Commodity Futures Trading Commission
Twenty-Fourth Meeting of the
CFTC Agricultural Advisory Committee

Joseph Dial
Chairman

Wednesday, October 29, 1997
1:04 p.m.

1155 Twenty-First Street, N.W.
Room 1000
Washington, D.C.

C O N T E N T S

ITEM PAGE

1. Welcoming Remarks

2. "How do agricultural producers feel about risk management?"
Moderator: Patricia Klintberg
Steve Oman, American Farm Bureau Federation
Gary Hellerich, American Soybean Association
Jim Miller, National Wheat Growers Association
Paul Hitch, National Cattlemen's Beef Association
Discussion

3. "How do agricultural producers feel about risk management?" continued
Moderator: Sally Schuff
Discussion

4. Private & public sector points of view:
"What will it take to motivate more producers to prudently manage their price and yield risks?"
Moderator: Roger Bernard
Dave Miller, American Farm Bureau Federation
Stu Ellis, Illinois Farm Bureau
Mark Lange, National Cotton Council
Ken Stokes, Texas A&M University
Paul Christ, Land O'Lakes, Inc.
Discussion

5. Report on USDA's Risk Management Education Summit: Craig Witt, U.S. Department of Agriculture, Risk Management Agency 151

6. Status of FutureCom Proposal for a new electronic exchange: John Lawton, Division of Trading and Markets and Fred Linse, Division of Economic Analysis

7. Flex Options: Jorge Dorhliac, Coffee, Sugar and Cocoa Exchange and Paul Petersen, Chicago Mercantile Exchange

8. Serial Options: Dave Lehman, Chicago Board of Trade

9. Status report on potential lifting of the ban on Agricultural Trade Options: Paul Architzel, Division of Economic Analysis

10. Status of proposed changes to the CBOT Corn and Soybean Futures Contracts delivery terms/Status of delivery terms issues for the CBOT Wheat Futures
Contract: Paul Architzel, Division of Economic Analysis

P R O C E E D I N G S

CHAIRMAN DIAL: I'd like to call the 24th meeting of the CFTC Agricultural Advisory Committee together and welcome you all here and thank you for your attendance and those of you who are members of the committee for your participation in today's agenda. A couple of housekeeping items: please speak into the microphone whenever you make your remarks. There is a little button on the front of it that you need to press, and on my right hand side, you all may have to share the mikes, because we had one go out awhile ago when we did the test run. So, don't hesitate to scoot it up and down the table if you will, please.

Let me recognize the commissioners who are here: Commissioner John Tull; John, thank you very much for being here; Commissioner David Spears; Hi, Dave; thanks for being here. Is Commissioner Holum here yet? And Chairperson Born has gone over to the Hill for a House Ag Subcommittee hearing, but she hopes to be here before we adjourn and make a few remarks before you later this afternoon.

Let's follow our customary practice and go around the table. Let's start with Steve Oman in front of me, and then, we'll move to Gary Hellerich, and we'll go around that way. Please turn on your mikes and speak into the mike.

MR. OMAN: Steve Oman, representing American Farm Bureau Federation.

CHAIRMAN DIAL: And then, after you use the mike, then, you'll need to turn it off unless somebody is going to use it.

MR. HELLERICH: Gary Hellerich, representing the American Soybean Association.

MS. KLINTBERG: Patricia Klintberg; I'm the Washington editor of Farm Journal magazine.

MR. JIM MILLER: Jim Miller with the National Association of Wheat Growers.

MR. HITCH: Paul Hitch; I'm representing the National Cattlemen's Beef Association.

MR. HACKETT: Scott Hackett, representing Millers National Federation.

MR. WHITE: Robert White, representing the National Grange.

MR. GANGWISH: Rod Gangwish, representing the National Corn Growers.

MR. SANFORD: Jimmy Sanford, representing the National Cotton Council.

MS. METZ: Kathryn Metz, representing American Cotton Shippers.

MR. AMSTUTZ: Dan Amstutz, representing North American Export Grain Association.

MR. ROEGNIK: Bill Roegnik, National Broiler Council.

MR. ELLINGHUYSEN: Richard Ellinghuysen, representing National Farmers Organization.

MR. BLANCHFIELD: John Blanchfield, American Bankers Association.

MR. KUBECKA: Bill Kubecka with National Grin Sorghum Producers Association.

MR. DODDS: Bill Dodds, representing the National Grain and Feed Association.

MR. NELSON: Chuck Nelson, representing the National Grain Trade Council.

CHAIRMAN DIAL: Well, thank you, ladies and gentlemen, very much.

Let me mention one other item. The strategic plan of CFTC's that has already been presented to the House Ag Subcommittee, it's an ongoing process, and the initial effort will be updated, and we certainly would appreciate the input of the Agricultural Advisory Committee.

On another note, for those who are interested, there are some copies--unfortunately not enough to hand out to everyone in the room--but there are some copies of a report on the analysis of the location and amount of deliveries on the New York Cotton Exchange Number Two Cotton Futures Contract. This report covers the past 27 years. Kathryn Metz, with the American Cotton Shippers Association, has those available, and I would encourage you to get a copy of it. It's got a lot of very useful information in it.

We will go into our first item on the agenda, the topic of how do agricultural producers feel about risk management. I want to thank Patricia Klintberg for agreeing to serve as moderator of this panel and also the producers that are on the panel for their willingness to talk about this particular subject. I shared over lunch with those of us who were able to get together for lunch that the primary motivation for this particular panel discussion and the one that will follow and the one after that is the fact that I am convinced that for all of our collective efforts to provide risk management education to producers, that unless we have a better understanding of how they actually feel about risk management education, the attitudinal barriers that they might have, that we will find ourselves in a situation similar to that of any organization that has a product or service that they want to make available to a potential customer but does absolutely nothing to advise that potential customer of the benefits that they can derive from taking advantage of using that product or that service.

We, once again, collectively, that is, the Government and the private sector, have an outstanding product that we are offering to America's farmers, and we need to explain to them how they can benefit economically and otherwise by using risk management education, but in order to do that effectively, we need to understand what the barriers are for the individual farmer, and that's why we have asked our panelists to talk about their own experiences and those of their neighbors and members of their organizations.

So, Trish, it's all yours.

MS. KLINTBERG: Okay; thank you.

Just so that all know a little bit about what I know about this subject, I've been writing about crop insurance and crop revenue coverage; in particular, the newest kid on the block in terms of risk management tools that farmers can buy, and it's proved to be fairly popular in the states where it's been offered. I think there was something like 180,000 policies sold last year. Some people thought it would be too expensive, that farmers wouldn't want to spend that kind of money over and above what they already spent for MPCI. But where farmers have been most successful with it, they have already been the sort of businessmen that uses the market, and if it's used in conjunction with a marketing plan, it tends to pay off, be worth the money for farmers; at least, that is what I have heard.

Every person's operation is different, and that's one of the problems with national farm programs in the past: how do you create a program for everyone that can take into account the differences in everything from topography to rainfall? And the answer is that you can't, but with an insurance policy that can be tailored to an operation in individual fields and that kind of thing, your chances of protecting yourself are just that much greater, I think.

Today, what we are going to do is I am going to ask Steve Oman to begin. He is from Ohio, and I think it would be useful if you could tell us what sort of operation you have, what kind of risk management you engage in, and we'll take it from there.

MR. OMAN: Okay; I guess I'll lead off not knowing what we're getting into here, but a little bit about our own operation: we have about a 24-acre cash grain operation, just a family operation, wife, son and myself. Some of the tools we've used in the past, and the one that probably sticks out is the crop insurance program. We've been involved in it for the last 3 years. Unfortunately or fortunately or however you want to look it, we collected the last 2 years of it. This year, we're back to at least a normal crop in our area.

Part of the reason or some of the things that I see happening why farmers don't participate in some of the risk management tools is one is it goes back to an education. A lot of the tools out there, they sound good. When the farmer sits down and starts looking at the bottom line, when he writes the check, then, he questions, you know, why did I do this? And I think there, again, that's going to have to come back to an education process.

Some of the problems that caused this in the crop insurance thing, and I've seen this right now in our own operation, coming off of two bad years, every time you have a bad year, you're penalized the next year. What you can guarantee yourself is lowered. And I've raised the questions with agents, and I said something to Ken one time down here about it. It ought to be a situation where just because you have a wreck one year, and a lot of times, you will collect crop insurance maybe one out of five, one out of seven years, that one year, even though they only lower you by a percentage, and you have a couple of them in a row, then, they keep dropping the back year; you eventually get a yield that the producer is going to look at and say, you know, I might as well bail out for a couple of years and gamble that our yields will go back up; then, we'll reinsure again.

The cost of programs; we go back, if you've got a--you know, they can be written off as a cost of doing business. There again, it's an education process. You have a lot of bankers, you could end up having a $50,000 or a $75,000 hedge account, and all at once, that banker, when you could have sold $3.50 corn, and you're locked in at $2,80, $2.90 corn, $3 corn, you know, the question is why did you do it? So, it's always that hindsight is 20/20.

The other thing that I see that producers do, they don't know their costs of production. In defense of that, costs of production can vary. They don't know how much they produce until the end of the year, and, therefore, I mean, in our area, you can easily have a 50 bushel to the acre difference in yield, and that does tremendous things to your cost of production.

I don't know how much you want me to say before we turn it over. I think you're going to have a dialogue after awhile or--

MS. KLINTBERG: Yes; and then, we'll also take questions. But on the question of yields, it is a problem as I understand it, especially for some growers in North Dakota in particular, who have had year after year of poor crops. The other thing that can happen is you slip into this nonstandard classification, which causes your premiums to go sky high and essentially forces you out of the program.

But it seems to me that even with a lower yield that can be insured, if you have, say, if it amounts to 60 percent of your yield that if you can use the market to lock in a profit that you may be better of doing that than not doing it. Do you use--do you forward contract and that kind of thing?

MR. OMAN: Well, I guess when I look at crop insurance, other than this year, and we're participating in the revenue insurance program, I guess--and maybe it's back, but I always look at crop insurance as guaranteeing a yield. And to do that in the past, you guaranteed a certain price that you bought in the elective when you went into the program.

The thing in our part of the country that concerns us, if you go to the 75 percent level, your premium costs, the subsidy from the Government is a lot less, and you really look at that bottom line when you go to 75. So, most producers and most agents will recommend you the 65 percent. And, there again, when you do that, I mean, you sit back, and, you know, depending on where your corn yields or soybean yields, at a point, I mean, history is going to tell you you're participating in a program for the risk/reward is not there.

MS. KLINTBERG: If you look at crop insurance that guarantees yield, I mean, that is the old way of looking at it; certainly still applicable. If you look at CRC as a way to guarantee yields and price, it's kind of a whole different ball game. I spoke to a producer today who was able to, with a basis contract, insure that when she priced her corn, the basis would not have widened so far in the area that it would, you know, she would lose from that end. She was also able to lock in transportation with the local elevator as part of the contract for him to handle the corn.

And so, she said basically what I did was eliminate the basis risk and the transportation risk. She said when you know these shortages with railroads and railroad cars and so on is an ongoing problem, you must manage that, and I understand that I can sound like I know what I'm talking about, but I'm not doing it; so, tell me what I'm--if I'm wrong.

MR. OMAN: Well, when you just start to get into the--you're getting into another aspect of risk management, which is your marketing side of it. I didn't touch on it that much, but a lot of that basis deals will come back to an individual's own storage facilities, and, you know, we all know what happens to basis at harvest time normally. I mean, you'll get them odd years. But I guess trying to anticipate a basis move in a demand-driven market can really throw a producer off base, because there aren't that many years--I didn't go back and look, but I would question how many years are really demand-driven bull markets. I mean, we went through one, I think, in 1995, and, you know, when the hedge to arrive situation happened to hit. And there's another situation that I happened to come from an area that really got burned from hedge to arrive, and it has really soured farmers and producers from doing a lot of cash forward anything just because of that situation, and a lot of that was developed by I'm going to say an educational process.

You take elevators; they have people, I call them grain originators, who are on the phone every day trying to get farmers to do this, and a lot of these people, you know, probably don't have the education to be doing what they're doing to convince a farmer that he should be doing this. Then, when the farmer does this, then, in May or June or July and something goes wrong, why, you know, he's still got the X number of bushels done at a certain price, and he sits there and scratches his head, well, why did I get into this? So, I think that's a lot of the problem.

MS. KLINTBERG: Yes; and, I mean, as I understand it, the problem with hedge to arrive is nobody expected the market to go up, and that is the--we're kind of in an age where we have a new mindset, where there is no Government program; there is no target price; there is the payment; that's supposed to end in 2002, and we seem to be in a period where demand is going to remain fairly steady. We'll see.

Gary, would you like to tell us about yourself? Gary's from Nebraska, soybean farmer.

MR. HELLERICH: Okay; thank you.

Yes, I'm from Valparaiso, Nebraska. I have about 2,000 acres in my operation. We are, as a result of the 1996 farm bill, we are primarily now a soybean-feed grain operation. Prior to that time, I always had about 300 or 400 acres of winter wheat in my production mix, but because of this change, we have now moved to a feed grain-soybean rotation.

As to answer your question as to why people do not utilize risk management tools to the extent that perhaps some other people do, in visiting with people who live around me and then also some who serve on Nebraska Soybean Association board, I find a number of reasons, and if you would, I could go through those. One of them is diversity of operation. A number of people feel because of their diversification, they don't need to carry as great of a risk management portfolio that somebody who is specializing in one particular product.

Another reason that I found was predictability or reliability of production; in other words, in some areas where Nebraska is typically short of rainfall or moisture, they have been able to supplement this with irrigation, and with that comes a reduced risk of yield fluctuation as compared to the dry lands situation.

A number of people feel that the risk/reward relationship heavily favors the insurance companies. You know, they feel that, hey, the insurance companies aren't in this thing to lose any money. And another reason is there is an effort to hit a balance between income or profit and expenses, insurance being another form of an expense. And then, a couple of times, individuals related to me that they did not trust the brokers, the commodity traders; there just wasn't a great deal of trust being established between themselves and these people who work within the commodity trade.

Some people just flat out don't like to pay premiums. They feel that is a waste of money. And I think one of the things that you mentioned was particular multiperil or CRC coverage. If you do file a claim, basically, you've shot yourself in the foot, because that enters into your average, your APH average, and your yield levels go down. And, as Steve mentioned that, and it's a big factor out there. You know, you turn in a claim and, you know--we just came through a severe snowstorm in Nebraska this past weekend, and I think you will find that there will be a number of individuals who have had damage to their homes and their cars from falling tree limbs and power lines and so forth, but I don't they're going to see a significant reduction in their coverage or a significant increase in their premiums. But here on the agricultural side, on the CRC or multiperil, we experience these types of things.

Another thing has been, as I mentioned, we are in a transition period now from a different crop mix, and particularly in some areas where they haven't grown a particular crop before that is now coming in, they are faced with what they call T yields on these average production history things. The T yields are typically real low, and, you know, you have to start someplace, but you don't have to start at such a low yield level. And, so, therefore, they just stay out of the program.

And like I say that one of the biggest things that producers in my area are now concerned about is, number one, we have the loss of revenue that is going to be forthcoming here before too long. What are we going to do enterprise-wise to replace that lost revenue? What are we going to be going into? What are we going to do to generate those additional dollars that are being lost by the lapse, by the expiration of the current farm program?

So, that gives you some idea of what I found out in the country.

MS. KLINTBERG: I just wanted to say one thing: in talking to bankers, they recommend CRC, some of those I've talked to, to their clients but find it particularly useful for people with irrigated ground, because, I mean, obviously, you are not going to have to worry about drought but wind damage, which has been a big problem; your premiums tend to be lower, because your yields are going to be good. You've got the protection; you've got the water. So, that's sort of an interesting twist, and it seems to me that diversification would be an asset always if you're going to have any sort of crop insurance policy.

If you are in a T yield situation with a new crop, there are things like group insurance that's county wide which basically, everybody chips in probably not a very large amount, because the whole county has to lose something before you get any sort of payment. So, you, as an individual, if you had losses, you might not even get a payment, but in a disaster situation, it's not a bad deal for the money.

And we have Jim Miller here from the Wheat Growers, who is going to talk to us about what he's heard in the country from his members.

MR. JIM MILLER: Thank you, Trish, and Chairman Dial, thank you for holding these panels and for your leadership in this important area. It's certainly something that is going to be worthy of discussion for a long time in the future, I'm afraid, but it is important that we address it.

I am now on the staff with the National Association of Wheat Growers here in Washington, but up until a couple of years ago, I was an active farmer in Washington State and still have a diversified small grain and poults operation out there. So, I've had a little bit of experience with crop insurance and other risk management tools.

And I guess, given the topic, I think really for the purposes of this group, we're talking primarily about production and price risk management, which really are only one set of factors, I think, when we talk about total farm income, risk management or lifestyle risk management, however else we might want to phrase it, because obviously, there are a lot of other risks out there that farmers are facing on a day-to-day basis besides production and price risks.

But to limit it to those, I did do a very scientific survey. I called about a dozen people around the country in order to get their opinions about this, so, this is the gospel, I guess, according to wheat growers. Actually, the first comment that I got about risk management, actually from people who had an understanding of what it probably should be was that it was unnecessary. They are basically individuals who are in a low cost of production area. They have very low risk, both production risk and, in some cases, very low price risk, because they do a lot of contracting directly to consumers close by, or, they are in an area where transportation isn't a major factor.

Most of them have low debt, and, not surprisingly, a great number of those folks are also very close to retirement, and their interests are less in terms of actually operating the farm as they are in providing some semblance of income for their future. But that is a group of farmers out there who really don't need these tools. They are able to manage with the resource base that they have.

I guess the second group, I would categorize as being confused or fearful or ill-informed, and I won't use all of the language that they expressed to me when I talked to them about crop insurance and the futures market, but to reiterate some of the comments earlier, in many cases, they're not even sure what risk management is. Unfortunately, I'm afraid, those are the folks who are going to find out what risk management should have been when it's too late, but, as was indicated, when a person looks at a risk management program, whatever that might entail in terms of crop insurance or use of a marketing plan that may include both cash sales and uses of futures and options, hindsight, if you're at all successful as a farmer, tends to make those programs look pretty poor, because you spend the money up front, and in the end, you haven't collected anything.

The only scenario that's worse is you spend the money up front, and you actually do collect, because what you collect usually isn't anywhere comparable to what you would have produced and gotten through the marketplace.

I think another characteristic of those people, though, because they are somewhat confused, they also tend to have, I think, a limited amount of discipline in terms of following through on the decisions that they've made or the decisions that they know they should make, and even with some of the bankers I've talked about who are encouraging farmers to implement marketing plans, it's very easy to draft a marketing plan. It's very easy on paper to see how it works, and it's very difficult for farmers to pull the trigger and actually make it operational.

In terms of being ill informed, there are a tremendous number of farmers out there whom I think have a very poor understanding and, in some cases, no understanding of insurance or marketing concepts. They basically have been on the land, producing crops and selling crops into the cash market after harvest and really have not spent any time exploring what other alternatives might be available to them.

And then, of course, all of us in this room have heard the story around the coffee shop about the guy that lost his farm, divorced his wife and had to auction off his two youngest children to make a margin call, and, unfortunately, those kinds of stories do sell out in the country. People are very fearful, especially of the futures market. And while we might say, you know, if you had done things correctly, you are really at very little risk; you don't have that much exposed; you can even find ways, through the use of options, to know exactly what your exposure level is. I don't think farmers at this point are really buying that argument in terms of the use of futures.

