UNITED STATES OF AMERICA

Before the

COMMODITY FUTURES TRADING COMMISSION

I.

INTRODUCTION

The Commodity Futures Trading Commission ("Commission") has received information from its staff which tends to show, and the Commission's Division of Enforcement ("Division") alleges that:

II.

SUMMARY

1. Farmers Cooperative Company ("Farmers Co-op" or "co-op"), a cooperative grain elevator located in Farnhamville, Iowa, aided and abetted by Richard Houge and Larry Peterson, co-op employees, offered to member farmers hedge-to-arrive ("HTA") contracts which functioned as off-exchange futures contracts and offered the farmers off-exchange agricultural options contracts. Farmers Co-op, aided and abetted by co-op employees Richard Houge, Larry Peterson and John McPherson, also enabled the farmers to trade exchange-traded futures and options contracts without the co-op having been registered as a futures commission merchant ("FCM"), and without providing the farmers with risk disclosure and monthly statements.

III.

RESPONDENTS

2. Farmers Cooperative Company is a cooperative grain company with its main office at 105 Garfield Avenue, P.O. Box 35, Farnhamville, Iowa 50538. Farmers Co-op is in the business of purchasing and storing corn and soybeans, selling the corn and soybeans to other elevators and end users such as grain processors, selling fertilizer and other agricultural products, and operating feed mills. Farmers Co-op has approximately thirty-four branch facilities, including twenty-three elevators, located in northern Iowa. Farmers Co-op has never been registered with the Commission in any capacity.

3. Richard Houge resides at 2364 Elm Street, Fort Dodge, Iowa 50501-8426. At all times relevant to the Complaint, Houge was an employee of Farmers Co-op. Houge has never been registered with the Commission in any capacity.

4. John A. McPherson resides at 700 Jay Street, Churdan, Iowa 50050. At all times relevant to the Complaint, McPherson was an employee of Farmers Co-op. McPherson has never been registered with the Commission in any capacity.

5. Larry D. Peterson resides at 2324 Dakota Avenue, Lytton, Iowa 50561. Peterson has been an employee of Farmers Co-op since the spring of 1995. He received a temporary associated person ("AP") registration in November 1995. He received his permanent AP registration in January 1996.

IV.

FACTS

Farmers Co-op's Hedge-To-Arrive Contracts

6. From at least March 1993 to June 1996, Farmers Co-op offered to enter into and entered into hedge-to-arrive contracts ("HTAs") with members of the co-op, usually local grain producers. Farmers Co-op's HTAs required producers to deliver specified quantities of corn or soybeans to Farmers Co-op on or before a specified date in the future. The HTAs contained standardized terms, were entered into for the purchase and sale of corn or soybeans at some time in the future, and delivery obligations were usually discharged through offsetting transactions or buy-back arrangements.

7. The HTAs offered by Farmers Co-op allowed producers to capture price movements in the futures markets, based upon the prices of corresponding contracts bought and sold at the Chicago Board of Trade ("CBT") or the MidAmerica Commodity Exchange ("MACE").

8. When a producer wanted to sell his grain using an HTA, the producer contacted Farmers Co-op, requested to enter into an HTA and specified the futures reference price, the quantity of grain and a contract month for delivery that was tied to the futures reference price. The elevator then placed an order to sell an exchange-traded futures contract with Farmers Commodity Corporation ("FCC"), its FCM, corresponding to the parameters specified by the producer.

9. After Farmers Co-op received confirmation from FCC that the corresponding exchange-traded futures contracts had been sold for Farmers Co-op's account at FCC, Farmers Co-op entered into the HTA contract with the producer by writing the HTA contract and handing or mailing it to the producer. The HTA contracts contained a commodity, price per bushel, quantity sold, and contract month that usually corresponded to the exchange-traded futures contract.

10. Houge and Peterson, both of whom were Farmers Co-op employees, took producers' orders for the HTA contracts, wrote the HTA contracts, and handed or mailed the HTA contracts to producers.

11. Farmers Co-op was responsible for all commission and margin requirements associated with the exchange-traded futures contracts corresponding to the HTA contracts.

