SPEECHES & TESTIMONY

Remarks of Chairman J. Christopher Giancarlo at the U.S. Department of Agriculture (USDA) 95th Annual Outlook Forum

February 21, 2019

Introduction

Secretary Perdue, Deputy Secretary Censky, USDA Chief Economist Rob Johanssen, USDA staff, my CFTC colleagues and other distinguished guests: thank you for the opportunity to speak to you tonight at United States Department of Agriculture’s 95th Outlook Forum.

For almost a century, this forum has brought together thought leaders to consider critical issues facing agriculture.  I applaud the Department for this enduring institution.  It is tremendously important.

I am very honored to be speaking to you.  You know, the chances were pretty slim that a guy like me from New Jersey, would ever become chairman of the U.S. Commodity Futures Trading Commission.  The odds were even thinner that two people, Commissioner Russ Behnam and I, from the same country in New Jersey would serve together at the CFTC, as we do today.

Believe me, the odds were almost impossible that a Jersey guy would be the dinner speaker at the USDA’s big annual event!

But, again this is America, where amazing things happen all the time.

Depth and Diversity of American Agriculture

And, you know, there’s a reason New Jersey is called the “Garden State.”  It is a top producer for such items as cranberries, blueberries, peaches, bell peppers, spinach and tomatoes. Its diversity of agriculture production compares favorably with America’s largest fruit, vegetable and nursery-stock producing states.  It is notable that, based on highest dollar value per acre, New Jersey is the most productive farmland in the United States.[1]

And, I know that Secretary Purdue is aware of this, because he just spent a few days touring New Jersey farms and meeting its producers. Our state and our country is fortunate to have such an Agriculture Secretary who is so tireless in understanding the concerns of American farms – from the smallest patch to the largest expanse – and fighting for their success.

Back in 2014, when President Obama nominated me to the Commodity Futures Trading Commission, I made a commitment to the Senate Committee on Agriculture that I would travel the country and meet with farmers and ranchers.  I promised to learn about their businesses and see first-hand the challenges they face.

In 2017, when President Trump nominated me to be Chairman of the CFTC, I renewed that pledge to keep agriculture and its challenges front and center at the agency.

During my term, I have travelled the country and visited farm country in over two dozen states from Montana, Texas, Arkansas, Louisiana and Iowa to Minnesota, Missouri, New York, Georgia, Mississippi and Oklahoma.  I have walked in wheat fields and harvested soybeans, tramped through rice farms and beneath pecan groves, milked dairy cows and toured feed lots, visited grain elevators and viewed cotton gins.  Throughout, I have been moved by the diverse beauty of this country.  I have come to love its farming families.  I know what a blessing that has been.

And, what an education for a kid from Jersey.  I was struck by the creative and innovative approaches underway in American agriculture.  They reflect fortitude and drive required to meet the challenges of the 21st century.  It is clear that producers are first and foremost business owners who must stay focused on developments in their industry both technologically and commercially.  Food production in the 21st century requires enormous ingenuity, technological savvy and expertise.  Staying competitive in today’s global economy requires new tools to keep up with growing world food demands while protecting the environment, managing costs and risk.

And, as we all know, agriculture is a risky business – which I believe is why I am here with you tonight.

Commodity Derivatives Help Manage Production Risk

For more than a century, American farmers have relied on U.S. derivatives markets to manage risk.  These markets allow farmers, ranchers, and producers to hedge production costs and delivery prices so that consumers can always find plenty of food on grocery store shelves.  They are one reason why American consumers enjoy stable prices, not only in the supermarket, but in all manner of consumer finance from auto loans to household purchases.

Derivatives markets influence the price and availability of heating in American homes, the energy used in factories, the interest rates borrowers pay on home mortgages, and the returns workers earn on their retirement savings.

Commodity derivatives markets provide a critical source of information about future harvest prices.  A grain elevator uses the futures market as the basis for the price it offers local farmers at harvest.  In return, farmers look to exchange prices to determine for themselves whether they are getting fair value for their production.  USDA uses that same information to make price projections, determine volatility measures, and make payouts on crop insurance.[2]

More than 90% of Fortune 500 companies use derivatives to manage commercial or market risk in their worldwide business operations.[3]  These markets allow the risks of variable production costs, such as the price of raw materials, energy, foreign currency, and interest rates, to be transferred from those who cannot afford them to those who can.