And then, you come into the issue where those markets, obviously, are only controlled by the big traders and not really developed for use by farmers. Again, whether it's true or not, I think that is a very pervasive opinion of the futures market out in the country, and as was mentioned, really, it's just another outlay; it's another expense, and we're not really seeing a return on that investment.

Another comment or complaint is really about the inappropriateness of some of the education tools as we now want to categorize them, really more or less out in the country in the past, at least, utilizing these things has been a sales opportunity for crop insurance salesmen, crop insurance agents, for brokers and traders. And, for the most part, while those people do have a lot of knowledge about particularly their own product but even a lot of knowledge about how their product can and should be used to the benefit of the producer, first and foremost in their mind and, I think, in the end, first and foremost in the mind of their audience is that they are out there selling their own product, and I think we have to move very quickly beyond that position, where the folks that do have the knowledge are trying to sell their product to the exclusion of someone else's product, and I think everyone in this room can play a part in that.

Another complaint about that sales program is it's very rare that you'll go into a meeting with anyone from the industry who is selling their product that they are fully going to disclose what the limitations of their product are or what else the producer might need to do in order to ensure that he is truly getting full value out of that product that he's being sold.

MS. KLINTBERG: May I say something?

MR. JIM MILLER: Sure.

MS. KLINTBERG: Don't crop insurance agents have to be able to talk to producers about all of the different products that are Federally subsidized?

MR. ACKERMAN: Crop insurance agents do have to be able to talk about all of the different products that are subsidized under the Federal Crop Insurance program, not necessarily, though, about futures, options, other types of things.

MS. KLINTBERG: But I meant just the various types of insurance, because they are all basically selling about four different things.

MR. JIM MILLER: They can sell a lot of things, but if you're out selling something, and one product is something that you know more about, or there is an advantage to you personally, I can venture where you're going to place the emphasis, and whether we want to admit it or not, certainly, there are people who have a preference of one product over another, and that's where they're going to concentrate. And, to a certain extent, I think that's only human nature. You're not going to get purely unbiased views from anyone who is, in fact, selling a product or making their living by doing that. We just have to recognize that that is, in fact, a fact of life, I guess.

MS. KLINTBERG: Well, farmers don't have to buy it, either.

MR. JIM MILLER: Farmers do not have to buy it, and, unfortunately, many of them aren't, and again, that's what I believe is one of the limitations to getting these risk management programs more widely dispersed around the country, more widely used is because they're somewhat timid about buying from a salesman, so to speak.

And a concept that has already been brought up is that the products are costly, and those costs are paid up front. I talked a little bit about NCS, but I guess the comment that I've heard, even from people who are very aggressive in developing risk management strategies are that they are still getting inadequate products for the amount of money that they're paying. Some of that is due to the fact that you're just not able to cover the full value or the full yield that you would expect, and in many cases, you can't even do that if you are using a combination of products. In many cases, these products do not work for specialty crops or even field crops such as wheat that might have certain special characteristics, and an example in wheat is durum. Sure, you can go out and insure; you can get CRC in the Northern Plains. It's based on hard red spring wheat price, but durum is a somewhat different product, and you're not able to cover the full value.

In effect, some people are saying there really is no reward built within the system, primarily the crop insurance system, for those who are good managers, even though the crop insurance system is moving to more of a revenue-based system with products such as CRC. And then, with farmers, you always run into the timing of when you need to make these decisions, some of it real, some of it perceived, but it becomes a damn good excuse. I was a winter wheat producer. We would start harvest in August, usually move directly from harvest into fall planting and finish up about the 10th of October, 10 days after the final sales closing date for winter wheat in the Pacific Northwest. That became a very good excuse for not even considering Federal crop insurance, because I was too busy to look at it.

But I think probably in the end, the comments and what criticisms there are, I think, just indicate that there really is a need out there for the industry broadly speaking to develop new products, to develop new techniques and to take a very hard look at what the future of agriculture is going to be with a number of the changes, both in terms of public policy as well as the changes that I think we are going to see in terms of the implementation of new technology and new demands from the consumer and find out how risk management strategies can affect those crops and those producers rather than trying to develop things today that were maybe good for crops that we're raising and conditions under which we're raising those crops 10 years ago without paying heed to what is likely to happen in the future with biotechnology and other changes.

Thank you.

MS. KLINTBERG: And now, we are going to hear from Paul Hitch, who is a cattleman who has also had some experience with snow recently, and, you know, cattle, obviously, are different. There is insurance for livestock but usually just if they die. As we talked about earlier this week, there is no way to recover losses that may occur in performance and quality of the animal that's really been stressed by weather or something else.

MR. HITCH: Right; ready for me?

MS. KLINTBERG: Yes.

MR. HITCH: Paul Hitch, president of Hitch Enterprises, representing NCBA, but we're cattle feeders mostly; have recently got into pork production. We also have irrigated farming and a combination cow/calf stocker operation on the ranch. Seventy-five percent of what I tell you today will be true; 25 percent will be false. It's up to you to sort out the true from the false. I believe everything I am saying is true, however, I'm sure that time will prove me to be somewhat wrong in that regard.

I don't spend a lot of time worrying about risk management, frankly, on our farming operation, although occasionally, I will go short wheat or corn based on our estimated production on our farming operation. But as a risk manager, I'm a meat guy. I'm a cattle feeder and a pig producer, and we're seriously reassessing our own risk management ideology, because we paid a great deal of attention in our cattle feeding to our break-evens in trying to go short the futures market somewhat above the break-evens. It's been a program with modest success, and I've got to admit I'm the father of the damn thing, so, I've got to love it even though it hasn't been tremendously helpful.

On the other hand, I did some risk management in pork production. I had no idea what my break-even was. It worked out really well. I said the price is high; let's sell it and see if it won't go down, and sure enough, it did. It makes me wonder whether knowing your break-even is a really useful item in entering into a risk management situation. Most of our--we also have death loss insurance, so, we've got fewer cattle to manage the risk on now than we did just a week ago, because a considerable number of the damn things died in the feed yard in the blizzard over this weekend.

I was too lazy to call anybody, but I looked back on my own foibles and failures in risk management, and I think probably I've covered all of my bases. In the list of reasons I'm going to give you why people don't engage in risk management. The number one I put down is laziness. I mean--

MS. KLINTBERG: I think you're right.

MR. HITCH: You know, it's hard work to think, and it requires thinking to develop a strategy to enter into the futures market, and most people don't want to go to that effort. Item number two is confusion. I said see laziness.

[Laughter.]

MR. HITCH: Item number three was the horror stories you mentioned, Jim. I said see confusion, which, in turn, refers you to laziness. All of these become subsets, but they're real. I mean, it's hard work to hedge. Item four is don't need to, either because they're financially solid enough to withstand the ups and downs in the market, or they think they are, or they don't perceive there being a big enough risk of a big enough down in the market to cause them financial distress.

Number five, this particularly applies to pork producers, those that I've talked to. Since I'm a new kid on the block, I brought a cattle feeder's mentality to pork production. I just couldn't stand it. The price was so damn high I said we've got to hedge; we've just got to. But the track record for the major pork producers, from what I understand, has been that they don't pay any attention to risk management, and they bet that their volume of production and efficiencies of production are going to be significantly below the average production cost of everybody else in the market and that they're going to make money most of the time, and they're willing to ride through the troughs because they don't want to give up the big profits on the up side, and they think the profit will be greater with no involvement in the futures market over a 5 or 8 or 10 year period than it will be if they manage the risk by guaranteeing themselves a more modest profit. And they feel they've got deep enough pockets to ride through the troughs, and they're big, and they're successful. So, I'm not going to argue with their approach to things, but I'm a cattle feeder, so, I bring a different attitude towards it.

I'd like to bring up one last thing that I think is relation important, and it hasn't been touched on by anybody else here. I was just humped up waiting for somebody else to steal my point, and nobody did. And that is that nobody really wants to take a lot of responsibility on. It's a psychological issue. It's not a money issue at all. If the market goes down, and I lose a lot of money, it's because the damn market was what caused me to lose money.

Now, then, you have a subset under the market. You can say those guys in Chicago on the Board of Trade or the Mercantile Exchange or the big companies or the funds; I mean, you've got a whole list of people out there you can blame for your misfortune. It's those people out there that caused me to lose money. You get involved in risk management; you make a bad decision; it costs you a bunch of money; you don't have anybody to blame but yourself, and you really don't want to do that.

You really don't want to say I'm the guy that caused me to come to this sorry state of affairs, and you've got to face that: when you make decisions in the market, and you're wrong, you've got nobody to blame but yourself, because you're the one who did it. Now, you can always subscribe to newsletters and blame the advisors, because they advised you to do this. I mean, they're convenient scapegoats in that regard, but people don't want to take responsibility for the bad things that happen to them, and if the market causes the bad things to happen, you've got somebody else to blame it on.

And I guess I had one final thought: cattle feeders, at any rate, are kind of crap shooters. They're traders, and it's kind of like if you followed a risk/reward analysis, you would never buy a ticket in a lottery, because the reward is not worth the known financial payout. But to a certain extent, feeding cattle without any risk management program is kind of like buying a ticket in the lottery. You could make that $150 a head profit, but you'll never do it if you have a risk management program in place, or at least I won't, because I'll have it hedged long before it gets there. And you give up the chance that this is going to be the one that otherwise, I would have hit out of the park for a home run, and all I'm going to get out is a dippy little single. And some people just don't want to give up the opportunity to make that spectacular play.

And that's the end of my speech.

MS. KLINTBERG: Thank you. I'd like to ask you, as a cattle feeder, do you see any need for insurance when you have tried to buy corn ahead, and then, say if there is a disaster, prices go up?

MR. HITCH: What kind of insurance? I mean--

MS. KLINTBERG: Well, there is talk of this--

MR. HITCH: We'll go, like, buy the board, you know.

MS. KLINTBERG: Yes.

MR. HITCH: That sort of thing. Our futures trading on corn, I do a little bit of it on our farming, but most of it is keyed to our corn acquisition for cattle feeding.

MS. KLINTBERG: And have you ever gotten really burned by--

MR. HITCH: Bad yields?

MS. KLINTBERG: Well, yes.

MR. HITCH: Yes.

[Laughter.]

MR. HITCH: Not--I mean, what we try to do--the way we try to finesse that at the feed lot is to try to convince the farmer that selling to us--don't sell us your whole crop. You know, you think you're going to raise 100,000 bushels of corn; contract 65,000 bushels of it to us; take 35,000 to town to the elevator. Then, if you only raise 65,000, we get it all, but at least you can cover your contract.

Now, you know, you can't force the farmer to do that kind of adjustment on his cropping program, and obviously, we've gotten burned a few times in the past when yields came in below expectations, although as a rule, you know, it doesn't wipe out the area, you know; as a rule, it's a farmer got hailed on and had a terrible crop, but the guy down the road had better than he expected or had at least enough more that you can let him bring more to you to make up for the guy who didn't bring you as much.

And we have the right to sue the farmers if they don't bring us everything they're supposed to, and we don't do that. You know, clearly, we don't do it if he got hailed on; now, if he just took it to town--well, we don't sue him then, either. We just don't buy his corn next year.

MS. KLINTBERG: Well, I saw both what you said as a comment that people are reluctant to make that, you know, that a lot of producers who are not interested in risk management may think that all they have to do is produce and put the grain on the ground, and that's it and sell at harvest time; or, as Art Barnaby said once, that he talked to--he's--does everyone know Art Barnaby? He's a Kansas State economist who helped develop CRC--said that a wheat grower said to him, well, that he only really felt good when he saw his grain in storage, and Art's like, you know, what's wrong with 354? You know, you sell the crop and got the money that you could put in a CD somewhere and get interest instead of having to pay the costs of storage and keeping the grain in condition. I don't know.

Do any of you have any questions for the panelists?

Yes, Ken?

MR. ACKERMAN: I'd like to make an observation, if I may. I'm Ken Ackerman, administrator of the Risk Management Agency. We're the crop insurance people. This is a very interesting panel. It is obviously very important for us, speaking for the Risk Management Agency as tool providers, as insurance providers, to listen to our customers, and a lot of the concerns you're raising, particular problems with our policies are things that we need to be very alert to and try to fix.

There is one impression, though, that I hope people don't walk away with. The fact of the matter is that despite all of these reasons why people might not insure or not use risk management, very large numbers do, and very quickly growing numbers do. And this is borne out by sheer statistics. In 1993, just a few years ago, we only insured in the crop insurance program about 80 million acres. Today, we insure over 200 million acres. It's very quick growth that's happened in a very short period of time.

We're also seeing growing numbers of farmers every year not simply settle for the low catastrophic level of insurance, but more and more are buying higher buy-up levels; more and more are using CRC and the different revenue tools. The point about farmers not wanting to take responsibility or the reasons that Paul is mentioning about why many don't, the fact is that growing numbers are prepared to take responsibility and are doing the homework. There are a lot of reasons for that. A lot of it is the environment that exists today with Federal programs being shrunken in the past few years.

One thing that was very striking to me this past year, we had two very dramatic loss situations over the past 8 or 10 months that were very different. We saw last spring the very severe flooding in the Dakotas and Minnesota. That was a very sad situation. It created quite a bit of destruction besides crop loss. But the farmers in the Dakotas who were subject to those terrible floods last spring, in that area, over 90 percent of them had crop insurance, and the large majority of those who did have crop insurance had it at the buy-up level.

And as a result, even though that was not an easy period for anyone, especially those farmers whose land was underwater, and many of them could not plant at all, they did at least have that security in place. By contrast, during the summer, there was a very bad drought in the Mid-Atlantic states, in Maryland, Pennsylvania, Virginia, New York, and in that part of the country, the crop insurance participation level was quite a bit lower. It was about 40 to 50 percent. And as a result, many farmers who could have gotten a small payment under CAT coverage or buy-up coverage, found that there was really no Government program that was available that could step in, and it created a very difficult situation.

I believe it was Jim who mentioned that many farmers feel they don't have a need for crop insurance tools. Unfortunately, in many cases, they don't find out until it's too late.

MS. KLINTBERG: Yes; that's true.

MR. JIM MILLER: Can I make one comment?

MS. KLINTBERG: Yes, go ahead.

MR. JIM MILLER: Ken, I don't question at all what you're saying about the numbers increasing, and I would expect that they are going to continue to increase just because of the necessity of people to do something, and some of that necessity isn't necessity that the farmer feels himself; some of it is necessity that some of John's people are imposing upon farmers. But nonetheless, I would venture a guess that if you asked most of those farmers if the coverage they paid for was adequate to protect them, a large number of them would say no, it's still inadequate; I had to protect something, but it's still not adequate for my operation.

MS. KLINTBERG: We can take two more questions, but I think the sentiment you just expressed goes to a mentality that sees insurance as something you buy so that you get a payment, and it doesn't work that way.

Gary?

MR. HELLERICH: I would have to object to that. I don't think there is any producer out there that buys insurance with the idea he's going to collect. I know that's kind of a general idea out there, but hey, look: we're all businessmen. You know, you buy insurance, and you collect; you've got a disaster on your hands.

MS. KLINTBERG: I stand corrected.

Go ahead.

MR. DODDS: I would just make a further observation on the use of risk management. I represent the National Grain and Feed Association here. I would say about 3,000 customers represent about 80 percent of our volume. I would guess that 80 percent of those customers sell everything before it's harvested, and it's basis; it's flat price; it's hedge to arrive, and I would guess about 50 percent of those use some kind of an insurance package for crop insurance.

MS. KLINTBERG: Well, that's an interesting statistic, because I would just say about my own experience, I'm not a farmer; I don't have a farm background. But one of the most illuminating things that I've done in terms of trying to understand what it's like to be a producer was to attend a risk management sort of seminar given by crop insurance people and sit through a day of marketing and imagining that you have a 100-acre corn base, and you go through all of the purchases of inputs; you go through the marketing. Of course, they had people helping you do this, because believe me, I think it's rocket science. It is. It's very difficult.

And the illuminating part was at the end, after you had spent all of this money; you had chosen what sort of coverage you were going to have or not, you had to pick your yield out of a hat, and then, you knew, you know, what your bottom line actually was.

With that, I will close. Thank you all very much.

CHAIRMAN DIAL: Thank you, Trish and panel. We appreciate that very much.

We'll move now to our second panel. It's going to be chaired by Sally Schuff, the editor of AgriPlus, and the panelists will introduce themselves once they get seated. Obviously, the panelists on the second panel represent different commodities, but they're going to deal with the same basic question, and that is how do agricultural producers feel about risk management?

MS. SCHUFF: Hi; I'm Sally Schuff. I work for Farm Progress Companies here in Washington. I'm one of the two editors in the Washington bureau that cover Washington news for our 37 publications nationwide. We have recently been acquired, having been owned by CapCities/ABC and the Disney Company. Our company was acquired in September by an Australian company that is a very large agricultural publishing and broadcasting company in Australia. So, we are now combining their publications in the Southeastern United States with ours to have a total of 37, typically state, farm publications nationwide.

We also publish Farm Futures magazine, which is our magazine for top producers who are involved in management and marketing issues on a daily basis. And some of the information that I use today will be from some surveys that Farm Futures has done, and I am going to quickly, rather than asking the panelists to introduce themselves, I've got some introductions here. I am going to quickly make introductions.

I'll start with one big question. We had some conversations on the telephone last week with each of the panelists. I had some very interesting conversations and some things that I think will be quite revealing that certainly were almost counterintuitive to me, and I think they will be interesting. I want to certainly thank Commissioner Joe Dial for this forum this afternoon. I think he has been a great leader for the agricultural community in risk management, and I think we all have much to thank him for in raising the visibility and the awareness of risk management issues as we go into this new post-farm bill era of what will surely bring us exciting ups and downs but nonetheless, ups and downs with price volatility.

Price volatility certainly couldn't be more in the news this week. It's probably a nice thing that we're at CFTC instead of SEC today. It's certainly a timely topic, and our risk management problems may look kind of pale compared to some of theirs today.

So, with that, let me get on with the panel discussion. Rich Ellinghuysen--Richard Ellinghuysen, having asked him which he prefers to be called, is here on my left, and he has a great deal of exposure to farmers' views on risk management from his work in the National Farmers Organization in Iowa. He has some really quite intriguing views on how farmers will respond in the post-farm bill era to change and how different sectors, commodity sectors, will adapt.

Richard's experience comes from the ground up. After beginning his career on his dairy and livestock and grain farm in Winona, Minnesota, he joined NFO in 1987 as a risk management specialist. He worked in that department and became its director while it changed its focus from cash sales focus to diversified futures marketing. The department now focuses on brands and brand management concepts. Since 1996, Richard has been director of program development for NFO.

As well as serving on this committee, he serves on the Ag Technical Advisory Committee by joint appointment of the U.S. Trade Representative and U.S. Secretary Dan Glickman. In 1994, he was recognized as an outstanding young Iowan by the Iowa Jaycees, and he is active in his church, serving as a trustee and a Bible study teacher.

Jimmy Sanford is in the middle there. I'm just going to do these in the order that they are in my hand here. Jimmy represents the National Cotton Council on this committee as the chairman of the board of Home Place Farms, Incorporated of Prattville, Alabama. His wife, Dot, is the president of the family's farming business, which includes several affiliated businesses, including Home Place Computing and Home Place Capital and several other business entities.