12. Farmers Co-op charged the producers a service charge of one cent per bushel which was deducted from the cash price of the HTA contract for placing the exchange-traded futures transaction and entering into the HTA contract with the producer.

13. The price that Farmers Co-op agreed to pay to the producer for the grain sold in an HTA contract was the difference between the futures reference price, which was the price at which the co-op sold the exchange-traded futures contract described in the HTA contracts, and the basis. The farmers' futures reference price was set when the HTA contract was entered into and was determined by the price of the exchange-traded future. Basis is the difference between the futures reference price and the cash delivery price offered by Farmers Co-op for the same delivery period. The basis could be set at any time up to the last day of the month preceding the delivery month specified in the HTA contract.

14. Farmers Co-op permitted producers to "buy back" their HTA contracts at any time before delivery was required under the contract and thereby extinguish their delivery obligations by means other than the actual delivery of grain.

15. When a producer wanted to buy back an HTA contract, Farmers Co-op placed an order with FCC to buy a CBT or MACE contract to offset the short futures position that had established the original futures reference price. Once the exchange-traded futures contract was offset, the HTA contract was cancelled.

16. The profit or loss generated by the offsetting trade was debited or credited to the producer's account with Farmers Co-op and the co-op prepared and mailed to the producer a statement called a "sales ticket" which described the transaction on the exchange and the amount of debit or credit. Any obligation that the producer had to deliver grain to the co-op was extinguished when the producer bought back the HTA contract.

17. Farmers Co-op permitted and sometimes encouraged producers to postpone the date on which grain was to be delivered to Farmers Co-op under the HTA contract by "rolling" the HTA delivery date into the future. When a producer requested to roll an HTA contract, Farmers Co-op placed an order or orders to buy CBT or MACE grain contracts to offset the short futures position that had established the original futures reference price and to sell futures in the later contract month designated by the producer in order to establish a new futures reference price. The gains or losses reflected in the price difference between the old and new futures reference prices were credited or debited to the producer's account with Farmers Co-op. The co-op then prepared and mailed to the producer the sales ticket which described the offsetting transaction and the amount of the debit or credit. The co-op also sent producers the HTA contract with the new futures reference price.

18. From at least November 1994 to June 1996, Farmers Co-op, through Houge and Peterson, permitted producers to sell to it off-exchange agricultural call options in corn and soybeans.

19. Producers who sold off-exchange agricultural call options in corn and soybeans to Farmers Co-op received premiums and became obligated, if Farmers Co-op exercised the options, to sell the grain to the co-op by a specified date at a fixed price. For each off-exchange agricultural call option in corn and soybeans that the co-op purchased from a producer, the co-op sold an equivalent exchange-traded option which matched the commodity, quantity, expiration month and strike price. The premiums were credited to the producers' accounts with the co-op.

20. When Farmers Co-op exercised some of the corn and soybean call options against producers, the co-op created HTA contracts between the co-op and producers.

21. The co-op bought back other such short off-exchange agricultural call options at the direction of the producers, prior to exercise on the exchange, thereby extinguishing the producers' obligations under the call options.

22. When such options positions were terminated before exercise by offsetting trades at the direction of the producers, the co-op credited or debited the resulting profits or losses to the producers' accounts with the co-op and mailed the producers sales tickets which described the transactions and the amounts of debit or credit.

Exchange-Traded Futures

23. From at least November 1994 to February 1996, Farmers Co-op permitted producers to buy and sell through its own account at FCC exchange-traded futures contracts in commodities which were not deliverable to the co-op and which the producers did not intend or have the ability to deliver to the co-op. Farmers Co-op bought or sold CBT, MACE or Chicago Mercantile Exchange contracts, including futures contracts for soybean meal, soybean oil, live hogs, live cattle and wheat, and bought CBT or MACE corn and soybean futures contracts, on behalf of the producers who requested them. From at least November 1994 to May 1996, Farmers Co-op also permitted producers to buy exchange-traded futures in corn and soybeans. 24. Farmers Co-op maintained several futures trading accounts at FCC. Farmers Co-op used some of the accounts to hedge the cash grain it owned. The co-op used the remaining accounts to place the futures trades that corresponded to the HTA contracts and the futures trades that were made for producers in commodities which were not deliverable to the co-op and which the producers did not intend or have the ability to deliver to the co-op ("non-deliverable commodities"), as described in Paragraph 23 above.

