Understanding the role that market-based solutions might play in addressing global hunger, at 4, Dec. 23, 2010, available at https://www.jpmorgan.com/cm/BlobServer/VoP_food_crisis_sept2010.pdf?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1158616602825&blobheader=application%2Fpd.

7 Id.

8 American Farm Bureau Federation, Fast Facts About Agriculture, available at http://www.fb.org/index.php?fuseaction=newsroom.fastfacts.

Last Updated: December 9, 2014