Jimmy's concern about risk management in agriculture goes back to 1971, when he chose to do his master's thesis on the topic marketing cotton cooperatively in Alabama utilizing an automated data processing system. He chairs the Government and Industry Research Committee for the National Cotton Council as well as the council's leadership development committee. He has served in numerous industry and civic organizations and on task forces, still finds time to serve as a deacon of the First Baptist Church of Prattville.

Bob White, down at the end, is from Ohio. He is with the National Grange and is representing them on this committee. He says he has got a nearly perfect risk management program. He has lived on the family's farm northwest of Columbus since he was 3 years old. In that life and time on that farm, he says he has never had a total crop failure, at least one that could not be corrected the following year. It must rain in Ohio, unlike some of the Western states where I am from.

He raises corn, soybeans and wheat, some oats, and he lambs a flock of 60 ewes. His farm has 600 acres of row crops. His father still lends a hand, but for the most part, Bob handles farming by himself. His wife works off the farm, and Bob has not encouraged any of the couple's six children to return to farming.

In a minute, I am going to ask him for his views on risk management versus riskier management.

Bill Kubecka, second to my left here, represents the National Grain Sorghum Producers Association. Although he is the past national president of the association, today, he will air his own views rather than those of the association. Bill and his wife Maxine are both veterinarians in Palacias, Texas. Bill's wife runs the veterinary clinic; Bill runs the family's farming business with his sons Mark and Wade. Kubecka Farms includes 6,000 acres of rice, cotton and sorghum production. He also manages Kubecka Dryers, which he owns with his father.

Bill has a built-in risk management program similar to Bob's. He lives in the coastal bend area of Texas south of Houston, where rainfall quote is not a problem unless there's too much. He has very little yield risk. He has fairly stable production, not necessarily good, he says, but stable. He has some opinions on how tax and trade issues play into risk management. He is active on the Texas Grain Sorghum Board and is involved in its trade issues with Mexico and Canada. He is a member of the First United Methodist Church of Palacias and serves as vice-president of the administrative board.

Rod Gangwish, one of my fellow Nebraskans down there, if there is an issue in Congress that affects corn growers, you're as apt to find Rod up at Longworth or Russell as you are on his home farm in the Platte Valley of Nebraska. He is the past president of the National Corn Growers Association, and he has one of those risk management systems that Gary mentioned earlier. He's got irrigation, which is quite uncommon not to have in Nebraska, and he has all sorts of other weather risks besides dry weather. He was one of those who had to dig out of the same blizzard to get here today.

Rod and his wife Jane have raised corn, soybeans and alfalfa for 24 years as part of a 1,500 acre farming operation near Shelton. He is currently vice-president of the board of the Nebraska Agricultural Leadership Council, and he is past president of the American Baptist Churches in Nebraska.

In addition to serving on this committee, he is a member of the Agricultural Advisory Committee of the Chicago Board of Trade. Today, he will be speaking on behalf of himself rather than expressing the views of the corn growers.

With those introductions, let me, in visiting with these people on the phone last week and this week, one of the interesting questions that continued to come up throughout the conversations was on the issue of price volatility. Somehow, I, at least, had the misconception that price volatility was a really, really bad thing. That was not the impression of many of the producers, and I would like to put--the one question I would like to ask each producer to answer--we'll just start here with Richard and go on down--what does price volatility mean to a producer? Is it good? Or is it bad? And what effect does it have on the operations that you're familiar with?

MR. ELLINGHUYSEN: Yes.

[Laughter.]

MR. ELLINGHUYSEN: It's both. Price volatility has advantages and disadvantages, because the markets are going to react higher than averages as well as lower than averages, and producers, as they look at risk management in my experience, and there is a combination of those people out there, some that like volatility. I mean, it's much the same way: some people like roller coasters, and some people don't. For some, it's terrifying; for others, it's an exhilarating experience. And a lot of folks like the volatile markets, because they know they are going to be above average at times, and they can capitalize on that. Others are terrified of it. They would prefer a slower, gentler ride. They would rather avoid it at all.

And from that, there are individuals who are in both camps that are good risk managers. Some manage their risk to protect against the volatility they are uncomfortable with; some of them manage it to grab hold of opportunity that they see coming. Others put their head in the sand and try and hide from all of it. I mean, some will just ride the wild ride and live and die by it and enjoy it; others, out of fear, will just hide from it. So, there is really a combination of opinions out there among people. There is no one size fits all.

MS. SCHUFF: Thank you.

MR. KUBECKA: Okay; from my perspective, of course, I am speaking of my own experiences today. I visited with a few people, fellow producers around, but again, we're in a very fairly stable production area. The only problem is that it is not that profitable. Our profit margins are very thin, and I guess the way I've--what this--how it affects my operation is I enjoy the opportunity for the volatility, for the price to go up, and we've done things to capitalize on that such as having our own storage; of course, also being able to take advantage of forward price contracting and, of course, I guess the best thing is having my wife work as well.

MS. SCHUFF: There's an honest man.

Jimmy?

MR. SANFORD: I'm going to give you a political answer. I would like to see volatility as long as we have equilibrium of prices within an industry. Now, that sounds somewhat of an oxymoron, but we, in the cotton industry, compete not only with each other nationally, but we compete with other global producers. And to top that off, we compete with man-made fibers or raw industrial product fiber.

So, we need volatility to try to capture the profit that we need to make to remain in business, but we need these prices to be volatile within a range of stability or equilibrium. So, I would be opposed to $2 per pound cotton, but I would certainly accept $1 per pound cotton.

MS. SCHUFF: Thank you, Ron.

MR. GANGWISH: Volatility is my friend. One of the first things that I did in the winter of 1975 after I started farming in 1974 was start going to some Pro Farmer seminars, Roger, and a gentleman by the name of Jim Gill told me at a Pro Farmer seminar that one-third of the crops or the production is sold in the bottom--now, I can't say it. One-third of the production is sold in the top--I did write it down. Two-thirds is sold in the bottom one-third, and one-third is sold in the top two-thirds. I really made a good impression here, didn't I?

[Laughter.]

MR. GANGWISH: So, the first thing I did when I got home was I got my old historic charts out and looked at those historic charts, and I determined what the price swings were in the previous 5 years, and that's something that always stuck with me, because I think at that time, the smallest swing in prices in 1975 was 95 cents in the corn market, and I thought wow, that's something. And so, one of the things I do is try to determine what is for next year, when I market next year's crop, what is that range, and whenever we get into what I think is the top third, I start selling.

And, you know, we use all of the things that I guess maybe you can use or have used in the past, don't necessarily every year. We use crop insurance, CRC. I do that because it lays off my risk, and I can't afford not to do it. But as Sally said, we're irrigated, and I have perils like wind, 100 mile an hour winds that I've had 2 out of the last 5 years or hail--not drought, but those are the kinds of things that we use in our farming operation. But I like volatility. I don't always make the right decision; I want you to know that, too.

MR. WHITE: I don't like it; I love it.

[Laughter.]

MR. WHITE: I don't understand why a producer will know his costs, and when there is a good profit there to sell at, he doesn't sell. Without volatility, I have a very difficult time making money. With volatility and the knowledge of your costs and projected yield, you will make money consistently. Why do you want to try for the home run and win one out of seven years or one out of five years? This is a business we're in, and I think that has something to do with the risk management program that you're about to initiate. The simple explanation that farming is a business, not a gamble, we all know what gambling is, because we're farmers, and with price volatility, we have the opportunity to take the gamble out of that, and I don't want to see the Government back in the farm program. It doesn't take a rocket scientist to realize what's happened the last few years with the market being stable, not an opportunity for me to market at a price that I can make a good living, and I think that's one of the methods that the risk management people want to send out there is teach them the tool that is necessary and will fit into their operation, stabilize their income. Let's get this idea out of our head of going for the gold like HTAs and get to the business of farming, and there are ways to make money with a volatile market. I'm tickled to death, and I don't want the Government back in agriculture.

MS. SCHUFF: With that, I'm going to go to some questions from the interviews on the telephone with each of the producers, and I'm going to just stay with Bob right now and ask him: he brought up the T word, which is the trust word, the problem that so many people have and also the problem of risk versus riskier management. When does risk management become a whole new set of risks all of its own?

Bob, are you--

MR. WHITE: I'm ready.

MS. SCHUFF: Okay; go for it.

MR. WHITE: Last winter, I decided that Bob, maybe you need a little education. So, there was a course offered over at the Lima branch of Ohio State University taught by an economist by the name of Dr. Dean Baldwin. It was Ag Economics 625, and I thought, well, that's something I can do this winter rather than work in the corn rows or in the fence rows, and maybe I'll learn something. And it was well worth my time.

And I want to tell you what I feel about the opportunities of risk management after I had completed that course and sat down and thought about it. Lo and behold, Dr. Baldwin has a theory that at certain times of the year with certain crops, you can hedge, and 75 to 80 percent of the time, if you do it then, you can make a profit. Another professor down at Ohio State University says if you sell at harvest every year, I have statistical data that shows that that's the thing to do.

And along with that, Ohio State University is running a study of all of the prognosticators and guessers and people who want to sell you the opportunity to market your grain, and there are hardly any of them who are right.

[Laughter.]

MR. WHITE: And I said to myself, well, I think I'm just as smart as they are. And, so, you say to a farmer with a risk program we're going to teach you how to manage your risk. Well, nobody else has the direct shot to it. Nobody else can tell you how to do it. It's a proven fact to me that that's the case.

And then, we have these opportunities. One of them happened to my neighbor about 3 weeks ago. The local elevator, the lady called many farmers in our area and said you've got to sell your beans; they're going to $5.80, and they were $6.06, and she got a bunch of them. She got a bunch of them. And I was selling at $6.60 to $6.80, and one of the fellows that I know, and the youngest farmer in our area is 27 years old, $6.06. How do you suppose he feels about that elevator and their risk management program for him? You know, I doubt if he is too enthused about listening to something they might have.

Also, during the winter, they put on a seminar three evenings, and I went to that, and it was very good. I was taking the college course and going to the evenings, but the interest was phenomenal, 12 farmers. Twelve farmers advertised in the paper, the whole county, 12 farmers. And after 3 days, and I have to say the presentations were very good, they gave a test out with 25 questions. I felt pretty good. I missed one. It was on a synthetic put, and if I had thought about it, I would have got it. Ag teacher got 22, and the rest of them scored 9 to 14. They flunked the test. Now, how do you suppose those farmers felt when they left about marketing their grain? You know, I don't think that they felt like they had learned a thing; certainly not much confidence in marketing.

So, those things concerned me, that we're going to have a program on risk, but what are we risking? What are we risking? Maybe we should have a program on management and risk, how do we manage agriculture?

A little bit about my operation: 600 acres; that's not much. But here's something else that enters into my mind: we in agriculture want to plant or we concentrate in one or two things: corn, beans or maybe hogs or cattle or something. That's risky. Hasn't been too many years ago when I read the Government said diversity is the way to go. Well, I've stuck with that. I've raised corn, beans, wheat, hay, and I work all summer. I don't go out in the spring and plant and go to the house; in fall, go and harvest. I'm busy all summer. I even plant some oats.

And so, I've diversified my risks. I have a flock of sheep. I have some opportunities with the weather. If one crop doesn't hit, I've never had a failure on every crop. If it's a little dry, I get clover seed. Price clover seed now. So, I have diversity. And along the way, I'm selling when it's at a profit. I'm managing my risk by diversity, and I am selling at a profit.

And I want to tell you something else that Dr. Baldwin said, and I would think that we would wake up, and I'm sure it's happening. Dr. Baldwin said the yields have peaked in the United States, and I want to tell you something. Now, you're not going to believe this, but I can take you and show you. My fertilization program, and I'm not in the greatest soil in the world, by a long ways, but my fertilization program is this: 200 pounds of fertilizer in a row for corn and 50 units of nitrogen, and I have raised 170 bushel corn, but I'm plowing down clover, and my soil is loose. You can stick your foot in it clear up to your ankle.

I think farmers and the Government in this country have ruined a lot of soil, and my soil tests, and I can show them to you, that's what it calls for. I put 250 to 300 pounds of fertilizer on my wheat, and that's the total in a 4-year rotation, and that isn't possible. The university says it isn't. But Dad and I's been doing it for 40-some years, and it works, and it's hard to explain, and you can't tell people that, but it works for me, and I'm going to stick with it. I'm going to stick with it.

So, that's what I call hand-managing my risk.

MS. SCHUFF: Thanks, Bob.

Those are some important insights, and I think he raises a very good point and one that some of the previous panelists have raised, too, is the issue of trust: who are you going to trust when you start talking about taking advice on risk management? And more important, who are you going to blame? I kind of like Paul's explanation of why people don't like risk management; they want to be able to blame somebody else. That's good. I think it is probably not all that far off, actually.

To follow up on that, on the question of who are you going to trust, I want to address a question to Jimmy Sanford, because he's here representing the National Cotton Council. They have certainly taken a big leadership role in risk management education from their association. If you haven't seen--I think most of you all in the room have seen their risk management network, database, a marketing database. It's really quite a gee whiz risk management tool. That's something they should be really proud of.

But will associations--and really, I'd like to address this, since all of you are here representing an association, what role is the appropriate role for the grower associations? How much responsibility and how much blame are you willing to accept, Jimmy?

MR. SANFORD: Thanks, Sally. Dr. Mark Lange will be on the next panel, and he will be able to give you further insight as to some of the thinking that is among our members of the National Cotton Council. We feel like, going back to what Paul Hitch said, we think that members should have a personal responsibility in making their decisions concerning risk management. Therefore, the National Cotton Council, which is somewhat unique in the fact that it is composed of seven industry segments, from the producer through the textile mills, has developed a risk management Internet system which is really an intelligent system, and it brings together, as was demonstrated at our last meeting, a worth of information to all segments of the industry. It does not tell the individual members as to when to buy or sell, does it, Mark? You wouldn't dare do that, would you, since we have both buyers and sellers that will be using this model.

But it does bring a worth of information, and I think it's an appropriate role, Sally, for associations to play. It provides many different models within it, subsets within it that members can do what ifs; it brings together models that help them analyze the crop mix as far as the different regions of the country, what percent should be in cotton; what percent should be in others.

Someone asked, well, why do you look at other crops? Well, many of our members are diversified producers; so, we bring in different crop models, enterprise budgets, so that our members can decide what mix should be there and play these what-if questions.

We have a big role, I think, Sally, in providing an assemblage of intelligence for our members, and I think that's the appropriate role for industry organizations to play, and we plan to continue to enhance the model that has begun. It's just an initial step, but it would be much more involved than what it is today. I'll be glad to elaborate further.

MS. SCHUFF: Okay; thank you.

Let me just go down the table started here with Richard and ask the others what role they think is appropriate for their association, if they think that it will be, in terms of their own membership, if they feel that they will be putting their membership at an advantage or a disadvantage by becoming involved with risk management. I know that NFO has been involved in risk management for years and marketing both.

Go ahead, Richard.

MR. ELLINGHUYSEN: I think very clearly that associations have an important role to play, at least informationally or educationally and depending upon their level of involvement with their members and their real mission can have a greater or a lesser impact on what they're doing. For ourselves, being involved in marketing, we feel it's very important. I've been involved in risk management for some time, and I've personally been involved for some time, so, it's very important to me.

I believe that we definitely have a role in helping our producers as we see this shift in the farm bill and as we see the volatility that is most likely going to occur and we enter into a broader global market and have those impacts, I think we can position our membership and our people well above the averages if we work with them and help them learn how to use these tools.

MS. SCHUFF: Bill?

MR. KUBECKA: The National Grain Sorghum has taken an active role in educating our membership. We have just gotten started on this. Of course, we are relatively young. Yes, we have been around for some time, but we have really had some growth here, because sorghum has had, if you look over the last 10 years, has lost lots of ground and a lot of acreage and tried to look at the reasoning for this loss. Part of it was due to the farm program, which I think that in the 1995-1996 farm bill, we got corrected, but risk management is a big issue for us, and we have taken an active role in it.

We are not far enough along that I can tell you what our results will be, but it is important for us.

MS. SCHUFF: Rod?

MR. GANGWISH: I think in terms of education and information in the traditional forms of risk management, those kinds of things are better left to magazines, to people who put on seminars and what have you. In terms of some information that farmers possess like how many acres are we going to plant; like what do you think the yield is on July 1, on August 1, on October 1, some of those kinds of things that are collected by other groups, and I don't know if this is feasible; this is just a personal viewpoint, and I guess, that we have kicked around different times.

The state of the art that we have in communication today would offer an organization or a group of organizations the opportunity to put together some information like that that is really producer information. Other groups do it, too, but it seems to me that that would be something that could be valuable in the days to come, particularly valuable in crops that are not just corn, white corn, say, or waxy corn or high oil corn or the different varieties of soybeans or specific kinds of crops that are not just generic commodities.

So, I guess that's an interesting thought that I think deserves some research.

MS. SCHUFF: Thank you.

Bob?

MR. WHITE: Well, there's an old saying that says that you can lead a horse to water, but you can't make him drink, and I think that the first problem is getting him to the trough and with some situation that he has some trust in that something is going to be presented that's worthwhile. And I think that's going to be the hardest job is getting him to the trough, and I am not sure that organizations are the best, but there are a lot that people trust in. Extension services in some area are trustworthy. I think you probably, if I was advising how to do this, you are going to have to diversify that and the area. In which you wish to proceed, you're going to have to go into that area and look and say in this area, what do farmers and who do farmers trust?

And that is the way we will have to proceed, because I think you could run a full page and put down there at the bottom that the Government wants you, and you could put them all in the back of a pickup in three chairs, because they just won't come. I think you're going to have to really start out with some trusting thing. We've been burned too many times, and I think we have to have something or someone that we feel is there to help.

MS. SCHUFF: Thank you.

One of the topics that has been mentioned here today and was mentioned in the phone calls was the role of forward contracts, the future of ag trade options as risk management tools. I'd like to ask Bill to give his views, particularly, on the role of forward contracting. Bob has already explained that in his view, that, number one, you must know your costs of production; number two, see an opportunity.

Yes, go ahead, Bill.

MR. KUBECKA: Well, I think you've covered part of it. My personal experience has been is knowing the cost of production. I know this sounds so simple, but in our area, there are a lot of people who don't know that, and, of course, then, seizing the opportunity when that price goes up. And we talk about volatility. When it's up, and you know your cost of production, and you're in a fairly stable production area, as I am, well, then, it's a no-brainer to go ahead and contract.

So, it's worked very well for us, and we do it in all of our crops, I mean, rice and cotton and sorghum, it's all the same. When a price is there, we're going to get it.

MS. SCHUFF: So, you would say that many producers that you're familiar with would have a high level of trust in forward contracts, perhaps more than some of the other tools and techniques.

MR. KUBECKA: Yes, in our area especially. Now, I know talking with the people out west, where it's more questionable as far as their moisture and all, they have a much harder time of doing this with any confidence, because I know in the Panhandle and basically the High Plains, they have been in 5 years of drought, and I've heard those guys complain and all about crop insurance and even production, and if you don't have production, you can't sell. You don't do a forward cash contract. So, you know, it's different in different areas.

But in our area--and I think that's something that we have to be made aware of, that there are differences, and it's going to be difficult to have a national program. I think we're going to have to have a program that fits the area.

MS. SCHUFF: Okay; so, the one size fits all.

I think Bob had a comment on the forward contracts, and then, I wanted to ask Rod to, when he mentioned the specialty corn crops, to be thinking about where contracting fits in on specialty corn crops and perhaps on the ag trade options question.

Go ahead, Bob.

