Introduction

Good afternoon and welcome back to AgCon. Traveling to Kansas City, leaving Washington, engaging in person, listening, answering the hard questions, and working toward finding solutions for America’s farmers and ranchers—this is an always has been my number one priority. I couldn’t be prouder to lead the return of this conference.

In 2019, I closed this conference with remarks filled with gratitude for the relationships that flourish within the agricultural commodity space and the commitments we all make to share our side of the story as we work within the agricultural risk management ecosystem towards safe, reliable, resilient, and accessible markets. At the time, none of us could have known that our third conference would be so far off, or that a perfect storm of externalities would impact commodity markets so profoundly in the interim.

The futures markets played a critical role during this extraordinary era. With livestock and grain markets under historically intense stresses, futures market transactions continued to be a reliable, transparent venue for price discovery and hedging for some agricultural markets.

Tremendous uncertainty from the supply chain breakdowns during this unprecedented time manifested in futures bid/ask spreads widening significantly, historic price volatility, and futures price limits being triggered at the highest rate in history in agricultural markets like lumber and livestock. Even as the world was recovering from the effects of COVID-19, commodity markets—especially agriculture and energy markets--faced tremendous challenges brought on by Russia’s invasion of Ukraine. Today, geopolitical risks, extreme weather, supply chain constraints, and changing global trade patterns continue to affect our markets to some degree.

Through all of this, the futures markets have continued to function well, reflecting supply and demand fundamentals and providing a venue for risk management and price discovery. But, the U.S. derivatives markets are not only vital to agricultural stakeholders for price discovery and hedging. The information and data generated and disseminated by and through our markets underpin many more USDA-sponsored risk management programs such as insurance and commodity-based programs.

Though the CFTC’s role is limited in cash markets to enforcement authority, CFTC economists and analysts monitor the commodity markets on a daily real-time basis, and can view the derivatives positions of large traders on a next-day basis. CFTC regulations require and CFTC has access to extensive data beyond large trader positions including transaction, messaging, and swaps data. Evidence of CFTC’s rigorous surveillance and monitoring work can be seen in the number of enforcement actions related to agricultural and livestock markets over the past few years, from misreporting to manipulative activities, including spoofing and misconduct involving confidential information.

Bringing bad actors to justice not only maintains the integrity of our markets, but our enforcement orders provide transparency by helping to identify potential structural market weaknesses and clearly articulating when conduct may cross the line. Another way the CFTC promotes transparency is by publishing weekly Commitments of Traders Reports, and we launched a new, user-friendly platform in 2022.

We share a common goal in ensuring that strategies employed today will support and sustain the agricultural markets in the decades to come. These strategies include making certain that our derivatives markets remain resilient, accessible, and cost effective as a risk management and price discovery tool. They also include safeguarding the cash and futures markets against mischief and misconduct through robust surveillance and swift enforcement. And, we must ensure that as we increasingly incorporate new technologies into our operations, we do so responsibly.

Yesterday’s economic data suggests that higher food and energy prices persist, impacting American families across the nation. CFTC staff are using every tool the agency has to ensure that commodity markets continue to fairly and transparently serve their intended price discovery function. With an unparalleled cadre of expertise, a vibrant and robust market with diverse traders, active regulatory oversight, and strong enforcement, we can proudly and safely say that the U.S. futures markets are the benchmark for global trade and price setting.

I want to thank all of those who made AgCon2024 possible,[1] and extend a warm welcome to our special guests: Ambassador Doug McKalip, U.S. Chief Agricultural Negotiator, Office of the U.S. Trade Representative; U.S. Senator Roger Marshall; and Jeffrey R. Schmid, President of the Federal Reserve Bank of Kansas City.

Agenda

The CFTC’s return to Kansas and our partnership with K-State’s Center for Risk Management Education and Research has endured because we understand that the folks in Washington benefit from the first-hand experience of engaging with the farmers, ranchers, and commercial end-users in the agricultural complex to learn and better understand what is happening and how your experiences are impacting the larger economy. Only then can we represent your interests and ensure that we make changes that will improve the market meaningfully. A healthy farm economy is a big part of a strong and vibrant rural economy, which is integral to our nation’s prosperity.

More broadly, conferences like this one provide opportunities to dig deeper into the issues that may not be making the headlines, but assuredly impact markets and stakeholders in significant ways. The first AgCon in 2018 focused on consumer awareness and customer education. In 2019, we focused more on issues of market integrity—questions like the impact of matching algorithms on market performance, and the convergence of futures and physical prices for grain and oilseed. Price discovery and liquidity are integral to well-functioning futures markets, and the CFTC must ensure that market structure does not adversely affect either. These conversations serve multiple important purposes. For the CFTC, they enable us to better serve our constituents. But these conversations also provide for awareness that hopefully builds confidence in our markets. Like the markets themselves, these conversations reduce uncertainty and risk.

We were off to a solid cadence when the pandemic forced us into hiatus. Returning for our third AgCon five years later, our agenda aims to level set our knowledge base for newcomers and explore the developments in agricultural derivatives and larger financial markets that present the greatest challenges and opportunities right now.

Our agenda kicks off with an issue that has been making the headlines in our space: the evolving relationships between futures commission merchants (FCMs) and customers and the potential impacts of new regulation on the clearing ecosystem. I recently testified regarding proposed rules by the prudential bank regulators known as the Basel III Endgame and G-SIB Surcharge proposals. Of paramount concern raised by market participants that these proposals could reduce banks’ ability to offer hedging services to clients such as farmers, ranchers, and other end users.