In short, derivatives serve the needs of American society to help moderate price, supply and other commercial risks to free up capital for economic growth, job creation and prosperity.  While often derided in the tabloid press as “risky,” derivatives – when used properly – are tools for efficient risk transfer and mitigation.  It has been estimated that the use of commercial derivatives added 1.1% to the size of the U.S. economy between 2003 and 2012.[4]

US Commodity Futures Are a Global Product

Today, American derivatives markets are the world’s largest, most developed, and most influential.  They are relatively unmatched in their depth and breadth, providing deep pools of trading liquidity, low transaction cost and friction and participation by a diverse array of global counterparties.  They are also some of the world’s fastest growing and technologically innovative.

U.S. derivatives markets are also unmatched in efficient and undistorted price discovery.  The value of many of the world’s most important agricultural, mineral, and energy commodities is reliably established in U.S. futures markets.  And those prices are set in U.S. dollars.  Dollar pricing of the world’s commodities provides an enormous and unparalleled advantage to American producers in global commerce.  The advantage being that, with dollar pricing, both producers and consumers do not need a currency hedge on top of their commodities hedges.

We cannot take for granted having the world’s leading futures markets.  There have been serious new entrants, like China, the world’s largest consumer of oil and fuel and a major global purchaser of iron ore for its world leading steel production.  China is opening its domestic futures markets to international participation.  It is also seeking to develop Chinese commodity futures markets as viable regional price benchmarks for key industrial commodities.[5]  Slower growing economies, like Europe’s, also seek to increase their competitiveness against U.S. Dollar pricing of global commodities.[6]

These moves challenge us to ensure that America’s well-regulated derivatives markets remain open, orderly and highly liquid.  We must do everything we can to ensure that they continue to provide domestic and international participants with the world’s most accurate price discovery, lowest friction execution and the deepest trading liquidity.  To borrow this forum’s theme – America’s futures markets are grown locally and used globally.  Let’s keep it that way.

Independent and Effective Market Regulation

American derivatives markets are also the world’s best regulated.  The United States is the only major country in the Organization for Economic Co-operation and Development to have a regulatory agency specifically dedicated to derivatives market regulation: the CFTC.  There is a connection between having the world’s most competitive derivatives markets and effective Federal regulation.  For over forty years, the CFTC has been recognized for its principles-based regulatory framework and econometrically-driven analysis.  The CFTC is respected around the world for its depth of expertise and breadth of capability.

The combination of regulatory expertise and competency is one of the reasons why U.S. derivatives markets continue to serve the global need to hedge price and supply risk safely and efficiently.  It is why well-regulated U.S. derivatives markets, by allowing low-cost and effective hedging, are of great benefit to American producers and consumers and to the rest of the world.

As some of you might know, the Commission was established as an independent agency in 1974, assuming responsibilities that had previously belonged to the Department of Agriculture since the 1920s with regulatory authority over the commodity futures markets. These markets have existed since the 1860s, beginning with agricultural commodities such as wheat, corn, and cotton.  Over time, these commodity futures markets have grown to include those for energy and metals commodities such as crude oil, heating oil, gasoline, copper, gold, and silver. The agency now also oversees trading platforms for financial products such as interest rates, stock indexes, and foreign currency.  On the heels of the 2008 financial crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act ( Dodd Frank Act ) giving the agency oversight of the more than $400 trillion swaps market, which is about twelve times the size of the futures market.

Yet, the agency’s value proposition is less about the enormous size of the markets it regulates, but the effectiveness of its work and independence from political control.  The framers of the U.S. market regulatory structure wisely made the CFTC an independent agency, not under the direct control of the executive branch, but subject to thoughtful oversight by Congress.  The effect is to shield it from the political tempests of the times, to regulate in the best interest of markets and not in furtherance of a broader political agenda.