MR. WHITE: One thing about forward contracting: when I say that I forward contract, that doesn't mean that that is the only thing that you can do or that is available. There are other things. But the way I look at the other things, that's a separate entity. In other words, I'm running a farming business here. The forward contracts in my farm business is this entity. If I wish to do something over here, whether to protect or enhance some something that I see coming, that's a separate entity. I think of that as separate. That's like I'm a market player. I'm a farmer over here; I'm a market player over here. Don't get the two mixed up, and don't put something over here you can't afford.

They're separate, and I think that's something that in a hedge to arrive, farmers hedged more than they possibly could, and they did not think this is the farm, and this is the HTA, and we really got into a mess, and they should have separated those things, and they shouldn't have done more than they could afford to manage over here.

MS. SCHUFF: So, you're saying don't get your speculative account mixed up with your hedge account.

MR. WHITE: Right; farming's one thing, but don't speculate to pay farm bills. If you're speculating, it's a separate entity and should be thought of as a separate entity and should be financed as a separate entity.

MS. SCHUFF: Thank you; I think that's an important point and one that is often a little blurry.

Rod, when you talk about specialty corns, what type of risk management tools? Where do your contracts play? What is your view on the ag trade options contracts?

MR. GANGWISH: I've raised specialty corn in the past and specifically white corn, and we've got some high oil corn. But when I was raising white corn, we had a company that was willing to pay a premium and willing to offer a contract for the white corn, and I was happy to oblige them to raise it, because I knew what my price would be, and if I knew what my price would be, then, I could assume the other risks I needed to assume.

They did that for about 3 years and then all of a sudden decided, well, we're not going to pay you, you know, 40 cents over; we're going to go down to 30, and then, they went down to 25; and then, they didn't even want to offer a contract. And, so, when they started doing that, I quit raising white corn. It was not hard for me to figure that out. Some guys continue to raise, and we all know what happens with specialty crops sometimes.

So, I don't raise a specialty crop unless I have a contract for it, because if I know what my price is, then, I can define the rest of my risks, and I can accept those. I'm not willing to put it in the bin for 2 to 3 years to wait for the price to come back up.

With regard to trade options, and I haven't had a chance to read their press release in detail that I found on the front table that's dated today, so, I can't say exactly what I was going to say, because some of that's been taken care of. But I really believe that we probably--if we're talking about spending money to educate people, I really believe that probably--and this is my personal view--that probably, it's not a very wise expenditure of money to spend a lot of time teaching farmers about options or teaching them about forward contracts, because the farmers that I know are an independent lot, and the ones that are in business today are studying what's going on; they know about futures; they know about options; they know about forward price contracts to the extent that they want to know, and when you've got a situation out there, and I heard the statistic out there that the average age of the farmer today is 58 years old.

Well, if a guy who's 58 to 68 hasn't used those alternatives that are out there, I rather suspect you are not going to be able to persuade him to do it. Now, the farmer who is 24 to 34 learned about those things in college, and most farmers today who are 24 to 34 graduated from college, the university somewhere along the line, and if they didn't, they're probably entering into a farming operation with a father who does know about those kinds of things, because that's just how things are in the country today.

And we're talking about the 20 percent of the farmers out there who raise 80 percent of the production, by the way.

And, so, I said that to say this, that I really believe that the best risk management alternatives that will come to farmers in the days ahead in the future have yet to be developed, and they will be developed from, in part, for sure, from the things that we know today, from, you know, they'll be a combination of the futures market, of the options market, of crop insurance, of something else that has yet to be put on paper, and they probably, at least I think, will have a good chance of being some sort of a trade option.

And I look forward to that, because I think that--I think that there is an opportunity there. I think that free enterprise and I think that the free enterprise system will develop those alternatives, and the people who have the bean counters in the back room will send them back and come forth with the product that will do what farmers need, and it will be simple; it will be farmer-friendly, and it will be something that will be accepted, not by everybody, maybe not by anybody more than today uses the futures and options market or takes crop insurance or takes CRC or any of the other things that are available out there, but it will be something that picks up a section of the farming business that isn't there today, and agriculture is changing in a big way and really fast nowadays.

MS. SCHUFF: I want to ask Bill to follow up a little bit; in fact, I wanted to ask Bill and Rod to sort of play off against each other on this question. When I talked with Bill on the phone, he said because of the fact that they have very stable yields in their area, because margins are slim, they don't see crop insurance as an important risk management tool. I heard Rod say today that CRC, you know, underpins his marketing program.

Let me ask Bill to start, and if the two of you could kind of air those two concepts, it would be good.

MR. KUBECKA: Okay; the reason that crop insurance does not fit into our situation is basically the cost of it. Again, with small margins and guaranteed additional expense, with a guaranteed yield--and I shouldn't say guaranteed but a fairly stable yield, it just doesn't pencil out for us to have that extra expense.

Now, I know this is not the same in all areas, but for our area, that's just the way it happens. We also say the same thing about options and all. Once you buy an option, that's a guaranteed cost. Of course, we have managed our risk in our area, and I think the big challenge here for us as a group here is to, as Rod is pointing out, is to take that segment that's not doing anything. I think as you've heard, most of us here today are doing things. The challenge is to take what we're not doing and get it to the rest of the people or to those producers who need it.

MR. GANGWISH: I agree, Bill. I mentioned that I use Federal crop insurance; we do on our farm, and we use CRC. I use Federal crop insurance, and I also add to that Companion II coverage for hail. I take Federal crop insurance for, I think, as I mentioned earlier, for hail and for wind and for any other peril that might happen. I am not particularly concerned with drought, because if I can't irrigate my crop to get to the point that I am raising 65 percent of my guaranteed yield, then, I've got to hire some new irrigators. So, I'm not worried about drought.

But I take crop insurance not because I like what the premium buys, not because I'm particularly satisfied with the coverage that I get, but I take it because in a 10-minute hail storm, I can be wiped out, and I know what my premium is, and it's a cost of doing business for me. It's a risk that I'm not willing to take. I don't know what the risk of being hailed out on, conceivably, maybe 50 to 75 percent of my acres would be. I'm sure the hail insurance companies know that. But however low that might be, it's not a risk that I'm willing to take.

So, for me, it's a cost of doing business, and I don't even think about it. I just know that when it comes time to go to bed, I can go to sleep, and when the storm warning comes, I don't worry about it.

MS. SCHUFF: That's one of the better reasons for doing what you do.

MR. GANGWISH: I don't know if that was all your question but--

MS. SCHUFF: Yes, that's it essentially.

Let me ask you, since you do buy CRC insurance, the fact that you have the replacement costs of bushels, do you feel more confident in your marketing program? You know, that's what we are supposed to believe, that this makes people more confident about going forward with a marketing plan. Do you agree with that?

MR. GANGWISH: Yes, I do. Actually, I bought CRC for two reasons, maybe three. One of them, you will laugh at and shake your head when I tell you this probably, but one of the reasons I bought it is that I sat in front of members of Congress at a hearing and said we want this, and so, it wouldn't be--

[Laughter.]

MS. SCHUFF: So, you had to own up to that, huh?

MR. GANGWISH: --a good idea for me not to buy it.

MS. SCHUFF: They checked.

MR. GANGWISH: The second reason that I buy it is that I go to my computer and make a little spreadsheet, and I put on that my SCIC underlying insurance; I put on it what CRC does for me and what the price is that CRC brings me up to, and then, I say how many dollars per bushel for my break-even is this? How much do I think I'm going to raise? What's my net revenue, gross revenue? And then, I look at the market, and then, I look at what might happen if I get hailed out or if I don't get hailed out, and then, I make my decision on how much Companion II to buy.

And so, I'm insured for my 10-year average yield at a specified price, and that's how I determine what my insurance coverage is going to be, and I don't know if that's right; I don't know if it's wrong. It seems like I spend a lot of money for insurance, but I know that next spring, when I go in to talk to my banker, whether it hails or not, I'll be able to get financed, and it's not just that I'm worried about getting financed; it's an overall management plan of where I've got my money invested and the kind of return that I want and the amount of those assets that I'm willing to risk.

MS. SCHUFF: So, you're addressing not only the price and yield risk but the banker risk.

MR. GANGWISH: Well, we have to come back and farm next year.

MS. SCHUFF: Rod just mentioned something that Jimmy and I talked about on the phone when he said that he didn't know if his decision was right or wrong or where it fit, and Jimmy and I talked about that some the other night, the problem of not being too sure where you are compared to your peer group. Jimmy, could you explain that particular risk, how you see that, some of the records, and the farm management records associations provide that service, but by and large, there are an awful lot of people that really are in a situation where they are unable to compare to each other.

MR. SANFORD: Yes; that's, I guess, the primary exception are the farm analysis associations that are dotted throughout the country, most of them organized by the extension service. We also try to position ourselves in the top quartile of both yield and price, and discovering how your peer group is doing is very difficult, as you alluded to.

If we had more reliable information on price data, the discovery of price when it comes to a producer level, and obviously, on a yield data, you would be able to better position yourself personally when it comes to risk management. There is a transition going on that many of you have already alluded to in agriculture in America, and I agree with Rod about education. It's going to be difficult to get many people to the table to be educated concerning risk management.

We're going through--I'm a fourth generation family farmer like so many farmers are. We had relatives in our family who did not make the transition when we went from the draft mule to the tractor. That will be the case in this transition. There will be producers who will not be able to make that transition. And that peer group, Sally, will continue to move upward. The marginal group will continue to fall to the wayside, and as much as we hate to see that from a humanistic standpoint, that is the nature of the beast.

MS. SCHUFF: Bill?

MR. KUBECKA: Sally, I'd like to make a comment on this. I know you and I discussed the same question, and my only concern of what Jimmy says, and I'm sure not going to deny him, I know my comments were that I wish I had some of this information to compare myself against, but sometimes, that in itself leads people to not really take care of their own business. They're worried about someone else, what someone else is doing, and again, I'm talking about in my locale, what I've experienced. People worry about what other people are doing rather than worrying about what they're doing themselves. They don't know their own costs; they don't execute a plan, because Joe Blow down here says, well, I've got this. Well, hey, I want to do as well as he did. Well, maybe you're at two different levels of production costs, and therefore, I would just warn that we have to be very cautious of comparisons, because they can be very destructive.

MS. SCHUFF: Thank you.

I've got a question here for Richard. We had talked about risk management, and while we're talking about some of the structural problems with perhaps the new risk environment leading to greater consolidation or the loss of some of the marginal farmers, Richard and I had talked about how some of the risk management climate will affect different commodity sectors differently. Richard comes from a strong livestock and dairy background, and I'd like to ask him to address how his views on how they will be affected in this climate.

MR. ELLINGHUYSEN: Well, I guess I see some significant differences in the different commodity areas, and a lot of that has been driven by the level of involvement that the Government has or has not had. The livestock production side, and my familiarity is primarily Midwest, upper Midwest, fed cattle and butcher hogs, and I see, you know, very little Government involvement in the pricing, and I also see a fair amount of astuteness there in terms of the use of futures, a shift towards some contract production to manage risk and so on. In fact, it would be my opinion, somewhat biased, I suppose, because I lean to livestock but that they're fairly astute as a production sector as opposed to what I am saying, what I have seen and experienced, some of with grain, where there is a production sector that has had a lot of support price involvement, not to say that there aren't some very astute farmers there who are unsophisticated, because they are. They have--just to understand the Government programs takes a whole level of sophistication that I haven't adapted to.

But I think a lot of those folks in grain are going to be looking, as they have already with revenue assurance things, at the new tools and aggressively moving toward them. But I think that probably the level of risk and its management of it by and large is already being managed by a lot of the livestock folks. I think that it's less so with grain, and it's going to need to become more so.

And dairy is something that we have not talked about much here at all. I think dairy has probably the biggest learning curve to go through in regard to managing price risk, I'm talking about, because they have a significant long-term relationship with the Government in regard to Federal: milk marketing orders, the BFP establishment, MW Series and so forth. And now, that is all changing, and they have not had tools.

Unless they were doing some price-type protection and so forth on their inputs, they have not had futures-related tools to price milk on up until almost 1996. December 1995, there was one futures exchange and in 1996 another that offered the fluid milk futures, and those were modestly useful. This past year, the BFP futures contract was introduced, and I think that's going to be much more useful, because it does marry on a casital basis to the USDA's BFP number, which forms the basis of most milk that's priced in the country throughout all of the Federal milk marketing orders.

But those folks, by and large, have the biggest learning curve to come through. So, I think as we look at different segments of the commodities and the production sectors, there are different levels of expertise in each simply by virtue of what they have had in the past, and I think that is going to drive us as we look at education or offering products to look at these very distinctly.

And inside each of these areas, of course, there are significant differences again, and dairy, again, has, as I view it, more of a traditionalist type farm approach. That's changing now, becoming larger, but there have been more of the diversified, the smaller type entities, and I think that they probably have more at risk, if you will; they are an older group. They have more equity built up and are least likely to look at managing their risk, because they prefer not to.

So, I think that there are significant differences in the full areas.

MS. SCHUFF: It's time for us to wrap up this panel. I think that what we've heard this afternoon certainly reinforces in all of our minds that the challenge facing the risk management education development is substantial; that--I like the way that the price volatility issue has so many positives as well as negatives. I think maybe we've had a tendency to focus more on the negatives. But I think we have certainly heard from this panel that one size does not fit all, which I think was, you know, certainly no surprise; that a variety of tools will be needed; that there will be some differences between commodity sectors; that there will be certainly some differences in geographical reasons; very certainly a possible trend of losing towards more consolidation, losing some marginal producers, something that is a key that I think everybody hopes will be addressed in the program.

With that, we have time for maybe one or two questions, and then, I think we've really got to wrap up. Are there questions?

QUESTION: Bill, I was wondering if, when corn for December 1998 hit $2.95, did you do anything for next year's corn crop?

MR. KUBECKA: Yes.

MS. SCHUFF: Trish?

MS. KLINTBERG: Yes, I had a question for Rod. Did you use your CRC policy to help you market your crop? You talked about the insurance, that you were insured for your 10-year average, but what I am interested in is if you were marketing your crop because you had CRC before you realized, you know, what sort of yield you had.

MR. GANGWISH: Yes; I think that depends on how you look at it. If I know that I have the crop to sell, I will sell it. If I know that I have the dollars to buy the crop to deliver on the contract, then, I'll sell it. It equalizes out. So, yes, it depends on the--I don't think about having the bushels that CRC buys me. I just think about it as dollars, but yes, you bet; that gives me the confidence to go ahead and market the crop throughout the growing season and contract it ahead of time, yes, by all means.

MS. SCHUFF: With that, I'd surely like to thank all of the panel members. They've really been very helpful and certainly enlightened me and again thank Commissioner Dial, who has been certainly a friend of agriculture. Thanks, Joe.

CHAIRMAN DIAL: Thank you, Sally.

We'll take about a 10 or 15 minute break and then come back for the final panel.

[Recess.]

CHAIRMAN DIAL: I guess if I rattle the feed bucket, I might be able to get some of them to come in.

[Pause.]

CHAIRMAN DIAL: This third and final panel that we have this afternoon consists of private and public sector points of view that are going to address the question what will it take to motivate more producers to prudently manage their price and yield risk. It's going to be moderated by Roger Bernard, senior Washington reporter for the Washington bureau of Oster Communications, and based on what the previous two panels had to say, this panel really has its work cut out for us, but they all have a lot of experience, and I'm sure they have some great ideas with regard to what it's going to take to motivate producers.

So, Roger?

MR. BERNARD: Thank you very much, Commissioner Dial, and I'll just grab this, I guess. When we think about risk management, Commissioner Dial mentioned I'm with Oster Communications. Perhaps you might know one of our publications a little better, and that's the Pro Farmer Newsletter. We are the largest subscription newsletter for farmers here in the country, offering them a news alert and advisory service.

I suppose probably a logical question is how many farmers really do follow the type of advice that an advisory letter such as ourselves or some of the others do, how many people do actually use that information? To the letter of the word and every single move? That might be 10 percent. But it has been on the rise as far as--now, when I say that's 10 percent, that's following every single move that we make. A lot of farmers will take part of that. They will take some of it. A lot of farmers will carry a newsletter, an advisory service, as was pointed out earlier, as somebody to blame but also as somebody to sort of give them some backup in making their own marketing decisions.

I'm always reminded of a story of the farmer who's out in the springtime who unearths the genie's bottle and rubs it and out comes the genie and says I'll give you a wish. He said all right; I'd like $5 corn and $10 beans. The genie says all right; you've got your wish. Next spring comes around; the farmer unearths the same bottle; rubs it, the genie pops out; says I'll grant you another wish. He says he wanted $5 corn and $10 beans. Genie said, now, wait a minute: I gave you that wish last year. What happened? He said, well, when corn hit $5 and beans hit $10, I thought they were going to $6 and $12, so I didn't sell anything.

Risk management, as most people think of it, is price and yield risk, but it can also be production risk. I was out at a forum in Oklahoma listening to a group of producers who were offering up some alternatives to their production of winter wheat in that area. One producer was talking about sorghum, another about soybeans, another about sesame, of all things. The gentleman who was growing sesame noted that he was clearing somewhere in the neighborhood of $200 an acre on growing sesame, and a woman after listening to his presentation raised her hand, and he called on her, and she said, well, maybe you can help me out here. If you're making that much money on sesame, why are you growing winter wheat at all?

And he looked at her, and he said, well, ma'am, bad habit. And I think what a lot of producers sometimes have gotten into that goes along quite heavily along the lines with what Mr. Hitch was talking about was four points of why farmers probably don't use risk management, I think, are maybe more valid than a lot of us want to admit. But changing the way that we do things and changing the way that we think about doing things is probably one of the best ways to get at and get around and get our hands around this animal called risk management.

How important is it? The 1996 farm bill has made risk management something that's very important for farmers to know how to do. They have created the Office of Risk Management. We've got the chief of that here today. So, if anyone has any doubt that risk management is going to be an important focus as things move on into the future, then, they have sorely missed the boat.

We've got a group of five panelists here today who represent a fairly broad cross-section of our agriculture industry. We've heard from the producers. We've heard them tell us why they either--why they do use risk management tools and some of the tools that they do use, and we've heard why they don't want to use risk management tools or why some farmers don't use them. We have panelists here represented from the American Farm Bureau Federation, Dave Miller; Stu Ellis from the Illinois Farm Bureau Federation, and I recall the name of Jim Gill being evoked earlier today; Mark Lange of the National Cotton Council of America; they're a group that, as we will hear, has done some pretty forward thinking when it comes to risk management for their association members; Ken Stokes of Texas A&M University; we can't leave our public sector out of the risk management scheme at all; and Paul Christ with Land O'Lakes, Incorporated, up near and dear to my heart coming from Minnesota. He's said that he's not from Minnesota but has lived there long enough, and I told him well, heck, we'll take him.

I guess the first question, as you see by our program, is what will it take to motivate more producers to prudently manage their price and yield risks? And I'm just going to start right at the top of the list. Dave Miller, what do you think it's going to take to get these producers to do more of that in their operation?

MR. DAVE MILLER: Thank you, and I'd like to start off addressing that question by setting a little bit of what I think is the background for it; you know, as several have mentioned, we are in a changing era with respect to risk management. We are moving from publicly managed risk management programs to private sector, individually managed programs. For the past 20 years, deficiency payments provided a general put-like protection to producers. Furthermore, Government stocks policy tended to keep grain and oil seed prices relatively close to the loan rates, where the public sector put-like protection became even stronger.

