Heartburn in the Heartland Comments of Bart Chilton, Commissioner CFTC April 24, 2008 Original Article Every year, family farmers and ranchers face more risks than most other professions face in a lifetime. Myriad forces completely beyond the control of producers are an ever-present fact of life: droughts, hurricanes, or other weather-related natural disasters; commodity gluts created by foreign nations who excessively subsidize their exports; unfair competition from abroad by producers who don’t have our high (and costly) labor and environmental standards; and rising fuel, fertilizer, and other input costs. The deck is stacked against family farmers and ranchers; their declining numbers give ample evidence of this. They have, however, an inspirational, entrepreneurial attitude—hoping for the best in the face of uncertainty and never-ending labor—that dates back to the founding of our nation. Each year, with their undying spirit, hope and imagination of a better future, those that can return to the fields and pastures do so to try once more. This cycle of hope, ingenuity, and hard work represents the quintessential American farmer and rancher. This year, their optimism was rewarded. Commodity prices are at all-time highs. So one would think that family producers would be doing well. But there’s heartburn in the heartland and here’s why. In order to not literally "bet the farm" on one year's crop, many producers have—since the mid-1800s—employed futures and forward risk management techniques to hedge their price risks. This provides price assurance for them at harvest time. Recently, however, futures contract prices have increased so sharply that the deposit (or margin) on futures contracts has risen well beyond what many family producers can afford. This has required them to seek unprecedented lines of credit from lenders. They are doing so at the most expensive time of year for a producer—when they have already bought seed, fuel and fertilizer. So they are, at this point, at the mercy of the lenders, who, understandably, have their own sets of concerns in these unprecedented times. The result is that producers can either get a loan under the terms and conditions set by the lender, or they can forget using a futures contracts altogether to hedge their risks. Forward contracting has also become, in many cases, unavailable due to price uncertainty in agricultural markets, apparently a result of a lack of convergence of futures and cash prices. If agricultural producers don’t hedge, they are literally “betting the farm” and gambling with their families' livelihoods. Not good options. So, what’s to be done? The Commodity Futures Trading Commission (CFTC) is charged with ensuring that commodity futures markets are operated honestly. It is our mantra, mission and mandate to protect the price discovery and risk management functions of the markets. This means that we ensure that there is no uneconomic activity taking place that would create artificial prices. Specifically, we accomplish this through vigilant market surveillance and enforcement efforts to detect and prevent fraud, abuse and manipulation in the U.S. futures markets. We utilize our regulatory oversight tools to ensure that the markets are viable tools for hedgers, speculators, and for American consumers. Of immediate concern right now is that these markets for some appear to be unavailable as risk management tools, because they can’t afford the margin requirements. The markets’ price discovery function also is of concern, due to a lack of price convergence. These are issues that require careful, comprehensive review. The Commodity Exchange Act (the law that established the CFTC) provides many tools to detect and correct problems in our markets. Credit issues for farmers are not specifically within the purview of the CFTC, but rather are the province of the agricultural lending community and its regulators. There are, however, other tools available to the CFTC to address market concerns. The problem with using these authorities is that there may be unintended consequences. So we need to select the appropriate oversight remedy for the job, and be very careful not to take any action that does more harm than good. That said, I certainly don’t support the approach that we should sit back and watch as a calamity crosses over the heartland. There is a problem and we need to search for viable solutions. That is why this week the CFTC took another step toward finding a solution by conducting a public hearing with a broad group of market participants and experts, including those in the agricultural lending field. The official record of this event will remain open until May 7th to accommodate the views of those who were unable to attend. While I don’t want to prejudge what exact steps should be taken—we are still accepting comments into the record on various proposals—I think the CFTC should take some thoughtful action in the very near future. We should also work with the agricultural lending community to see if there are other avenues, beyond the authority of the CFTC, to address producers’ needs—including, but not limited to, credit requirements. At the hearing this week, officials from the U.S. Department of Agriculture (USDA), the Federal Reserve Bank of Kansas City, and the Farm Credit Administration (FCA) pledged to do their part to be engaged and to help. That is important, because the issues raised may require a comprehensive solution rather than a piecemeal approach. For my part, I’ll take a cue from family farmers and be optimistic, focus on the positives, go to work each day, and search for the right solutions. Commissioner Bart Chilton of the Commodity Futures Trading Commission (CFTC) asked Pro Farmer Washington consultant Jim Wiesemeyer to publish the following column. His views in this guest editorial are a reflection on this week's CFTC public meeting on the current situation in today's futures markets.