25. Houge, McPherson and Peterson placed the futures trades that were made for producers in non-deliverable commodities, as well as the futures trades that corresponded to the HTA contracts.

26. After a producer placed a futures trade in a non-deliverable commodity, Houge, McPherson or Peterson then prepared a "Trade Confirmation Contract," which confirmed the trades made on an exchange and mailed or handed such confirmations to the producer. The co-op charged producers a fee for such transactions, which was the same amount which the FCM charged the co-op, and which the co-op characterized as a "brokerage commission." Because the co-op was responsible for all margins associated with the exchange-traded futures positions, it thereby extended credit to producers to maintain the positions at FCC.

27. When Farmers Co-op subsequently offset such futures positions at the direction of the producers, it credited or debited the realized profits or losses to the producers' account with the co-op and prepared and mailed sales tickets to the producers, which described the transactions and the amounts of debit or credit.

Exchange-Traded Options

28. From at least November 1994 to at least June 1996, Farmers Co-op permitted producers to buy and sell exchange-traded call and put options in corn, soybeans, soybean meal and live hogs.

29. Houge, McPherson and Peterson placed the orders to buy and sell such options on behalf of the producers who requested them and placed the options positions into the same Farmers Co-op accounts at FCC where the HTA-related positions were placed. Farmers Co-op charged producers a fee for such transactions, which was the same amount that the FCM charged the co-op, and which the co-op characterized as a "brokerage commission." Because the co-op was responsible for all margins associated with the exchange-traded call and put options, it thereby extended credit to producers to maintain the positions at FCC.

30. When producers bought call options and bought and sold put options in any commodity, the producers and the co-op did not contemplate, and the option transactions did not require, delivery by the producers of any such commodity to the co-op.

31. When producers sold call options in commodities other than corn and soybeans, the producers and the co-op did not contemplate, and the option transactions did not require, delivery by the producers of any such commodity to the co-op.

32. Producers carried in their co-op accounts debits which were created when they bought back or rolled HTA contracts, paid option premiums, or incurred losses related to the purchase or sale of exchange-traded futures or option contracts. The elevator extended credit by allowing producers to maintain debits in their accounts until the debits were satisfied by credits from other transactions or by checks the producers delivered to the co-op.

33. Farmers Co-op sometimes delivered checks to producers to pay for credits in their accounts which were created when they bought back or rolled HTA contracts, received option premiums, or realized gains related to the purchase or sale of exchange-traded futures or option contracts. In other instances, the co-op applied such credits in producers' co-op accounts to satisfy debits from other transactions.

34. The parties to the HTA contracts and the futures and option contracts included persons or entities that were not "eligible swap participants" as that term is defined in Part 35 of the Commission's Rules, 17�C.F.R. ���35.1�et seq.

V.

VIOLATIONS OF THE COMMODITY EXCHANGE ACT

COUNT ONE

VIOLATIONS OF SECTION 4(a) OF THE ACT: UNLAWFUL OFFER

OF AND ENTRY INTO CONTRACTS FOR THE PURCHASE OR SALE

OF A COMMODITY FOR FUTURE DELIVERY

35. Paragraphs 1 through 34 above are realleged and incorporated herein by reference.

36. Beginning in at least March of 1993 and continuing to at least June 1996, in connection with marketing and entering into HTA contracts, Farmers Co-op offered to enter into, entered into, executed, confirmed the execution of, or conducted an office or business in the United States for the purpose of soliciting, or accepting orders for, or otherwise dealing in, transactions in, or in connection with, contracts for the purchase and sale of a commodity for future delivery (other than a contract which is made on or subject to the rules of a board of trade, exchange, or market located outside the United States, its territories or possession), and such transactions and contracts were neither conducted on or subject to the rules of a board of trade which has been designated by the Commission as a "contract market" for such commodity nor executed or consummated by or through a member of a contract market, in violation of Section 4(a) of the Commodity Exchange Act, as amended ("Act"), 7 U.S.C. ��6(a) (1994).