Also influencing producer decision making process was the existence of the natural hedge for producers, at least, in the major corn, soybean, wheat and cotton producing areas, i.e., a 10 percent reduction in production in general brought about a 15 or 20 percent price increase and offset, on a revenue basis, the impacts of that lower production, i.e., the natural hedge. Thus, when we take the natural and the publicly-provided risk management tools into account, what we really find is that many producers already had the nearly optimal hedge protection without entering the marketplace, and additional risk management products probably increased risk for many producers; did not decrease risk.

Most of the price risk was transferred farther up the marketing chain, and as we look farther up the marketing chain, we see extensive use of the price risk management tools of futures, primarily futures and cash contracts, to manage that risk.

Now, however, as we look at the FAIR Act and the changes that are occurring with regard to the nature of the risk profile that producers face, the natural hedge still exists, and the pseudo-put of loan rates still provides some management of the risk at that lower end of that profile, but we are seeing prices move away. Because of the change in stocks policy, prices in general have moved away from loan rates, and so, they provide less of a support mechanism in terms of risk management. Thus, producers are now--and it's really only in the last couple of years--are even being subjected to a full measure of the risk profile.

And secondly, we are now seeing, with the demise of the Government or public-sector provided risk management tools, an opportunity for the private sector to even develop the tools that are appropriate for risk management. So, when we say why haven't producers used the risk management pricing tools, I would say they did use them appropriately. So, the criticism that we hear that producers haven't used them, I think, is totally unfounded.

I think there's--when we look at this whole area of risk management education, I think we do find that where that area of risk management education is needed, producers in general underestimate the extent to which they now face risk. As I have worked with producers, it is clear that when you go back and look at historical yield data, most producers underestimate their own individual farm's risk of yield loss. We think in terms of a crop failure, you know, either the good crop or the total failure and really fail to realize what that, from a statistical standpoint would be the deviation around the norm. Producers also tend to overestimate their average yield, the statistical average.

The other point I would make is that there are two types of risk that producers really face, and it's sinking the boat type of risk or missing the boat risk. Both are real risks. The Government programs cover most of the sinking the boat risk for the past 20 years through deficiency payments, loan rates, et cetera. They covered a wide specter of that risk, not all of it but a big chunk of it. What it created, then, was a mindset among producers of how to minimize the risk of missing the boat, and you minimize the risk of missing the boat by staying in the market rather than early forward pricing.

And you do that also by spreading sales across the time period, which has been--producers have taken by building on-farm storage and utilizing commercial storage to extend the marketing year. These are strategies that minimize that risk of missing the boat, because, in fact, the biggest risk to a lot of producers is having sold too early in a rising market.

The other risk that I think producers did respond to very accurately was inflationary pressures of the seventies and eighties, that, in fact, in a general rising market, the risk is that you sell too early, not that you sell too late; and, in fact, if land values and costs, et cetera, are inflating rapidly, you do not want to be an early seller. And I think when we look at all of those types of things, we see that, in fact, producers have been very good at managing their overall risk profile.

I would add a couple more things, I think, as a background to this that when we look at the types of education and risk management programs that have been out there within farm bureaus, we've got about 15 or 20 state farm bureaus that have operated marketing education programs for a number of years, and I think Stu Ellis from the Illinois Farm Bureau will highlight one of those state programs. At the American Farm Bureau, we have been actively supporting our state affiliates through such programs of market master, acres and various risk management and marketing programs that are an integral part of our national convention and other types of activities.

From a policy perspective, we have been at the forefront in support of public policy which is conducive to the creation of private sector risk management tools now that there is a demand for them. We have encouraged the development of open fair commodity futures and options contracts; we've supported the development of private sector crop and revenue insurance products and the delivery mechanism for putting those into the marketplace. And in support of these activities, AFBF, in conjunction with our state affiliates, have created the American Farm Bureau Insurance Services Corporation, a company that's devoted to the helping of the development of those risk management services and the delivery of those products.

Our individual state farm bureaus are also taking the initiative in the risk management services area. I know the states of Kansas and Illinois farm bureaus offer extensive risk management and marketing education services. Iowa Farm Bureau has just developed a new revenue assurance product for their members. Tennessee, North Carolina, South Carolina, Georgia, Arkansas, Mississippi and Virginia Farm Bureaus offer extensive crop and livestock cash marketing services to members, because they exist in areas where the infrastructure was not sufficiently developed out of the private sector.

Is there more that can be done? And I would say the answer is sure. And as the public sector support is withdrawn, private sector groups such as Farm Bureau will step in and provide the types of risk management products our members need and want. At the beginning of this panel, that question was asked: what are some of the hot buttons for producers? And I would say the biggest hot button is need. When producers perceive the need for private sector, on-farm risk management tools, they will demand and support the development of them.

I think the second hot button is opportunity. When producers see an opportunity for these tools to help them manage risk, they will actively and aggressively seek such tools out. In those instances where the tools are not readily available, I think producers will look to producer groups such as Farm Bureau, to the Cotton Council, et cetera, to create and develop farmer-friendly products, and I think Rod Gangwish very eloquently addressed some of those issues earlier.

I've talked some about what I think is the great myth that's perpetuated for a number of years is that producers haven't been doing risk management because they haven't flocked to futures and options. I think nothing could be further from reality. I believe that producers have actively managed their risk through participation in Government programs, utilization of on-farm and commercial storage to facilitate smoother seasonal sales patterns and through prudent and supplemental use of futures, options and various cash contracts.

Farmers tend to be quick adopters of technology which has proven effective, especially products which are clearly income-enhancing, i.e., hybrid seed corn, fertilizer, pesticides, et cetera, where there is a proven track record of the ability of those expenditures to increase income and provide stability. I think one of the needs in the risk management area is more evidence of consistent performance of the tools. There is not consistent evidence that regular use of many of the risk management tools provides income enhancement or even increased stability of income.

For the future, I think producers will demand risk management education programs that integrate all aspects and tools of risk into an understandable package. While the overall package may contain modules on individual risk management tools, that overall package will have to take into account all of the risk management tools available to the producer. It will no longer be sufficient to just teach hedging or futures and options courses. Producers will want and need to know their overall risk profile, what it looks like and how the various price, yield and financial risk management products will allow them to create the risk profile that they desire.

We must remember that the goal is not to eliminate risk. The goal of most producers is to find and take acceptable levels of risk and to find ways to manage, share, transfer or mitigate the unacceptable risks.

That probably was more answer than you wanted at the beginning, but I hear a lot about that we bash ourselves of not having been good risk managers, and I just think that is totally false. We are not as successful in American agriculture and world leaders because we bungled risk management.

MR. BERNARD: Okay, Dave, you've made some very good points there, and you also gave us a very good lead-in to Stu Ellis with the Illinois Farm Bureau.

Stu, what is one of the ways that your organization has tried to get farmers to use some more risk management tools?

MR. ELLIS: Let me give you a little example of what we've had in the past, and the Illinois Farm Bureau Educational Program in the past 5 years has expanded from a single course on agricultural options to 14 different courses that we have right now. We have a series of financial management classes that really extend over 9 days if people want to take the full meal deal. We have nine marketing-related classes, two classes on production regulations. This last year, we began with one introductory class on risk management that kind of got people thinking about it and providing some conversation to back up what they'd been hearing in coffee shops and reading in farm magazines.

We also have a farm program workshop. We have also written guidebooks to explain the technical information that a lot of farmers will see on DTN and farm data, and we've produced a decision aid diskette that's produced to blend marketing plans with family budgeting.

Now, that's what we've done in the last 5 years. For the coming educational season, and that really begins in December and lasts through mid to late March, that 90-minute class on risk management is going to be expanded to 40 hours over 5 days. It will be covering production and marketing risks along at financial, legal and human resource risks. Not every farmer in Illinois is going to be taking it. It's not designed for every farmer. But it is going to be produced in regional sessions around the state, and people will be able to select from a menu of classes that they would be interested in taking.

We will also be adding a new class on managing moisture in storing and selling grain, and we will also be adding a new class on off-exchange agricultural trade options, and I want to thank the CFTC for providing today some legitimacy for that new class that I'm going to have.

[Laughter.]

MR. ELLIS: I was hedging my bets, I guess.

[Laughter.]

MR. BERNARD: A little of your own risk management.

MR. ELLIS: That's right.

We have averaged over 1,000 participants in each of the last 4 years in our classes, but the trend is declining. It started out about 1,200 4 years ago, and we just slipped under that 1,000 mark last year. The reason the trend is declining in farmers attending our offerings is that there are more conflicts with family activities. I always come in second to a junior high girls' volleyball game or a boys' basketball game. And, so, people would rather go to a family activity, and I can certainly understand why.

Other sources of education are more user-friendly: computer-based training on demand and at home. And those are being provided by sources that pop up now and then, and it's a lot easier to sit behind your computer at home and plug in a CD-ROM and do it yourself instead of putting on your coat and going out to a meeting.

And thirdly, one of the reasons that the trend has been declining is that markets have been reasonably high, profits have been up, and nobody is worried about what price they're going to be getting. Now, based on our experience the last several years, the challenges that we are facing, attendees will either be the best farmers who want to get better or those who want to survive for another year.

We're going to have to provide an economical delivery system. County farm bureau meetings are just not well-attended. My average audience this last year was very dismal, and I even showed up in some places where there were no farmers who showed up. And, so, that trend is something that we really cannot afford to continue, because I put on many, many thousands of miles this last year, and it is just not worthwhile.

We have been holding more and more regional meetings. Those are becoming a little bit more popular, because we are getting the people who will drive 30 or 40 or 50 miles and who really want the education, and they will certainly be there for more than just a social occasion. We are going to be developing computer-based training. That will also really kind of fall under the auspices of electronic delivery, because we're going to be producing at least two and maybe as many as four of our classes on videotape this next year, where a videotape will be provided to each county farm bureau, and people can go in and check it out and watch it at their own leisure.

We are also going to be conducting some Internet conferences. For the county farm bureaus that do have an Internet connection, and that is not widely existing at this time, we can easily put on a program in Bloomington and have people tune into it and see that happening with the technology that does exist, and that is going to save some people traveling a lot of miles on a cold winter evening.

Something else that we are doing more and more is cooperative sponsorship of our education to reduce competition with other organizations and particularly to reduce any financial outlay of the cost. Illinois Farm Bureau and the Illinois Cooperative Extension Service are both working to develop the risk management program that I referred to a few moments ago. Farm business educators from the extension service and myself are designing and will deliver a program that will be in regional sessions.

For the last 3 years, we have had an alliance of the Illinois Farm Bureau, the four farm credit districts that serve Illinois and six commodity groups. Those have all gone together to cosponsor financial management training. That financial management training has been provided to over 300 farmers in the last 3 years.

And so, based on what we see in the trend, what we have done, I want to make three particular points that I think are noteworthy here. First of all, we're going to look to stronger relationship with lenders as referred to earlier as John's people, but I think Mark is here as well, too, so, the lenders who have the leverage to promote attendance, we can show that participation from a lending group will, indeed, improve participation at that event and will show that it improves knowledge a little bit as well and if put in practice of what the people are learning, that will result in a better quality loan.

So, point number one is money is the key--whether a producer wants to keep more of his money or if a producer wants to continue borrowing someone else's money, he will probably be participating. And, so, to capitalize on this, we have worked with farm credit to bolster attendance at our financial management training sessions. We have also held these under the sponsorship of some rural community banks which have large agricultural loan portfolios. And so, if we can ally ourselves with lenders who would encourage that farmer to participate, we feel that that will indeed enhance that person's learning.

The secret has been revealed that farmers do not want to be seen by their neighbor at an educational meeting. They don't want anyone to know that there may be something they don't know and could learn, and I think Paul Hitch made the observation earlier today that farmers do not want to feel responsible for a mistake they might make. Well, in this case, point number two is that one's ego will get in the way.

Either a producer has to swallow his pride and attend the meeting where he might be seen, or he has to be motivated by either his lender or his spouse to attend an educational meeting. And, so, we will work and encourage sometimes a spouse to encourage their spouse to attend that meeting.

Now, we've used this finding to develop an educational marketing program that is really designed to appeal to some very healthy egos. In this particular format, we will offer this under the title of the marketing challenge, and teams of people who attend the meeting will compete with each other to achieve the highest marketing price using a variety of marketing tools, and I will give a county farm bureau manager a variety of options to things to make things even better and more spicy and exciting if there are some rewards that are given out.

But the interesting part about this, in working in a team concept, the weaker marketers on that team will kind of be quiet and will learn from the stronger marketers, and the weaker marketers, if you really heard what was going on in their mind, would say that's how that works; I always wondered how that worked, and they have just indeed learned from their neighbor that they probably have some respect for it.

And so, the stronger marketer gets an ego boost from the whole exercise, because he, indeed, has led this team down to the road of victory. And, so, we have found that this has been quite successful, and I do plan to incorporate that concept into more classes.

Now, even though farmers will descend on a farm sale like vultures to pick over a carcass, you will find many who will empathize with that farmer who went out of business. They probably know him, and they are very sad about that. And, so, point number three is that a farmer who says to himself I don't want that to happen to me is going to be a good candidate for risk management education, because they will have some strong feelings of support for that particular family and will immediately relate that to their own family situation.

So, there are three points that I think are somewhat guiding for what we are doing in Illinois. I see risk management education as the biggest challenge for farm organizations that do provide educational and informational services and want to retain their members and their clients. I believe it has to be presented as a complete package, not just a seminar on futures and options. And, so, that is why we are focusing also on financial, legal and human resource management as well as marketing and production risks.

Participants will learn a process for managing any type of risk, and as they go through the longer class on risk management that we have, they will be building a comprehensive risk management plan, and it's going to be a multi-page document in a three-ring binder, and that is going to help them build their family and farm risk management plan as they proceed through the course.

It is going to make them a better quality risk for any prospective financial counterparty as well as a producer who will not only survive but will, indeed, thrive. I appreciate the opportunity for some comments and look forward to future discussion here.

MR. BERNARD: Okay; thank you very much, Stu. You did make a very good point about the lenders being very involved. It reminds me of the story former Congressman Huckabee used to tell a lot about the grower who had grown sugar for years, lost money every year, went into his banker one year and said I need to get a loan, and the banker said no, not unless you grow cotton, because cotton seems to work around here; people are making money with it. You grow cotton this year.

The guy grew cotton one year. He came in to the banker his next season and said, well, how does it look? And the banker said, well, you've made enough money in just one year of growing cotton to wipe out half of the debt that you accrued in all of those years of growing sugar. What do you think about that? The farmer thought a second, and he said well, looks to me like another year, I can go back to growing sugar.

[Laughter.]

MR. BERNARD: One of the groups that has been very forward-thinking in their risk management efforts is the National Cotton Council. Mr. Sanford alluded to it a little earlier, and I'd like to turn to Mark Lange now to give us some idea of what the National Cotton Council is doing in terms of their risk management program, which is relatively new getting fired up really in May of this year.

Mark?

MR. LANGE: Thank you.

I believe a colleague of mine demonstrated to the Ag Advisory Committee at an earlier time the actual working of our network. We now have that network functioning since the end of May, and it's provided only to members of the National Cotton Council. It was seen by the actual industry members as something that should be delivered to them, and it wasn't just something conceived by several of us sitting on the staff that actually were eventually charged with managing the project.

In 1995, it was obvious to the leadership in the National Cotton Council that the nature of the change in the farm bill was going to put agriculture at greater risk than it had been in the past, and one of the first questions asked by the producer leadership was just what does that mean about Council programs? What will be done as part of this change, as Council resources are devoted to addressing our needs?

And, so, it really was something that came from the grass roots. Its delivery was managed by several of us, but it was something that the membership actually saw.

And I think one thing I'd like to do is echo something that Dave said: growers, especially in agriculture, had a risk management plan. Look at the numbers that participated in farm programs, and participation in farm programs made you eligible for a wide range of benefits that was, in fact, a tremendous risk management tool. And when we think about one of the points that was made in an earlier panel about if I adopt a risk management plan now, I take--I possibly, depending upon the strategies I invoke, I possibly take the top off of a good year while I underpin some bad years.

But if we go back and look at the farm programs that used to be in place, taking the top off the good year would be a disastrous decision, because you would then be using the farm program to essentially provide you the floor. It would be satisfactory, but it wouldn't necessarily be a very successful program, but when the good year came, if you couldn't really profit for the good year, you would definitely be harming yourself.

We have essentially turned that upside down now. Under this farm program, we won't know yet how bad a bad year can be. We know it will come, and at some point, it will happen. Just how bad it will be to producers remains to be seen without the floors that used to be in place and the safety nets that used to be in place.

So, our response in developing this network was really one that was driven by membership. We have phase one out now that is very much focused on price information, up-to-date price information, both in the U.S. from commodity markets, USDA's spot markets and international cotton prices.

The next round is to actually begin to incorporate within that tool marketing wizards that will allow a user to play what-if games: what if I did this, and I did it--instead of today, I would have done it 6 months ago, that sort of thing? And not just as options but also involving hedging, using crop insurance techniques like CRC to actually play some what-if games with their enterprise and meld it in with enterprise budget systems. That will be coming out in phase two, which will probably be about one year from now.

One other thing that I think we should note about the risk management in the National Cotton Council. I know most of us here have been very focused on the idea of the producer as being the person seeking risk management information and education. In the National Cotton Council, an interesting group, we've found, have been a large number of what we refer to as storefront or FOB cotton merchants who have also suddenly found themselves in an entirely new environment and ill-equipped for it. The number of those merchants that have gone bankrupt in the last 2 years is very troubling. So, what we are finding is not only the producer seeking information but also some merchandisers, who find themselves where it used to be, you could be a basis trader, trading basis with the producer, trading basis with the textile mill and deliver cotton and make a living, and that is gone, and that change has caught another sector by surprise, and the demand for risk management education is actually coming as well from the merchandising sector.

That, I find very interesting, because it tells me some people that we thought were very savvy about marketing perhaps were using that's the way Dad did it just as we hear our producers being charged with, well, they farm that's the way Dad did it.

MR. BERNARD: All right; thank you very much, Dr. Lange.

Texas A&M University is known for more than a few people of their work with farmers and others. Ken Stokes, give us some idea when you work with farmers, what, I guess, do you see as the main tools that you can use to get them interested in risk management?

MR. STOKES: Thank you very much.

One of the things that, as we approach this thing, I come up with the problem of what is prudent risk management. Pulling off of the same concept that Dave was talking about, what is prudent risk management? Have they not been doing that in the past? What is bad risk management? It comes back to maybe that sink that ship concept.

I'm a Texan, and I tend to brag about being from the great State of Texas, and I will tend to overstate a few things, and I may step on a few toes, but I apologize for that up front. But basically what we're thinking about: is prudent risk management going to save the farm? Last week, I attended the old-timers' reunion of the Fort Worth Stockyards. Prudent risk management would not have saved that terminal livestock facility. The small town that I was raised in where my grandfather was, in East Texas--do you all remember Billy Sol Estes and some of the things that he was doing a long time ago? There were three cotton gins in Lonoke, Texas; there are none now. It's all in grass. Prudent risk management would not have saved those farms.

And we've got the same issues coming up in dairy. We've talked about the changes that are occurring in the dairy, the hog industry, the poultry industry, big changes. I now live in a county, Erath County, that had a lot of chicken houses. Now, it's got a lot of dairy barns, and I'm not sure if those dairy barns are going to last either. But that overall issue in terms of profitability is going to be one that we are going to have to be looking at as well as the variability that exists in prices.