The CFTC has been closely monitoring these proposals. In addition to personally engaging colleagues from the prudential and market regulators, we have put together a team of experts at the Commission to work alongside our regulatory counterparts. Our aim is to educate and identify what we are seeing in our markets, the changes that have occurred, the concentration of participants, the reduction of services for smaller participants, and the importance of the diversity of participants so that producers can have access to futures markets.

During my testimony, I shared some important data points that really drive home the issues. Going back to 2004, there were 177 CFTC-registered FCMs. Right now, twenty years later, we have just about 64, a huge reduction. At the same time, we have seen an increase in customer funds held by FCMs from approximately $80B in 2004 to about a half trillion dollars today. In short, we have had tremendous market growth and a reduction, or perhaps more aptly, a concentration in capacity. This is even more striking given that the five largest five clearing members—all banks—hold about 60 percent of customer funds.

Our role is to share our perspective and expertise on how the derivatives markets address risk, and the role of capital within existing frameworks. There is a tendency to evaluate similar activities as presenting the same risks, but that is not the case in our jurisdictional markets, as there are active and dynamic mechanisms such as margin, to name only one, that provide real-time position and customer management. CFTC staff are engaged, and the prudential regulators have been receptive to understanding our view.

To be clear, capital is one of the benchmarks and the foundations of good financial regulation, and it is important that prudential regulators move forward with the Basel III Endgame and G-Sib Surcharge. We certainly and painfully are aware of what happened in 2008 when firms were so undercapitalized it required a government intervention to keep the economy afloat. But, I believe we should be mindful about how it is implemented. We have to preserve incentives for clearing and ensure that market participants are not cost prohibited from pursuing effective risk management. As we think about policy going forward, we must be intentional in our efforts to understand the trend of disappearing FCMs over the last 20 years and the impacts it is having. While we have witnessed consolidation like this across many industries, the derivatives markets require a level of diversity that requires a balance of participants to avoid concentration that could ultimately lead to cascading consequences that bleed into the larger financial ecosystem in the event of a participant failure.

Moving forward, later this afternoon, my fellow commissioners will gather for a panel focused on their views of the issues important to the agricultural community. They will be followed by another unique panel focused on illegal conduct in the cash commodity markets and how the CFTC uses its authority to deter and stop fraud and manipulation, sometimes alongside the Department of Justice who can bring criminal actions. We will close the day with remarks and a fireside with our honored guest, Ambassador Doug McKalip.

Tomorrow morning, Senator Marshall, a member of the U.S. Senate Committee on Agriculture, Nutrition, and Forestry will start our day with opening remarks and transition us into a day of learning with a panel on the lifecycle of a futures contract. I promise that by 9:30 a.m., you will most certainly be in the know regarding the who, what, where, why underling our markets.

We will transition quickly into the “new frontiers” of data and information with a diverse group of experts who will walk you through a behind the screens tour of decision-making when it comes to market data and information, and a panel on voluntary carbon markets.

Jeffrey Schmid, one of our newest Federal Reserve Bank presidents, will join us for a lunchtime keynote. With an impressive work history and perspective on bank regulation from his earliest days as an FDIC field examiner in its KC office, I am sure President Schmid will bring a unique perspective.

Our final panel will focus on hot topics in livestock.

Conclusion

For the CFTC, the purpose of our conferences and committee meetings, first and foremost, is to listen, learn, and lay out what we can each be doing to support the agricultural economy. And I understand that there are a lot of challenges—a lot of unknowns and risks—these days. The agricultural economy has faced stiff headwinds for many years. Persistently volatile commodity prices, extreme weather events resulting from climate change, and trade policy are a few of the significant hurdles that make production agriculture more challenging every year. These are uncertain times, and the whole purpose of our futures markets is to help to provide certainty. I believe the strength and vibrancy of the futures market, which serves as a critical price discovery and risk management tool for end-users, is a testament to the creative and entrepreneurial spirit of the American farmer.

Last year, I testified before the Senate Committee on Agriculture, Nutrition, and Forestry regarding CFTC oversight. At the time, the process for the 2023 Farm Bill was underway, and your concerns and expectations were front and center. With agricultural market developments at the heart of policy debates on a global scale due to increasing food prices, transportation challenges, climate change, ongoing market volatility, market concentration, and the real risk of food insecurity, I reaffirmed the commitment I made during my 2017 nomination hearing to ensure the U.S. derivatives market remains both a desirable and cost-effective risk management and price discovery tool for agricultural producers and the entire value chain.

The lack of certainty in your businesses is in part why the derivatives markets exist. As Farm Bill negotiations continue, the Commission is watching them closely, and I will continue to advocate and voice my support and leverage our relationships to ensure that information flows and dialogues continue.

In closing, I want to thank our friends and colleagues at Kansas State University for collaborating to bring us all back together.

[1] From K-State, I would like to recognize Joe Parcell, Director, and Emily Garwood, Managing Director, of CRMER (Center for Risk Management Education and Research). From the CFTC and Kansas State, I would like to thank our moderators: Tom Smith, Ann Wright, Rob Schwartz, Lonnie Hobbs, Brian Coffey, Nathan Hendricks, and Ted Schroeder. I wish to extend a collective thank you to all of our panelists. I want to acknowledge that putting together a conference like AgCon takes a tremendous amount of work. I want to thank all of the individuals who put together this event from procurement, to legal, to our travel and business managers, and our press office. In particular, I want to thank Chuck Marvine, the CFTC’s Kansas City Regional Office Director and a Deputy Director in the Division of Enforcement.