37. Beginning in at least March 1993 and continuing to at least June 1996, by the conduct alleged in this Count, Houge, as an employee of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in offering to enter into, entering into, executing and confirming the execution of contracts for the purchase and sale of a commodity for future delivery in that he took producers' orders for HTA contracts, placed the futures trades that corresponded to the HTA contracts, and wrote the HTA contracts.

38. Beginning in February 1995 and continuing to at least June 1996, Peterson, as an employee of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in offering to enter into, entering into, executing and confirming the execution of contracts for the purchase and sale of a commodity for future delivery in that he took producers' orders for HTA contracts, placed the futures trades that corresponded to the HTA contracts, and wrote HTA contracts.

VIOLATIONS OF SECTIONS 4d(1) and 4c(b) OF THE ACT AND

COMMISSION REGULATIONS 32.3 and 33.3(b):

ACTING AS A FUTURES COMMISSION MERCHANT WITHOUT REGISTRATION

39. Paragraphs 1 through 34 above are realleged and incorporated herein by reference.

40. Beginning in at least November 1994 and continuing to at least February 1996, Farmers Co-op solicited and accepted orders for the purchase and sale of commodities for future delivery on or subject to the rules of contract markets and, in connection with such solicitation and acceptance of orders, accepted money or property (or extended credit in lieu thereof) to margin, guarantee or secure trades or contracts that resulted therefrom, without first having registered with the Commission as an FCM, in violation of Section 4d(1) of the Act, 7�U.S.C. ��6d(1), in that it allowed farmers to buy and sell exchange-traded futures contracts in commodities which were not deliverable to the co-op.

41. Beginning in at least November 1994 and continuing to February 1996, Houge and McPherson, as employees of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in acting as an unregistered FCM and thereby violated Section 4d(1) of the Act, 7�U.S.C. ��6d(1), in that they accepted and placed producers' orders to buy and sell exchange-traded futures contracts in commodities which were not deliverable to the co-op.

42. Beginning in at least February 1995 and continuing to February 1996, Peterson, as an employee of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in acting as an unregistered FCM and thereby violated Section 4d(1) of the Act, 7�U.S.C. ��6d(1), in that he accepted and placed producers' orders to buy and sell exchange-traded futures contracts in commodities which were not deliverable to the co-op.

43. Beginning in at least November 1994 and continuing to at least May 1996, Farmers Co-op solicited and accepted orders for the purchase and sale of commodities for future delivery on or subject to the rules of contract markets and, in connection with such solicitation and acceptance of orders, accepted money or property (or extended credit in lieu thereof) to margin, guarantee or secure trades or contracts that resulted therefrom, without first having registered with the Commission as an FCM, in violation of Section 4d(1) of the Act, 7�U.S.C. ��6d(1), in that it allowed farmers to buy exchange-traded futures contracts in corn and soybeans.

44. Beginning in at least November 1994 and continuing to May 1996, by accepting and placing producers' orders to buy exchange-traded futures contracts in corn and soybeans,

Houge and McPherson, as employees of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in acting as an unregistered FCM and thereby violated Section 4d(1) of the Act, 7�U.S.C. ��6d(1).

45. Beginning in at least February 1995 and continuing to May 1996, by accepting and placing producers' orders to buy exchange-traded futures contracts in corn and soybeans, Peterson, as an employee of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in acting as an unregistered FCM and thereby violated Section 4d(1) of the Act, 7�U.S.C. ��6d(1).

46. Beginning in at least November 1994 and continuing to at least June 1996, Farmers Co-op accepted money or property (or extended credit in lieu thereof) from option customers as payment of the purchase price in connection with commodity option transactions, and solicited and accepted orders for the purchase and sale of commodity options, without first having registered with the Commission as a futures commission merchant, in violation of Section 4c(b) of the Act, 7�U.S.C. ��6c(b), and Regulations �� 32.3 and 33.3(b), 17�C.F.R. ���32.3 and 33.3(b) (1997), in that it accepted and placed producers' orders to buy and sell exchange-traded put options and to buy call options in any commodity, and to sell call options in commodities other than corn and soybeans.