Now, producers will adopt profit increasing technology. There is no doubt in my mind about that. Any time new technology--as Dave was saying--comes along, and it pays, they're going to adopt it. My job was originally created back in the 1950s to teach farm recordkeeping. Nothing happened until we finally got some inexpensive recordkeeping programs that now actually make it easier to keep the records on the computer than not doing it at all. They've adopted it.

The satellite information systems, the DTNs, the farm datas, all of that technology has been widely adopted. Computers, they haven't jumped onto much, because it still takes a lot of time to sit in front of that computer and push the pencil. It's still not an easy process. Marketing tools, they have not adopted. There has not been widespread use. But if you look at what Mr. Hitch was saying about the cattle industry, the feed lot industry, the risk management tools are widely used there in cattle feeding. Local elevators use them widely.

So, it depends on where you are, and if you are in that margin, and you are trying to protect the margin, some of the price risk tools might work.

Also, crop insurance: crop insurance should be a no-brainer. It's much better than the Texas Lottery, because farmers pay in a lot less than they collect nationally. And if I could invest in crop insurance rather than the Texas Lottery, I could make some money on that. It is for the communities as well as for the individual farmers. But there are problems. You go to a monoculture of West Texas cotton and cotton farmers, they buy cotton. Texas gets a lot of money out of crop insurance for cotton. You go to the upper Midwest, the Great Plains states, the monoculture wheat; they produce, they buy crop insurance.

You come into the mixed cropping area that I'm working in in Central Texas, you go through the South, and you do not see widespread use of crop insurance. There's something wrong with the rates, and it needs adjusting, and the farmers recognize that.

We've gone back and looked. We've got some additional funding from our state legislature. We've gone back and looked at the issues with producer panel groups in terms of what they were wanting in terms of risk management education, and it comes down to, you know, how to control the resources, you know, lease arrangements on land, lease versus purchase on equipment, ownership structure in terms of managing taxes, passing on the estates. Production issues come up very, very strongly all of the time, you know, essentially coming down to--what is it?--the added costs versus the added benefits. So, producers are primarily looking for those kinds of things that will make them money.

Now, we've talked about in terms of risk management, our producers are going to have to play the game. I mean, they are risk takers, and if they do not want to be risk takers, they can go out and hire out and be a tractor driver if they want to, but most of them are encouraged in doing something. But what we are talking about in terms of risk management is trying to cover for the unexpected. Sitting here thinking about it this morning, I was watching TV and watching the football game, and it was kickoff, and the team was behind. They had made a score, but they were still behind. The kicker went off there to kick off and fell down, and everybody just stood around and looked at them, and that other team said what happened to him? And then, all of a sudden, another team member of his kicked the ball and recovered the onside kick while the others sat there watching.

Expect that unexpected. The hedge to arrive issues, that was part of the process of not fully understanding the tools that were out there. There was nothing wrong with $2.75 for corn at that point in time. Mr. Miller, I've got one of the members of the Texas Wheat Producers Board that's complaining about CRC. Jeez, you know, I thought I was guaranteed the price, so he sat there and watched the wheat price go down and down and down, because he didn't understand that it was based off of 95 percent of the Kansas City July contract rather than the local price. He didn't understand the product. Now, whose fault that is, I don't know, but we've got to be prepared for those unexpecteds.

Now, I'm convinced anybody that knows what's fixin' to happen in the market is not going to be selling you information in terms of telling you what's going to happen. It's just not going to happen. If he knows what's going to happen, he's going to keep that information to himself, and he doesn't need to sell it.

But we're down to knowing the cost of production, and I've heard that term over and over and over in terms of what it costs to produce. First of all you're not going to know your actual cost of production until you harvest, so, you can figure that out. But there is a big difference between pre-harvest cost of production--I mean, pre-planting cost of production versus post-planting. Right now, I ask the question about, you know, the December 1998 corn price. You know, it topped out at $2.95 for December 1998 corn. Now, that is corn high enough to attract a lot of production.

If we start talking about wheat prices in excess of $4, now, it's getting a little bit too late to do it, but we may be plowing up some bermuda grass pastures, and $1 cotton? Jeez, how much production would we get with $1 cotton, Mark? Jeez, I don't care whether there are boll worms or not. I could spray every day with $1 cotton.

But who's going to get those benefits? It comes back to cost of production. What hat is the producer wearing? We talk about cost of production in terms of the seed, the fertilizer, the tractor; you're going to have to basically pay those inputs. The residual input is that if we had $1 cotton, if we had $4 corn, who's going to get the benefits?

I was asking Stu about corn yields up in his area, 165, 175 bushels, rent is $150 to $200 an acre. Well, down in my area, we talk about 70 to 80 bushel corn and rents about $30 an acre. Now, you start dropping that price to $2 corn, I will not be producing corn in my area. They are still going to do it up in the Midwest; they don't have anything else to do. Rents are only going to fall to $100 an acre. But that kind of an adjustment process in terms of who's controlling those resources are going to have to be very important, because when we're talking about risk management, we've got to talk about, you know, the individual farmer, about who's going to farm it.

You know, we may lose individual farmers if corn prices start varying up in the Midwest, but that land is going to stay in production. We start dropping the level of corn prices; then, my area may go out of production just like East Texas went out of cotton production.

There is a strong, strong role for the public-private partnership that I don't believe, you know, as I talked about the CRC in terms of that insurance agent who actually delivered that product, I can get up and do all of the promotion that I can do about crop revenue coverage and what it can do, but that insurance agent is the one who sits down there and delivers the product. We can hold our courses in terms of workshops and how to use the market, but when you sit down and want to do a minimum price contract, you're going to be sitting down with a local elevator operator to do that.

Over in cotton, the basis, you know, those individual cotton buyers, local cotton buyers are the ones that ought to be able to offer those producers minimum price contracts, forward contracts, hedge to arrives, where the basis aren't locked in. That delivery of the product is going to be in the hands of the private sector, and there is lots of money to be made out there. And if you look at all of the surveys, they do trust the private sector in terms of providing information.

Now, whether they trust that local broker, that local elevator operator, more than they trust that introducing broker who sits in Dallas, I mean, that may be subject to question. And then, Mr. Ackerman, I have to beg to, you know, I don't think there's any of the insurance agents that I know that could give a full explanation of CRC, MPCI, CPIAR--I mean AR, GRP, CAT and NAP and the different coverage levels.

MR. CHRIST: They're all part of the alphabet.

MR. STOKES: They're all part of the alphabet, okay? But that product, to understand the insurance programs, there are lots of alternatives out there that that insurance agent does not have time to explain all of that detail. He can't make money educating. But at the same time, the selling process is part of the educating process. There is a role for the public sector; there is a role for the private sector. The partnershipping that we're doing that I hear going on in Illinois--it is Illinois.

MR. ELLIS: No S, Ken.

MR. STOKES: There is? Excuse me. Texan coming out in me. But we've got a master marketer program that's getting heavily supported in Texas for the corn, wheat, farm bureau in terms of getting programs that we can deliver, education programs down to producers at a county level using marketing clubs, but we're having to develop master marketers who can go and deliver that.

MR. BERNARD: All right; you've given us lots of things to chew on there, and I'd like to turn now to Paul Christ, Land O'Lakes; you come from a region of the country where there's probably a little more diversity than there is in some other areas of the country, with dairy, hog operations, grain operations, you name it. How do you work with people up in your neck of the woods on getting them more interested in risk management?

MR. CHRIST: Okay; a quick review of where we are in dairy futures. We've had dairy futures since June of 1993. So, se basically have had them 4 years. We have only had a contract that has a fairly predictable basis with respect to farm milk prices since April, the basic form of the price contract.

Land O'Lakes now has a forward contracting program with their members, and I've been out--I don't know; I've probably had 40 or 50 meetings over the last 3 or 4 years--talking to farmers about these techniques to try to get them interested in taking a shot at them.

The first thing I want to talk about is who you want to motivate. You don't want to motivate everybody, because very few people, at least in the dairy industry, have both the emotional and the business maturity to take on this challenge, that when someone makes a commitment with a forward contract or in the futures market, they have to accept the consequence, positive or negative. There aren't a whole lot of them who are ready to do that.

Second, only when we narrow it down to those who need it, you're primarily talking about people who are leveraged, people who are well-established, the farm has been paid for 15 years, and they own 10 percent of the local bank, they go to sleep when you talk about this stuff. But the people who are leveraged, they have a real need to use these things so that they can maintain some cash flow.

The banker is a primary motivator, and I would characterize the people who are likely to use these tools in two classes. One is what I consider the professional farmer. That's the guy who is really good at the technical aspects of farming. He'll try any new technology; he's got a lot of land; he's running 80 hours a week, and he hires, you know, a lot of workers. He's not a very good financial manager or business manager. The banker is the motivator there.

The second one is the guy that is a professional manager, who hires technical expertise to help him conduct his business. He will do this, but he has to learn. Somebody has to teach him the first steps, and in my experience, a lot of people, most people in the dairy industry don't have any experience with these techniques. A few of them have hedged grain, but most have not. You've got to teach them the simplest, most straightforward technique to lock in a fixed price or to protect a price floor and then encourage them to try it once in a small way where the worst thing that can happen to them is they're $500 worth off than if they didn't do it.

Get them to try it the first time. Forty percent of their attention is going to be spent on that one, little bitty contract rather than on the rest of their business, but they will learn a lot from that experience.

The second thing is keep it as simple as possible. And that's why we're in forward contracting. Farmers don't want to worry about do I get in? Do I get out? Do I pay a margin call today? How much is my brokerage fee? They want to call up the co-op and say lock me in. And keep it simple, straightforward, no complexity.

Once these, I guess, candidates for these techniques have tried it a few times, then, it's time to go into more sophisticated levels of risk management, and we're not that far along yet in the dairy industry, so, I can't tell you what the next logical steps are. But target the audience very narrowly. Make it easy for them to get the information; invite them to a meeting; if they don't come to the meeting, send a video home. We're doing that. Teach them one technique. Encourage them to try it once, and then, when they have some experience, some successful experience, teach them the second technique. That's where we are.

Thank you.

MR. BERNARD: All right; I'd like to turn to the group here. Are there any questions for our panelists? Yes; we've got time for about one question.

MR. JIM MILLER: Mr. Stokes, you referred to the HTAs as imprudency by farmers that this happened, and I have a little concern with you saying that farmers were imprudent. Do you feel that maybe there was some imprudence in elevator operators in placing those and the way they placed those things before farmers? Or could it be possibly a combination of both? And possibly, is that a product that should be looked at to see maybe there's something can be done to prevent that from happening again?

MR. STOKES: Well, I didn't mean to use the term imprudent if I did, but essentially, my personal opinion is that at $2.75, when the producers were looking at the hedge to arrive for corn at $2.75, that was looking at a pretty good price. Now, they were fed a steak dinner, and they were pricing that hedge to arrive off of old contract versus new contract.

There were a number of things that were not fully explained at that point in time from where I'm looking at it in Texas. That lack of an education role was a problem. The lack of some detailed contracting was a problem. But in terms of looking and using the basic tool, there was nothing wrong with that. I don't think either side was really wrong in what they were doing; they just got caught in the trap of escalating prices.

So, in hindsight, you know, both parties wish they hadn't done it, but I don't think at the time that there was a real problem, except that the contracts weren't real clear.

MR. JIM MILLER: When you say, well, let me give you an example of what concerns me, and it's a direct example and just 2 miles from me. Two fellows in a corporation probably farm about 1,500 acres. It was in the paper last week, $668,000 lawsuit. It's hard for me to believe that there was imprudence. There was something wrong there. Why would an elevator accept a situation that would allow that size operation to get involved in that kind of debt, and why would they let it go so it became that large? I have a problem, you know, with that particular product in that how can something like that get that far out of hand? Somebody must have overstepped his bounds someplace. $668,000 on an operation that size seems like a sizeable amount of money.

And in most of those that I am aware of, that's a similar circumstance, that the opportunity to utilize that was there, but certainly, somebody overstepped, way overstepped, and I just, you know, wanted to hear what your comment would be.

MR. STOKES: I'm going to have to say that I can't comment on that one because I don't know; there are a lot of details that you're not giving me that I just don't have privy to. So, I'm not in a position to do it. It's much like Mr. Christ was talking about in terms of dairymen using the futures contract. Last week, a dairyman was complaining that, you know, buying corn, using that futures market, he lost $60,000 by buying corn last year, and the price went down. He forward contracted at the time that he was making a good decision, but he's not willing to accept that in hindsight, it was a good decision.

Now, I'm not sure--you know, there's all kinds of rolling forward and all the things that went on with the hedge to arrives that I just don't really know about, but I'm just saying there's nothing wrong with the basic tools. It is a tool much like forward contracting. It's just a matter of the basis not being there.

MR. BERNARD: Okay; I think with that, we're going to have to close off this panel. I think if one thing has come out from each one of these panelists and as we've sat and listened to the farmers today, education is the key, but to have education, too, you have to have people willing to learn and willing to listen.

Thank you very much, and I'll turn it back to Commissioner Dial.

CHAIRMAN DIAL: Thank you, Roger; thank you, panelists. We appreciate it very much.

We're going to take just a minute for some technical detail work, and then, we'll move to the next item on the agenda, which is a report on USDA's risk management education summit that was held in Kansas City back in September, and that presentation will be made by Craig Witt, Risk Management Agency, U.S. Department of Agriculture.

[Pause.]

MR. WITT: Thank you, Commissioner Dial. I appreciate the opportunity to meet with you here and explain a little bit about the risk management education summit that was held in September and also to explain a little bit about our program.

The summit that was held in September, many of you attended, but for the benefit of those who didn't and also for the benefit of those who did, I think this might be helpful to see how this risk management education summit that was held in September fits into the larger picture. For starters, the risk management education summit was part of a plan devised together in a partnership between the Risk Management Agency, Cooperative State Research, Education and Extension Service and the CFTC.

Just a little background. The principles of that plan are as follows: first, the plan, of course, responded or was a result of some of the legislative developments, both in the area of crop insurance and in the area of farm supports. The plan was designed to use the existing resources. As you heard in some of the previous panels, there is a lot of risk management education that's going on right now, for Stu Ellis outlined the plan for Illinois that they have in place, which is a very ambitious plan and a very comprehensive plan.

Part of the risk management education plan of the three agencies coming together in partnership was to use these existing resources to strengthen the programs that already existed and to reach out to farmers and ranchers who aren't benefitting currently from existing risk management education efforts.

A second principle is that the risk management education plan is to be tailored to local conditions. I think another panelist mentioned that one size does not fit all in risk management and that each local area has, of course, different crops to deal with, different kinds of problems, and there should be a risk management--the risk management plan should be tailored to local conditions.

It was felt that a risk management education plan should be self-sustaining, that once the ball gets rolling and people are trained that that has a self-sustaining effect in helping to continue over time. The plan is designed to cover an array of risks, not just crop insurance or yield risk and not just price risk but other risks as well; in fact, the program identified five areas of risk: yield risk, price risk, financial risk, human resource risk and legal risk that the plan should address.

Next, the plan should recognize the connections between all of these areas of risk. There are some exciting developments that are going on between the price and the yield risk, for instance, in some of the crop insurance products that are being developed and some of the research that's being done that show how, for instance, crop insurance, basic yield type crop insurance, combined with a marketing plan is more powerful and has some synergistic effects that you can't get by examining just price risk or just yield risk separately. So, we need to recognize the connections between the risks.

Finally, a plan has to be adaptable to change. The memorandum that was passed out on the desk on the way in here concerning the recommendation for ag trade options is one example. Any risk management plan that we have in place now needs to be able to adapt to new tools that are available and new research that's developed in the risk management area.

Well, the Kansas City summit, then, fit into this plan. It's only one of four major points of a comprehensive risk management education plan. The other elements of that plan are, secondly, the regional state producer level risk management education program delivery, and I'll get into that a little bit in just a minute here. Also, the development of curriculum and materials; and finally, the encouragement of risk management education research, supporting research into risk management education, decision aids, ways of presenting education to farmers that perhaps use new technology or new ways.

Now, the other three elements of the plan, the other three other points to the plan are aided by what is called a RFP grant. That stands for a request for proposals, and that, for 1998, a total of $3 million will be made available through this RFP process for those three areas: program delivery, supporting research and the development of curriculum and materials for a risk management education. The RFP process is designed to encourage partnerships between private and public and educational institutions to develop risk management education in those three specific areas.

All right; going back to the summit now, that's a little bit of the context of what the summit was--where the summit fit into the process. It was actually the launching pad for a national risk management education effort with the three groups: extension, Risk Management Agency and the CFTC.

Well, we had several objectives that we wanted to accomplish in the summit. The first was to raise a national awareness of the need for risk management education. Now, we've heard in some of the panelists today various ideas on how much risk management education is needed, but I think it's clear that there are certain areas of the country that have good risk management education programs; there are others that need a substantial amount of risk management education, and so, one of the objectives of the Kansas City summit was to raise that awareness.

Secondly, it was to establish a nationwide network of public and private stakeholders in risk management, to bring people together who have an interest in promoting risk management education throughout the country. The next objective was to train the trainers. The idea of this program is that at the Kansas City summit, the participants would actually be trainers for regional, state and local activities, and they received risk management education themselves at the summit.

Now, obviously, the crop insurance people were well versed in crop insurance, but the crop insurance people were not well-versed in some of these other areas of risk, the five areas that I mentioned: yield, price, financial, human resources and legal. So, one of the objectives was to give these participants exposure into the risk management problems of other areas.

Before the summit, many in the crop insurance business, when they heard the term risk management, they automatically thought of crop insurance and only crop insurance. After the summit, they came away with a broader idea of what risk management was all about, and the same applies to commodity brokers and so forth and grain elevators who thought only in terms of price risk management when the term risk management was applied

Another objective was to be this--at this national summit was to provide a model for regional, state and local efforts that from this national model, we would have regional and state summits and that eventually, through hopefully fairly quickly here, that the training would reach the producers.

All right; this represents a list of the kinds of groups that were represented at the summit. So, you can see grain elevators, insurance companies and associations and so forth representing a broad array of private and public stakeholders in risk management education.

All right; what were the results of this summit? First, enthusiasm was extremely high among those who participated. There were a few who felt that--that had different ideas on what risk management education should be, but by and large, enthusiasm was extremely high as a result of this meeting. More than 470 from the groups that we mentioned participated in the summit. As I said, that's a broad representation of stakeholders, representing all of these different industries.

The evaluations that came back were very positive, especially regarding the second day, when we got into a little bit more of the nuts and bolts as to how various kinds of risks would be managed among various commodity groups, and I think our best evaluations came from those sessions, where they felt they really got a lot of information.

And finally, as the objectives that we identified there before were reached, that we did raise the awareness; we did provide a model; we did bring people together in a networking context and so forth.

Well, so, now that the summit is completed, what are some of the followup plans? Well, for starters, I'd just like to explain a little bit about the Risk Management Agency, its organization and how it is combining with the extension people, and that's--that CSREES is Cooperative State Research Education and Extension Service, and the Risk Management Agency is divided into 10 regions with 10 what are called regional service offices. As part of this risk management education plan, the extension people have organized themselves five regional coordinators that align with our 10 regional service offices to provide leadership for regional, state and local followup to the summit.

Through these regional and state organizations, their first objective in following up from the summit is to identify what we have called third party influencers. These are the insurance agents, the farm credit people, the commodity brokers, those who have an influence in the community, those who are trusted by producers and to bring them to the table to help us in the risk management education effort.