Having served under both the Obama and Trump Administrations, I have witnessed a consistent abstention from interference in the CFTC’s regulatory mission.  And that is right.  It is a credit to U.S. political institutions.  Society may choose to address such concerns as climate change, poverty or gender discrimination, but they are properly addressed through legislative and executive initiative.  The job of regulators is to oversee trading markets that fairly value those concerns, not promote or institute them.

I believe that insulation from political control and singular, dedicated regulation are among the key reasons why U.S. markets remain the world’s preeminent.  And interestingly, despite being the most venerable, U.S. futures markets are today among the fastest growing markets in the world.  Their continued ability to attract global capital and investment reflects their universally-recognized integrity and independence from particular government social, monetary or political policies.

Renewed Focus on Market Evolution

Upon becoming Chairman, I made some institutional changes designed to refocus the agency on better understanding the current evolution of markets.  In 2017, we set up the Market Intelligence Branch as part of the CFTC’s Division of Market Oversight.  The work of the new branch is important.  It is to understand, analyze and communicate current and emerging derivatives market dynamics, developments and trends – such as the impact of new technologies and trading methodologies. The Market Intelligence Branch is set up to increase the Commission’s knowledge of evolving market structures and practices in order to inform sound policymaking at the Commission.

Market Intelligence staff provide a brief summary of market news twice daily, and every Friday they provide a report of key market developments to the Commissioners and senior staff.  They also brief other U.S. financial regulators, like the SEC, the Federal Reserve and the Treasury.  In these briefings they cover the full range of derivatives markets: financial markets, energy markets, and, of course agricultural markets.  Staff discuss the spectrum of issues affecting markets, from weather to global trade.  In addition, about once a month, Market Intelligence and other CFTC staff present their findings on a major research topic.  In the agriculture space these briefings have covered such matters as the impact of high frequency trading on futures markets and the effect of new block trading in grains markets.

In April of 2017, we also launched the CFTC’s first annual agricultural futures conference in Kansas City.  The CFTC, along with Kansas State University, conducted a first-of-its-kind conference called, “Protecting America’s Agricultural Markets:  An Agricultural Commodity Futures Conference.”  I am proud to say that USDA Under Secretary Bill Northey was the keynote at our conference last year.  Panelists discussed current macro-economic trends and issues affecting our markets, like market speculation, high frequency trading, trade data transparency, novel hedging practices and market manipulation.  Participants looked at problems in convergence between cash and futures prices and volatile storage rates and heard about advances in distributed ledger technology, algorithmic trading and other emerging digital technologies, as well as current regulatory activities in protecting participants from manipulation, fraud and other unlawful activities.

 Our common purpose was to hear from end users who use our markets to hedge risk and to consider and address issues of emerging market structure and trading practices to ensure that these markets remain the world’s most robust, dynamic and liquid for decades to come.

We will hold our second Ag futures conference on April 11-12, 2019.  The program is excellent.  I hope to see many of you there.

Renewed Commitment to Free Markets

As we focus our regulatory energies to better understand the changing dynamics of our commodity derivatives markets, we cannot deny that much is changing, and changing rapidly.  New emerging digital technologies are pulling our farmers and ranchers into a virtual future, often beyond comprehension, with a powerful, gravitational pull. They are entering this virtual world with worries about trade, commerce, costs, and competition.  And, as regulators, we needed to listen, and continue to listen.  The greater the pace of change, the greater must be our capacity to keep pace, understand and harness it.

Yet, amidst all this change, I want to reassert for you tonight an enduring and true value.  That is, the value proposition of free market capitalism.  The proposition that broad and sustained prosperity generally occurs wherever in the world there are open and competitive markets, free of political interference, combined with free enterprise, personal choice, voluntary exchange and legal protection of person and property.

This value proposition is a source of human expression, aspiration and creativity. Freedom of choice is a social good in its own right, a moral and economic imperative.  Life, liberty and the pursuit of happiness are about the freedom of the individual – not just moral or political freedom - but economic freedom as well, freedom to live in a self-directed manner and conduct commerce as one may determine.

Under free market capitalism, well-regulated and well-ordered trading activity is considered a forum of human self-expression and economic advancement.  Freedom to act in the marketplace is a part of freedom itself.  Billions of consumers, following their own self-interests and individual needs, make the decisions that direct the future, not have it directed for them.