47. Beginning in at least November 1994 and continuing to June 1996, by the conduct alleged in this Count, Houge and McPherson, as employees of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in acting as an unregistered FCM and thereby violated Section 4c(b) of the Act, 7�U.S.C. ��6c(b), and Regulations �� 32.3 and 33.3(b), 17�C.F.R. ���32.3 and 33.3(b) in that they accepted and placed producers' orders to buy and sell exchange-traded put options and to buy call options in any commodity, and to sell call options in commodities other than corn and soybeans.

48. Beginning in at least February 1995 and continuing to June 1996, Peterson, as an employee of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in acting as an unregistered FCM and thereby violated Section 4c(b) of the Act, 7�U.S.C. ��6c(b), and Regulations �� 32.3 and 33.3(b), 17�C.F.R. ���32.3 and 33.3(b) in that he accepted and placed producers' orders to buy and sell exchange-traded put options and to buy call options in any commodity, and to sell call options in commodities other than corn and soybeans.

VIOLATIONS OF COMMISSION REGULATION � 1.33(a):

FAILURE TO ISSUE MONTHLY STATEMENTS

49. Paragraphs 1 through 34 above are realleged and incorporated herein by reference.

50. Beginning in at least November 1994 and continuing to June 1996, Farmers Co-op failed to issue monthly statements to producers for the transactions described in Paragraphs 40, 43, and 46 above, in violation of Regulation � 1.33(a), 17 C.F.R. � 1.33(a) (1997).

51. Beginning in at least November 1994 and continuing to June 1996, by failing to issue monthly statements to producers, Houge and McPherson, as employees of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in, and thereby violated Regulation 1.33(a), 17 C.F.R. � 1.33(a).

52. Beginning in at least February 1995 and continuing to June 1996, Peterson, by failing to issue monthly statements to producers, as an employee of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in, and thereby violated Regulation 1.33(a), 17 C.F.R. � 1.33(a).

COUNT FOUR

VIOLATION OF REGULATION � 1.55:

FAILURE TO ISSUE RISK DISCLOSURE DOCUMENTS

53. Paragraphs 1 through 34 above are realleged and incorporated herein by reference.

54. Beginning in at least November 1994 and continuing to June 1996, Farmers Co-op failed to issue risk disclosure documents to producers who entered into the transactions described in Paragraphs 40, 43, and 46 above, in violation of Regulation 1.55, 17 C.F.R. ��1.55 (1997).

55. Beginning in at least November 1994 and continuing to June 1996, by the conduct alleged in this Count, Houge and McPherson willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in failing to issue risk disclosure documents to producers, and thereby violated Regulation 1.55, 17 C.F.R. � 1.55.

56. Beginning in at least February 1995 and continuing to June 1996, by the conduct alleged in this Count, Peterson, as an employee of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in failing to issue risk disclosure documents to producers, and thereby violated Regulation 1.55, 17 C.F.R. � 1.55.

VIOLATIONS OF SECTION 4c(b) OF THE ACT AND REGULATION ��32.2:

ENTERING INTO PROHIBITED OPTION TRANSACTIONS

57. Paragraphs 1 through 34 above are realleged and incorporated herein by reference.

58. Beginning in at least November 1994 and continuing to June 1996, Farmers Co-op offered to enter into, entered into, confirmed the execution of or maintained positions in transactions which are of the character of, or are commonly known to the trade as, options and calls, in violation of Section�4c(b) of the Act, 7�U.S.C. ��6c(b), and Regulation 32.2, 17�C.F.R. ��32.2 (1997), in that it allowed producers to sell call options in corn and soybeans.

59. Beginning in at least November 1994 and continuing to June 1996, by the conduct alleged in this Count, Houge, as an employee of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in offering to enter into, entering into, confirming the execution of or maintaining positions in transactions which are of the character of, or are commonly known to the trade as, options and calls, in violation of Section�4c(b) of the Act, 7�U.S.C. ��6c(b) , and Regulation 32.2, 17�C.F.R. ��32.2, in that he allowed producers to sell call options in corn and soybeans.