The next step is to hold meetings with these partners to plan the regional, state and local education effort, and that is--these steps are going on as we speak here. Most of my time since the summit has been spent in travelling around to our regional service offices and working with the extension people on helping identify these third party influencers and helping to plan regional and state activities.

One objective is to have summits at either the regional or state level; that is, each region is to decide what works for them and to bring the parties together to make that happen; for instance, in the Northwest, our Spokane regional office, which includes the four states of Washington, Idaho, Oregon and Alaska, have decided that because of the commodities that are produced at least in the Northwest region of the lower three states that a regional summit would be more appropriate than a state summit. They have already made plans and are going to hold one in January to bring the key people together for that effort.

Then, of course, after these regional and state summits are held, then, the program works its way down to county and community program delivery, working with commodity groups and the partners that I've mentioned.

Also as part of this, I mentioned about these RFP grants. One of the key items in here is the announcement of the RFP which should be, within the next month or two, hopefully and with the announcement of RFP grants, then, those who have an interest in risk management education can come together, get the information on how to write these grants, and they will go through a selection process, and worthy grants will be awarded in the area of delivery of risk management education, curriculum and supporting research.

Well, that's the summary of what the risk management education summit was about and kind of its context in the overall plan to help take--which is to form educational partnerships to help U.S. farmers and ranchers build the needed risk management skills.

Thank you, Joe.

CHAIRMAN DIAL: Thank you, Craig.

Are there any questions for Craig?

MR. BLANCHFIELD: Yes, I have one, Commissioner Dial. Are you ever going to get the speeches from the summit on your Web site? They're not there.

MR. WITT: Yes, we have been having trouble with the Web site, and it's related to the Government bureaucracy. But yes, we are aware that we have promised to get all of the summit materials available on the Web site and also to get to all of the participants copies of all of the materials that were presented at the summit, and that is happening.

CHAIRMAN DIAL: Yes, sir.

QUESTION: To what extent does the summit incorporate input from the producers, from the farmers themselves as to the type of programs maybe they would like to see, the type of information they're looking for.

MR. WITT: Right; there were a number of producers who were at the summit. Obviously, as we move to the regional, state and local level, grower organizations and so forth who represent producers will be heavily involved in that process.

CHAIRMAN DIAL: One more question.

MR. HELLERICH: Yes; I was wondering where is--is the funding for this project here, is this coming from that amount of money that was allocated through the risk management section--

MR. WITT: Yes.

MR. HELLERICH: --of the farm bill, or where is it originating from?

MR. WITT: Secretary Glickman, in March of this year, as he was announcing as part of this initiative indicated that monies would be available, and $3 million of that total will be available for these grants and the RFP process during fiscal year 1998, which runs from October 1 of this year until September of next year.

MR. HELLERICH: I believe that the total commitment was what? $4 million to $5 million in that time?

MR. WITT: That's correct.

MR. HELLERICH: Okay; and this project here is going to take $3 million of it.

MR. WITT: That's correct.

MR. HELLERICH: Okay; thank you.

MR. WITT: Okay; just for your information, $1 million of it has been designated for the extension people to distribute to projects that they consider worthy that might not make it under this type of process, and the last million is for the Risk Management Agency to do a similar thing. The summit itself, the cost of producing the summit, was part of that from the Risk Management Agency.

MR. HELLERICH: I see; what is--to avoid--we heard some various other programs and so forth that are being done. How are we going to avoid duplication so we don't waste our resources?

MR. WITT: Well, that's an excellent question, and I hope that you got from the principles that we outlined in coming up with the plan in the first place that the idea is that where there is good risk management education already going on, we did not want to duplicate it, and we don't want to stand in the way. We want to support those programs and to help them move forward, and if it's done either by extension or by grower, there are several grower groups, farm bureau programs; you know, we want to support those and not duplicate what they're doing already.

The whole idea of partnering with all of these groups is to make sure that we do not duplicate that, that we don't reinvent the wheel. There is also a synergistic effect that by partnering and by having kind of a central clearinghouse where we're aware of what is going on that's good in one area that we can broadcast that to other areas to make sure that they can have good programs and can take advantage of this, that they might not otherwise be aware of. So, we're acting kind of as a clearinghouse. The critical word is facilitate. It's not a leadership per se. It's a facilitation of risk management education.

MR. HELLERICH: Okay; thank you.

CHAIRMAN DIAL: Well, Craig, once again, thank you very much.

As I mentioned earlier, our Chairperson, Brooksley Born, was over on the Hill this afternoon for a House subcommittee hearing. She has returned. Madam Chairperson, would you be kind enough to come forward and make a few remarks?

[Pause.]

MS. BORN: Thank you very much, Joe. I'm really delighted to be able to be with you for at least part of the afternoon. As Joe said, I've been up on the Hill along with several others in this room attending Chairman Ewing's subcommittee meeting on the Commission's strategic plan, and Susan Keith and Kendall Keith and Jim Lindauer, among others, were up there having input into our strategic plan, for which I am very grateful, and I think copies have been sent to each and every member of the advisory committee, and we would be delighted for any input from any of you as well.

The Commission's advisory committees are extremely important to the Commission, and you're a very valuable resource to us. The Agricultural Advisory Committee, in particular, has been a very important source of information and advice to the Commission. Since I joined the Commission about a year ago, a little over a year ago, I've found that your insights and your contributions have been very helpful.

I think you play a very special role for us. You represent the views of those market participants and commercial and agricultural interests who look to the exchange markets for hedging and price discovery, and the Commodity Exchange Act was designed to protect the market integrity for those uses and really to protect you, and for that reason, we really can't do our job well without significant input from you. We certainly get a lot of input from the exchanges and from the regulated persons, but we also need input from the people who are benefitting from our regulation.

I very much appreciate the active role that you have all played during the last year in giving us input and advice on a number of important issues we've had before us. I think that the program today presents a number of those issues and an opportunity again for you to have some more input. I'm looking forward to spending as much of the rest of the afternoon as I can with you. There are still some repercussions from the volatility of the market that may call me out of the meeting, but please accept my apologies if I do have to duck out, but right now, I intend to spend the rest of the afternoon with you.

And welcome to the Commission. I know Joe has welcomed you all earlier today, but let me say on behalf of all of the commissioners how delighted we are that you are here and are helping us to do our job better. Thanks.

CHAIRMAN DIAL: I'd also like to recognize Commissioner Barbara Holum. Barbara, thank you very much for joining us this afternoon. We appreciate the fact that all of the commissioners have been with us today during the meeting to the extent that their time would allow them to.

Okay; let's move to the next item on the agenda, which is going to be a presentation on the status of FutureCom, a proposal for a new electronic exchange which will be made in two parts. The first presentation will be made by John Lawton from the Division of Trading and Markets. John?

MR. LAWTON: Good afternoon. I'm going to provide a brief description of how FutureCom plans to operate and then discuss the status of their application with the Commission.

FutureCom is a for-profit entity, and they would be the first fully-automated futures exchange in the U.S. They also would be the first Internet-based futures exchange in the U.S. All traders on FutureCom would have to be accepted by the exchange. Upon acceptance, they would become clearing members; that is, they would clear for themselves. The exchange would establish minimum capital requirements, and the exchange will also impose trading limits on members depending on what your capital is. In addition, these limits will be enforced--automated trading limits; that is to say, the system won't accept trades if you are going beyond your pre-established limit.

Trade matching will be done pursuant to a price-time-priority algorithm, which is similar but not identical to the algorithms that are used on some of the existing automated trading systems. One difference is that they will accept market orders, which generally, systems today do not have the capability of doing. FutureCom has contracted with NFA to provide financial surveillance and arbitration programs.

As a start-up exchange, FutureCom not only had to draft terms and conditions for its proposed contract, which Fred Linse will be discussing in a moment, but they also had to establish rules of governance; they had to establish membership rules, trading rules, clearing and banking procedures, surveillance procedures, a compliance program and computer vulnerability safeguards as a fully automated exchange.

One other noteworthy aspect of FutureCom: as I mentioned a moment ago, generally, they're going to be dealing directly with their traders, so, they're generally not going to be trading through intermediaries, which is a point of distinction from traditional exchanges, and that, of course, has implications both from the trade practice point of view for the Commission and from the financial integrity point of view.

Basically, the status of the application is the Commission published it for public comment in January of 1997. At that time, some of the commentors expressed the view that they didn't believe there was enough information available for them to make meaningful comment. The Commission staff has been working with FutureCom since that time. Over that time period, FutureCom has basically totally revamped their rule book. They have refined what their clearing procedures and banking procedures are going to be. They've established surveillance and compliance procedures, which they didn't have before, and throughout this time, they've been continuing their development work on the actual computer systems, and they have been in touch with our computer experts here in regard to system vulnerability and system security issues.

Our current plan is that we will republish in the fairly near future. We've received quite a bit of additional documentation from FutureCom within the last two weeks, which we will make available to commentors and put it out for public comment in the Federal Register. We also will continue to be working with them during that comment period to address any additional issues that arise. I would point out that last week, FutureCom had mock trading session over the Internet, and we have had some discussions, and we will have ongoing discussions with them as to what the results were and what enhancements people have suggested and what refinements they need to make to their system.

Is there any question from anyone?

[No response.]

CHAIRMAN DIAL: Thank you, John.

Fred Linse from the Division of Economic Analysis will present the rest of the story on FutureCom.

MR. LINSE: Good afternoon. Following up on John's presentation, the Division of Economic Analysis' responsibility in this particular effort is to review the proposed terms. I'm going to review the proposed terms and conditions of the futures contract and also provide some description of the standards that the staff of the Commission uses to evaluate proposals such as this.

The proposed futures contract calls for cash settlement of all positions that remain open after the last day of trading in expiring contract months. This is all in cash settlement. The cash settlement price would be based on the U.S. Department of Agriculture five-area daily report for slaughter cattle. The five-area daily report contains prices, average weights, the number of cattle sold for live cattle in the states of Texas, Oklahoma, Kansas, Colorado, Nebraska, Iowa and southern Minnesota.

The cash settlement price will be a weighted average of prices for live slaughter steers and heifers calculated over a minimum of five days. The cash settlement price will be based on a minimum of 100,000 head of cattle. In reviewing the proposed contract, the staff are considering the proposed cash settlement price in light of the standards set forth in the Commission's guideline number one. These standards are that the proposed cash settlement price should not be susceptible to price manipulation; and two, that the cash price series upon which the cash settlement price is based shall be commercially acceptable, a reliable indicator of the cash market, timely and publicly available.

Staff are currently well-advanced in the review of this proposed contract. Before forwarding any recommendations to the Commission, we are going to consider any comments that might be received by the Commission in connection with the upcoming Federal Register notice that John has mentioned earlier and also any other information received by the Commission or the Commission's staff in the interim as well.

Thank you.

CHAIRMAN DIAL: Questions for Fred?

Yes, Ken Ackerman?

MR. ACKERMAN: This may be a question more for John Lawton than for Fred, but one question occurred to me. Chairman Born referred to a few minutes ago the heavy trading and volatility in the securities markets the last few days. One of the points that the news media mentioned in a couple of stories on it were the experience of the Internet-based trading systems for retail stock traders and some of the stresses on them the last few days and how they've held up.

Just from the news media stories, I gather they generally held up pretty well, but there were some situations where there were problems in terms of people being able to get online during peak market movements to execute trades and so on, and I just wondered how that kind of--those issues are factoring into your consideration and if you've looked at that in your review.

MR. LINSE: We have looked at that. I mean, FutureCom itself actually can't control the Internet. I mean, we've looked at how well their own systems performed. One of the things that we said in the disclosure documents that they would have to put out would be that members should be aware that you are trading through the Internet, and if your particular Internet provider goes down, you should make alternative arrangements to get your orders in to FutureCom, and they will have, for example, people on the phone to talk to people, but primarily, I think they're going to deal with that as a disclosure issue.

MR. HITCH: Question: when are you going to decide?

MR. LINSE: Sometime after the comment period. I mean, we expect to be putting it out for comment again with the revised rule book and with the revised compliance procedures, et cetera, in the very near future. It will probably be a 30-day comment period. And, so, it would be sometime after the conclusion of that.

MR. HITCH: Okay; thank you.

CHAIRMAN DIAL: Thank you all very much.

We'll move now to the next section of our agenda, and that will be a presentation on flex options by Jorge Dorhliac from the Coffee, Sugar and Cocoa Exchange.

[Pause.]

MR. DORHLIAC: Good afternoon, ladies and gentlemen. I would to start by thanking Commissioner Dial for inviting the Coffee, Sugar and Cocoa Exchange to be part of this session. It has been quite an instructing experience for me to hear the concerns of producers about how to better use these management tools.

And this particular session that I am going to be talking about will talk about one of these tools. It is really not a new tool. Flexible options have been in use as a financial instrument for quite awhile, and the idea goes back at the exchange when a couple of years ago, when the sugar trade came to us and said listen, we are trading a lot of these options on the over-the-counter market, and wouldn't it be nice if we could trade it in an exchange environment?

And we, of course, said yes, that would be very nice indeed, and we started working on this product, and it took us a couple of years to set it up in the right way. The concept of flexible options is a very simple one. The details are really quite problematic in terms of programming the systems, but we think we've got it right now. We started trading in sugar options on September 10, sugar flexible options on September 10, and we will shortly move into trading coffee options and cocoa options, probably at the, I don't know, January or February of next year.

What are the questions that immediately come to mind when one talks about flexible options? I think I'm going to try to answer in the brief period of time four of them. The first one, of course, is what is a flexible option? And that relates what is a flexible option when you compare it to a standard option? The second one is what are the advantages of a flexible option and the disadvantages, of course, when compared to standard options?

The third question I will try to answer is what are the advantages of trading flexible options, which seems to be an over-the-counter product naturally, in an exchange environment? And finally, I would like to address the issue of whether flexible options can actually be a successful risk management tool in the agricultural commodities.

So, let's go with the first question, which is what is a flexible option? As a matter of fact, somebody gave me awhile ago a good definition about what a flexible option is, and it goes something like this: a flexible option is a standard option with a twist. As a matter of fact, I would say a flexible option is a standard option with three twists, at least in the case of the Coffee, Sugar and Cocoa Exchange, and the idea of a flexible option is basically to allow the market participant to customize as many as possible of the parameters of the option.

In a standard option--sorry--in a standard option, most of the parameters set are predetermined by the exchange. The strike prices go in regular intervals. In the case of sugar, for example, they go in increments of half a cent. So, you have an 11 cent strike, and then, you have an 11.5 cent strike and a 12.5 cent strike. Also, the expiration date on a standard option is predetermined. In the case of sugar, it expires 2 weeks prior to the last trading day of the futures contract.

And finally, the exercise style of the option is also predetermined in a standard option. It's an American option. A flexible option, then, is a standard option where you can customize those three variables. Let's take a look at the first one, strike prices. A trader can decide what price he wants that strike to be. It could be something in between 11 and 11.50, for example. It could be 11.20; it could be 11.25. There are some restrictions that apply, but basically, the amount of strike prices available to a trader are going to be quite substantial.

One of the restrictions we have in terms of customizing strike prices is that, by and large, they have to be within the standard range in which strikes for standard options are currently selling. But aside from that, it could be anywhere in between. This is quite an advantage over a standard option. For a trader, for example, for a commercial house, it might have a commitment at the very specific strike price which might not match precisely the strike prices that are predetermined in the standard. In that occasion, the trader could just simply list the option with the precise strike price that he needs.

The second variable, which seems to be, by far, the one that has attracted the most attention is the expiration date of the option. As I mentioned before, the standard option expires 2 weeks prior to the last trading day. A lot of traders have been telling us that they would have liked to have the ability to set their own expiration date, probably closer to the last trading day of the underlying futures. They would like the protection of an option until almost the very last day.

Other uses of these, for example, have been we've seen a lot of interest in listing options that have expiration dates that same day; in other words, a commercial house, for example, might be working some sort of deal and might think that it might access the futures market later in the day but might not be sure about it. So, a good way to protect the deal is to write a very short-term option, usually a day. So, by paying a few ticks, which is because the option would have very little time to expiration, it would be a very cheap one. He buys the insurance that he needs in case the deals come through. So, expiration date has been very popular or has caused a lot of interest among traders.

And finally, the last variable we allowed to customize is the exercise style. This one speaks directly to the risk of an early exercise, which is present on the American. A lot of the trade houses were telling us a long time ago that listen, I mean, with the standard option, sometimes, these options get exercised because we want to, and then, we have a little bit of a problem. So, for those traders who are worried about the possibility of an early exercise, they can choose to list a European option.

That is basically the three twists I was mentioning when comparing flexible to standard options. Those are the variables that the traders get to customize. What about the advantages and disadvantages of this product? Well, two things immediately come to mind here. On the advantage side, a flexible option allows you to build a more perfect hedge; in other words, by having the ability to customize these three variables, you have the ability to actually buy or sell an option that precisely fits your needs. That is definitely the advantage of the flexible option.

What is the disadvantage? The disadvantage is really the unknown of whether we are going to be able to produce liquidity in all of the options that we are going to list on the flexible side, because imagine: by combining the three variables, the amount of options that could be listed is infinite. Practice tells us that that is not going to happen; the market will alone favor some options over others. But basically, a lot of the comments that we have been getting in the past few weeks was we're not getting enough liquidity here; we are concerned that if we get into flexible options, then, the other day, we are not going to be able to find a partner to trade with.

And I think the jury is out there. It has worked very well in the financial, achieving some success, and we will see whether it will fly in the agricultural sector.

Let me try to answer the third question here, which is why--what is the advantage of trading a flexible option which seems to be naturally an over-the-counter product in an exchange environment? And the advantages to me are really obvious ones. They have to do, the first two of them, have to do with price discovery and competitive pricing. When you go into an exchange to trade, you have 20, 30, 50 traders watching you. You get the bidding process coming in very smoothly.

If you do that on the over-the-counter market, you are doing a principal-to-principal transaction. You are dealing with one particular person, and you don't know whether you could have gotten a better price for that particular product. That is all resolved in an exchange environment.

The third one, I think, is a very important one, which is counter party access. In an over-the-counter transaction, as I said before, it's a principal-to-principal transaction. You might not know who wants to be the counter party to you in this particular transaction. You might have some idea of hedging a product 3 years or 2 years out, and you might not be able to find somebody. By going to the exchange, shouting it in an open outcry mood, you are immediately accessing hundreds of potential counter parties.

And the fourth one is, of course, the one that comes to mind most readily, and it is the existing of the clearing corporation. By trading in an exchange, you eliminate counter party risk. The clearing corporation becomes the seller for every buyer, the buyers for every seller. In the over-the-counter market, we have entered into a personal transaction. If I walk away from that transaction, you have to come and get me. In the exchange, you always know that the exchange will be there to respond for that.

And finally is the ability to offset. In a flexible option, what you have is in an exchange-traded flexible option, what you have is the ability to leg out, as we call it, to close one particular component of the option you have traded. Let's say that you have traded a synthetic long futures. The next day or 2 weeks later, you decide that you want to keep the call aspect of that synthetic long, but you want to offset your put side. So, you can do that by simply trading the part, the component, that you don't want any more.

Incidentally, we allow flexible options to be listed with up to four components. So, in one listing, what we call the RFQ process, the request for quote, can be for up to instruments that have four legs, which covers a lot of the--it certainly covers the most-used financial instruments, the most-used flex so far, and I've seen at most three-legged instruments being listed. I've never seen a four-legged one. I've seen a lot of twos, two-legged instruments. Those are probably synthetic longs or shorts.