For an emerging generation fascinated by crowd sourcing, free capital markets are the ultimate in crowd sourced decision making.  Free markets should be the natural choice of today’s youth, who today and always, aspire to bright and self-actualized futures – something that is no more freely and openly chosen than under free market capitalism.

Conclusion: A Future of Human Potential

I personally hope that we can renew faith in free markets for ourselves and our children.  We must not be afraid or be intimidated.  We must renew our confidence in the value of our free market model.  In so doing, we best encourage and reward the initiative, productivity, drive and dreams of everyone on this planet…not just for soybean growers in White Cloud, Kansas, dairy farmers in Melrose, Minnesota or cotton producers in Bardwell, Texas, but also for commodity traders in Chicago, swap dealers in New York and London and pension managers in Tokyo.  We must do so for the sakes of the tomorrow’s citizens here at home and abroad, in developed economies and developing ones, in places that lack infrastructure, or nations with growing needs like the Congo or facing economic crisis like Venezuela.

We must confidently encourage the world to continue to follow this model of free market capitalism – a model that is unmatched in alleviating global poverty and unlocking human potential.  We welcome others to join us in a future of untethered aspiration.  A future where creativity and economic expression is a social good all by itself – and a good for us all.

With the proper balance of sound policy, regulatory oversight and private sector innovation, new technologies and global trading will allow our markets to evolve in responsible ways, and continue to grow the economy and increase prosperity.

Thank you again for the opportunity to talk with you this evening.

 


[1] Farm Flavor, New Jersey Agriculture Overview, December 10, 2013, at: https://www.farmflavor.com/new-jersey/new-jersey-family-farms/new-jersey-agriculture-overview/

[2] E.g., USDA, Informational Memorandum: PM-17-012, 2017 Crop Year (CY) Common Crop Insurance Policy and Area Risk Protection Insurance Projected Prices and Volatility Factors; Malting Barley Endorsement Projected Price Component and Volatility Factor; and Hybrid Seed Price Endorsement -Hybrid Seed Corn Prices (Mar. 1, 2017), available at https://www.rma.usda.gov/bulletins/pm/2017/17-012.pdf.

[3] See International Swaps and Derivatives Association, 2009 ISDA Derivatives Usage Survey, ISDA Research Notes, No. 2 (Spring 2009), at 1-5, available at https://www.isda.org/a/SSiDE/isda-research-notes2.pdf.

[4] The Milken Institute found the following economic benefits to the U.S. economy from derivatives: “[b]anks’ use of derivatives, by permitting greater extension of credit to the private sector, increased U.S. quarterly real GDP by about $2.7 billion each quarter from Q1 2003 to Q3 2012; [d]erivatives use by non-financial firms increased U.S. quarterly real GDP by about $1 billion during the same period by improving their ability to undertake capital investments; [c]ombined, derivatives expanded U.S. real GDP by about $3.7 billion each quarter; [t]he total increase in economic activity was 1.1 percent ($149.5 billion) between 2003 and 2012; [b]y the end of 2012, employment had been boosted by 530,400 (0.6 percent) and industrial production 2.1 percent.”  See Apanard Prabha et al., Deriving the Economic Impact of Derivatives, Milken Institute, at 1 (Mar. 2014), available at http://assets1b.milkeninstitute.org/assets/Publication/ResearchReport/PDF/Derivatives-Report.pdf.

[5] In the first quarter of 2018, the Shanghai International Energy Exchange launched a yuan-denominated crude oil contract allowing non-Chinese market participants to trade directly for the first time in the Chinese commodity markets. Shortly following this new contract, China opened yuan-denominated iron ore and bunker fuel oil contracts to international traders.  There is also talk of China allowing international market participants to trade Chinese futures contracts in rubber, copper and even soybeans.

[6] Francesco Guarascio & Dmitry Zhdannikov, Reuters, EU Brings Industry Together to Tackle Dollar Dominance in Energy Trade, February 13, 2019, at: https://www.reuters.com/article/us-eu-oil-usa/eu-brings-industry-together-to-tackle-dollar-dominance-in-energy-trade-idUSKCN1Q21WB