And these are the advantages. I mean, there are probably more. I think that these are the basic advantages of the system over the over-the-counter market, and the question is how well can we succeed with such a flexible product in the agricultural side? It certainly has been a good experience in the financial side. The Chicago Board of Trade has quite an active bid on flexible options for the Treasury bonds. It has not been tried in agricultural commodities.

We launched it on September 10. We've got very few trades so far. We've got a lot of people trying to list options, bidding and offering but finally not trading on them. One of the problems we discovered was that the design of the screens had to be very specific and very special. At first, we designed the screens in such a way in which the traders were complaining to us that they cannot really read this; I mean, the amount of variables that we have to take into consideration are so large that it's difficult for us to concentrate on this.

So, we have to go back to the drawing board and redesign the whole system again. We did that last week, and it's much easier to read right now. The trade is very excited about the product. Unfortunately, there seems to be a big gap between being excited about the product and then actually using it, but we think this is a matter of an educational process.

It's very much to upgrade, similar to upgrading your computer. You are used to your old computer. It has 66 megahertz. It does what you need it for; you know, it certainly has your Excel program and your word processing program. And then, somebody comes and tells you to buy a 300 megahertz computer, and you say what do I need that for? It's certainly useful, but I don't really need it, and it takes awhile, it takes a lot of education for you to actually think that this is a very particular product that will definitely help the trade in designing optimal hedges.

Thank you very much.

CHAIRMAN DIAL: Thank you very much. Are there any questions?

[No response.]

CHAIRMAN DIAL: We'll move now to a presentation by Paul Petersen of the Chicago Mercantile Exchange.

[Pause.]

MR. PETERSEN: I think Jorge took a number of my overheads. So, I will just plug in a few cracks in the interest of time, a couple of things that I wanted to focus on about things we're doing at the Merc, and then, I'll be happy to entertain any questions you might have.

Okay; the Chicago Mercantile Exchange filed for and has received approval for flexible options on these eight commodities: live cattle, live hogs, feeder cattle, pork bellies, butter, milk, cheddar cheese and lumber, and that's pretty much our entire product line. And as I said, we have received Commission approval. We plan to start trading sometime after the first of the year. Again, to second a comment by Jorge, these take a great deal of work to implement, and as you'll see in an example here in just a minute, you'll see exactly why that is true.

Jorge touched on the idea of a request for quote procedure. I think it's important that we spend just a minute on that. These options are not listed. They aren't up on the board already. So, you have to make them. Up some more? Whoa! There we are.

So, in order to make them eligible for trading, we have this RFQ procedure. We currently have flexible options in our equity products, Standard and Poor's 500, for example. So, we do have some experience with this that we plan to clone and bring over to the ag markets. The first thing that happens is a call comes in from a customer into the trading floor, and once those specifications for the desired options are received, first of all, we check to make sure that the specifications fit within the required parameters.

Once that is true, in other words, the option is valid, the RFQ is displayed on the trading floor, and it's also disseminated to the public. So, it goes out over our normal quote feed. So, it's not just visible on the floor; it's also visible through quote vendor services.

The RFQs, they are accepted or will be accepted between 10 minutes after the open and 30 minutes after the close. The easy answer to that is that's just to make sure that they don't get lost in the shuffle of the standard options trading. Once the RFQ is posted, there is a response time interval of 5 minutes, and there is no trading during that time on this particular option. It's just everybody stands still, go off, sharpen your pencils and figure out a price for these things, figure out a quote.

Once the 5-minute period is up, trading opens. There is an open outcry session. At the end of that response time interval, then, the best bidder offer is established. At that point, it's relayed back to the customer, and at that point, the customer is free to either take that best bid or offer or decline. It's entirely at his option. So, it really is a quote; it's not binding on the customer in any way.

Once we have had an RFQ, trading remains open on that particular option for the remainder of the trading day. So, we don't have to go through this whole response time interval every time a similar option comes into the trading floor, and just to justify the time and trouble that we have to go through in order to price these on the floor, there is a minimum order size of 10.

To illustrate the flexibility that's available with these products, let's start with a standard option, and let's just arbitrarily pick something like an April 1998--I think this was for a hog example that I prepared but a strike price of 70 and expiration into 1998, and we'll just look at the put. So, we have April 1998, 70 put and April 1998, 72 put. The standard options, the normal interval for the strike prices is at 2-cent intervals. So, 70, 72, and likewise, they go up 74, 76, 78.

But let's just focus on the two that are here in the shaded area. Once we go to a flexible pricing system, and we flex on the strike price, under our proposal which has been approved, we would go from 2-cent intervals to one-quarter-cent intervals. So, this effectively multiplies the number of options by eight. So, we go 70 cents, 70 and a quarter cents, 70 and a half, 70.75, all the way up. So, you can see we've really widened out the range of possibilities here.

The other thing you can flex on is exercise style. So, when you go to a choice between European and American, that doubles that number again. So, we go out to eight additional strikes. And then, we can flex on expiration date, and this is where it really gets fun, because then, we go by day. We go October 29, October 30, October 31 for the expiration date with all of these other variables in effect and finally get it all the way out to April 15, which was the original expiration date.

And on this particular example with, I think, about 125 business days between current time and April 15, it works out to about 8,000 additional options. So, it really is an incredible expansion in the number of option possibilities. I can't imagine any reason why somebody can't get whatever they need with this amount of flexibility here, and we look forward to putting these up for trading and letting the market have a crack at them.

Any questions?

Yes, Ken?

MR. ACKERMAN: I guess one of the parameters that neither you nor Jorge mentioned as a flex item is the size, the size of the lot.

MR. PETERSEN: Right.

MR. ACKERMAN: Is that unworkable, or is that something that was considered?

MR. PETERSEN: Two part question or two part answer. One, we have to trade the options on the underlying futures contracts. So, until we can find a way to trade fractional futures contracts, I think we're kind of stuck with the standard size. But that can be overcome, because you can find an option with a delta that is sufficiently small so you can exactly fit that to the size of the underlying cash commodity. So, it can be overcome. Any sharp broker should be able to do it for you. It just takes a little additional work.

Paul?

MR. HITCH: I'm the designated dumb question asker in the group. What's European style and American style mean?

MR. PETERSEN: Oh; American style means that it can be exercised on any business day between the time the option is written and last trading day. European style is not exercisable until the very last day. You can't pull the trigger until the end. And I believe that European style options are generally a little bit cheaper than American style, because you don't have this early exercise risk that Jorge touched on.

CHAIRMAN DIAL: Thank you very much, Paul.

We'll move now to a presentation by Dave Lehman from the Chicago Board of Trade on serial options.

[Pause.]

MR. LEHMAN: Thank you very much, Commissioner and thank you members of the Ag Advisory Committee for staying out late this afternoon to listen to these presentations.

When the Commissioner's office contacted the Board of Trade about a new agricultural product that we were working on to present at the Ag Advisory Committee, we kind of scratched our heads, and we've tried several new ag products recently and haven't had much success. The ones that are stuck in my mind right now, though, are corn and soybeans. We've got new corn and soybean contracts that are going to be listed for trading soon, and while you don't really think of those as new contracts, they're really contract changes, but in effect, they're going to be new contracts, and I think they're going to offer users and producers of those commodities a much better risk management tool.

But what I'm going to talk about today, and I'll do it real briefly, are serial options in the agricultural markets. They are exchange traded and cleared, and Jorge mentioned that that is a benefit of a flex option. They are short-lived options, and the ones that the Board of Trade is looking at, we have serial options trading in our financial markets. Those that we're looking at in the agricultural markets would have about 30 days of expiration or 30 days in length. They would be listed in futures months or in calendar months where there is currently not an option contract trading.

They would provide more trading opportunity, greater flexibility and lower cost. And I think the cost aspect is one that we've heard most from our customers that they're looking for an option that has less time value. We've heard that earlier today in some of the producer seminars that one of the drawbacks to using option contracts or insurance policies is the cost, the premium costs of those. The flex--or, I'm sorry, I can't get flex options out of my head; I guess that is where we're really moving--serial options would have a lower cost.

As you can see, there are serial options currently listed in agricultural markets at the Kansas City Board of Trade, Chicago Mercantile Exchange and then, the CBOT's 30-year Treasury complex. I think this overhead will give you hopefully an idea of what it is a serial option can do for you as compared to a standard option, and the example that's on the board would apply to corn, wheat, oats contracts, where our standard delivery months are March, May, July, September and December, and the blue lines represent the standard options; those are options that are currently available, and the length of the line doesn't necessarily show you when that option started trading, but the important thing to look at is the length of the red line. The red line would be the serial month, and that would be listed for, as I said, 30 days. There would be a five-day overlap between the expiration of one option and the listing of another, so, there would be a time period when those options could be rolled forward.

As you can see, we would have option contracts expiring in every calendar month under a serial feature. So, we would add, in the corn cycle, two, four, six, eight additional option expirations, and these contracts would again, I think, what our customers have told us in our survey is that they are looking for something that costs less and gives them a little bit more flexibility.

The status of the Board of Trade's serial option project is that our Business Development Committee on October 15 recommended unanimously to the Executive Committee that we move forward with this. The Business Development Committee looked at a recommendation from staff that was based on input from our Agricultural Advisory Committee, which has, for quite some time, recommended greater access to the options markets, and we've looked at ways of increasing access in terms of changing the last trading day.

There are some restrictions in doing that in the Commodity Exchange Act. We've also looked at listing them on Project A, that we've accomplished that in the last year. From where we're at today, the Board of Directors is expected to look at the recommendation from the Business Development Committee at the November meeting, and hopefully, we'll have serial options in the grain markets beginning after the first of the year.

Are there any questions?

Yes, Milo?

MR. HAMILTON: Yes, Dave, when these things, when they get exercised on, do they go to the next futures month? Or how does that work, like a Jan/Feb or something like that?

MR. LEHMAN: Yes, a Jan serial option would be an option on the March futures contract. So, if you exercised a January option, you would have a long or short March futures position.

CHAIRMAN DIAL: Any other questions?

[No response.]

CHAIRMAN DIAL: Next, we have a presentation on the status report, if you will, on the potential lifting of the ban on agricultural trade options. Paul Architzel from the Division of Economic Analysis will make a brief presentation, and copies of the notice of proposed rulemaking are being distributed, and I would urge you to take a serious look at these. There will be a comment period, and not only you as individuals but hopefully also your organizations will study them and give us the benefit of your comments.

Paul?

[Pause.]

MR. ARCHITZEL: Thank you, Chairman Dial and members of the Advisory Committee. I'm pleased to have been asked to brief you on the status of the Commission's consideration of the prohibition on agricultural trade options. I know that Commissioner Dial appreciates when people speak directly, particularly attorneys, so, I will keep my remarks brief.

As you probably are aware, the Commission today sent to the Federal Register rules proposing a 3-year pilot program to lift the prohibition on agricultural trade options, subject to various regulatory requirements. Copies of the document have been given to you today. The proposal will appear in the Federal Register sometime early next week and will also be accessible through the Commission's Internet Web site.

Before proceeding to brief you on the proposal, I'd like to note that all of the commissioners have taken a very active interest in this issue. The Commission conducted two field meetings, and Commissioner Dial attended a third informational meeting on this issue over the summer. These were the first field meetings that the Commission has held in over 10 years. Despite the high level of involvement by all of the commissioners, Commissioner Tull should be recognized for his assistance in the conduct of our field meeting in Memphis and for his strong leadership in shaping the proposal that you see before you today.

I must also say, however, at the risk of offending Commissioner Dial, that Commissioner Dial was truly the shepherd behind this process--or perhaps in a manner speaking more to his liking, he certainly rode herd over the progress of this proposal. I am happy to report, however, that he stopped short of resorting to the use of a cattle prod.

[Laughter.]

MR. ARCHITZEL: It's important to note several features or points at the outset: one, this proposal is a proposal, and it's at the initial stage. The Commission is asking for your comments and considers carefully the comments it receives from the public in determining the final rules that it promulgates.

Two, this is a proposed pilot program. The purpose of a pilot program is to test the waters and to gain experience and confidence before heading out to open seas. The Commission has successfully used a pilot program format in permitting the reintroduction of exchange-traded options, and it can be an effective method to undertake a major revision of policy such as this.

Three, these rules will apply only to transactions in agricultural trade options. They are not intended to apply in any way to forward or spot commodity business. Those areas generally are excluded from the Commission's authority and have been so excluded from the beginning of the first version of the Commodity Exchange Act which passed in the 1920s. Nothing in this proposal changes that exclusion.

In fashioning the proposed pilot program, the Commission considered all of the comments which were received on the advance notice. We received around 75 comment letters, and they were almost equally split between those opposed to lifting the prohibition and those favoring the lifting. However, there was a general consensus that if the Commission does proceed to lift the prohibition, it should do so with caution and build in safeguards and protections for both the customers and the trade option merchants.

This proposal tries to do that, providing a number of safeguards and a degree of protection within a framework of regulation designed for this decentralized and more informal type of market. The pilot program contains the following specific features: one, eligible instruments. Instruments eligible for the pilot program are options that, if exercised, will result in physical delivery of the commodity and are between two commercial parties. In addition, the options included in the pilot program cannot be repurchased, resold or otherwise cancelled prior to their expiration or exercise.

Two, registration: one of the counter parties must be an entity in the business of offering to buy or sell the options. That entity would be required to become registered as an agricultural trade option merchant. Registration would be streamlined and would include in a single registration form the agricultural trade option merchant and its sales force or associated persons. All registered natural persons would be required to take a targeted proficiency exam and periodic ethics training.

Three, net worth. Agricultural trade option merchants would be required to have initially and to maintain a net worth of $50,000. If customers pay premiums up front, the agricultural trade option must keep those premiums segregated from its own capital until the option is closed out or expires. If the agricultural trade option merchant's net worth falls below $50,000, it would be required to offer to refund the customer's premium that it is holding and, at the same time, close the customer's option positions and to cease offering new options contracts.

Four, disclosure: agricultural trade option merchants would be required to provide a disclosure document, to give customers a confirmation, to give customers information on price quotations and on the customer's account and to provide customers with a monthly statement.

Five, reporting and recordkeeping: agricultural trade option merchants would be required to maintain their books and records. They would be required to report on position information quarterly. They also would be subject to special calls for information. Generally, the Commission makes special calls very sparingly. We can anticipate that during the course of the pilot program, we may use that special call authority to obtain information which would help to evaluate the success of the program and the effectiveness of the rules.

Six, internal controls: agricultural trade option merchants would be required to have written internal control policies relating to their trade practices, to reconcile their books monthly and to have their financial statements audited on a yearly basis.

Seven, short positions: the proposed pilot program rules do not permit agricultural producers to grant or sell put or call options except agricultural producers would be permitted to enter into the combination of buying a put and selling a call, often referred to as a minimum/maximum or a fence contract. As proposed, the amount of the commodity that the agricultural trade option merchant could require the producer to deliver at the maximum price could not exceed the quantity of the commodity that the producer has the right to deliver to the agricultural trade option merchant at the minimum price.

Eight, exemptions: if both counter parties have a net worth of $10 million, they are exempted from all of the above rules and are subject to only an anti-fraud rule.

Nine: finally, the Commission is proposing to remove the existing prohibition of exchange trading of options on physicals in these commodities. That is a step suggested by the exchanges in our public meetings in Memphis, and it would give them more flexibility and enable them better to compete with trade options. Therefore, of the multiplicity of options, they can now quadruple them or maybe even more than that.

I understand that wading through all of these rules at one time may seem daunting, but the number of proposed rules is due in large part to the fact that the Commission will be permitting an entirely new class of instrument that was previously prohibited. Various trade and industry associations have offered their assistance in educating both vendors and potential purchasers of these instruments. In addition, the Commission is seeking comment on whether to delegate certain of these functions to the National Futures Association.

With the help of the industry and trade associations and of the NFA, the Commission is hopeful that these proposed rules will provide a framework for lifting the prohibition on agricultural trade options in a manner that is safe, prudent and cautious. I'd be happy to answer any questions.

MR. HITCH: When does this start, the 3-year trial period?

MR. ARCHITZEL: It would start immediately upon final adoption of the rules. At this stage, we're only in the proposed stage. We will have a 30-day comment period, and the Commission will consider going with final rules thereafter.

Yes?

QUESTION: I believe the equivalent of these are traded in the non-agricultural markets like energy markets; isn't that correct? If so, are they regulated to the same degree?

MR. ARCHITZEL: No, they're not regulated to the same degree. I think that the Commission determined that in the case of agricultural trade options, this level of regulation was appropriate to going forward with lifting the prohibition.

CHAIRMAN DIAL: Any other questions?

[No response.]

CHAIRMAN DIAL: Paul, as you know, don't go off very far, because you're on next for our final agenda item, which is a status report of the proposed changes to the CBOT corn and soybean futures contracts delivery terms.

MR. ARCHITZEL: Currently, I think as you all know, on December 19, 1996, the Commission issued a notification to the Chicago Board of Trade under Section 5(aa)10 concerning the CBT's corn and soybean contracts. Under that notification, the Commission required that the Chicago Board of Trade respond within 75 days.

On March 14, 1997, the Commission published in the Federal Register the CBT's proposal, and in response, we received some 700 comments. After analyzing those comments and receiving further submissions from the CBT, the Commission, on September 15, 1997, issued a proposed order. The proposed order was published in the Federal Register on September 22, 1997, and it had a 30-day comment period, which expired October 22, 1997.

To date, we've received about 230 comment letters, and we are currently analyzing those comment letters. On October 15, as required by Section 5(aa)10, the Commission provided an opportunity to the Board of Trade to address the Commission, and that hearing was conducted on October 15. The staff is currently analyzing all of that material. The Commission has indicated that resolution of this issue is its most important priority for us, and we're certainly taking that to heart, and we expect that we will be making a recommendation to the Commission sometime, I believe, before the end of the year, as Chairperson Born has indicated.

Questions?

[No response.]

MR. ARCHITZEL: On a related but different topic, the Commission began looking at the wheat contract in December at the same time it issued the 5(aa)10 notification to the Board of Trade regarding corn and soybeans. We received some comment but not much at that time. On April 18, 1997, in response to requests from the Commission, the Board of Trade indicated that it would refrain from acting on recommendations that had been made by a special task force concerning wheat which it had appointed and would be studying the matter further.

On July 8, 1997, the Commission published a Federal Register release asking for comment with regard to the wheat contract. That comment period closed on August 22. The Commission received approximately 10 comment letters in response to that. We have certainly looked at those letters and will be considering those and acting on those more fully once the corn and soybean contracts have been resolved.

Yes, please.

QUESTION: Commissioner, could I ask a question about the corn and soybeans? Can you explain the status of those 1995 contracts in the meantime?

MR. ARCHITZEL: The Commission issued two letters to the Board of Trade in connection with those and advised the CBT that it would be deciding those contracts in connection with its decision on the Section 5(aa)10 notification, so that those issues will be handled together with the Commission's determination on the broader issue.

QUESTION: So, what is the current status?

MR. ARCHITZEL: Their current status, I believe, is that they are listed by the Board of Trade, and the Commission will determine what its legal status is when it determines the larger issue under 5(aa)10.

QUESTION: Thank you.

CHAIRMAN DIAL: Other questions?

[No response.]

CHAIRMAN DIAL: Thank you all very much for your time and effort, and once again, we appreciate it, and we'll look forward to your input on all of these major policy issues that the Commission is considering, and I hope you have a safe trip home.

[Whereupon, at 5:41 p.m., the meeting was concluded.]