60. Beginning in at least February 1995 and continuing to June 1996, by the conduct alleged in this Count, Peterson, as an employee of Farmers Co-op, willfully aided, abetted, commanded or induced Farmers Co-op or acted in combination or in concert with Farmers Co-op in offering to enter into, entering into, confirming the execution of or maintaining positions in transactions which are of the character of, or are commonly known to the trade as, options and calls, in violation of Section�4c(b) of the Act, 7�U.S.C. ��6c(b) , and Regulation 32.2, 17�C.F.R. ��32.2, in that he allowed producers to sell call options in corn and soybeans.

VI.

By reason of the foregoing allegations, the Commission deems it necessary and appropriate, pursuant to its responsibilities under the Act, to institute public administrative proceedings to determine whether the allegations set forth above are true and, if so, whether an appropriate order should be entered in accordance with Sections 6(c) and 6(d) of the Act, 7�U.S.C. ���9 and 13b (1994).

Section 6(c) of the Act allows the Commission to (1) prohibit a respondent from trading on or subject to the rules of any contract market and require all contract markets to refuse such persons all trading privileges thereon for such period as may be specified in the Commission's Order, (2) if the respondent is registered with the Commission in any capacity, suspend, for a period not to exceed six months, or revoke, the registration of that respondent, (3) assess against a respondent a civil monetary penalty of not more than the higher of $100,00 for each violation or triple the monetary gain to the respondent for each violation, and (4) require restitution to customers of damages proximately caused by the violations of the respondent.

Section 6(d) of the Act allows the Commission to enter an Order directing that the respondent cease and desist from violating the provisions of the Act and Regulations found to have been violated.

VII.

WHEREFORE IT IS HEREBY ORDERED that a public hearing for the purpose of taking evidence on the allegations set forth in Section I above be held before an Administrative Law Judge, in accordance with the Commission's Rules of Practice under the Act ("Rules"), 17�C.F.R. �� 10.1 et seq. (1997), at a time and place to be set as provided by Section 10.61 of the Rules, 17�C.F.R. ��10.61, and that all post-hearing procedures shall be conducted pursuant to Sections 10.81 through 10.107 of the Rules, 17�C.F.R. ���10.81 through 10.107.

IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations contained in this Complaint within twenty (20) days after service, pursuant to Section 10.23 of the Rules, 17�C.F.R. ��10.23, and shall serve two copies of such Answer and of any documents filed in this proceeding upon Susan A. Berkowitz, Regional Counsel, and Camille M. Arnold, Trial Attorney, Division of Enforcement, Commodity Futures Trading Commission, 300 South Riverside Plaza, Suite 1600-North, Chicago, Illinois 60606. If any Respondent fails to file the required Answer or fails to appear at a hearing after being duly served, it shall be deemed in default and the proceeding may be determined against it upon consideration of the Complaint, the allegations of which shall be deemed to be true.

IT IS FURTHER ORDERED that this Complaint and Notice of Hearing shall be served upon the Respondents personally or by registered or certified mail, pursuant to Section 10.22 of the Rules, 17�C.F.R. ��10.22.

In the absence of an appropriate waiver, no officer or employee of the Commission engaged in the performance of the investigative or prosecutorial functions in this or any factually related proceeding will be permitted to participate or advise in the decision in this matter except as witness or counsel in a proceeding held pursuant to notice.

��� By the Commission.

Dissenting Opinion of Commissioner Barbara P. Holum in the Matter of Farmers Cooperative Company

I dissent from the Commodity Futures Trading Commission's Order instituting administrative proceedings against Farmers Cooperative Company, Richard Houge, John A. McPherson and Larry D. Peterson for violations of the Commodity Exchange Act (Act). In my opinion, the hedge-to-arrive (HTA) contracts offered by Farmers Co-op do not constitute illegal off-exchange futures contracts, but instead fall within the forward contract exclusion.

Neither futures nor forward contracts are defined in the Act, but have been defined through case law and various Commission interpretations and policy statements. Thus, there is no bright line test to determine whether a transaction is a futures or forward contract. Instead, the transaction must be viewed in its entirety to determine the underlying purpose. Congress generally exempted from the Act's regulatory scheme commercial, merchandizing transactions in a physical commodity in which delivery was delayed or deferred for commercial convenience or necessity. The courts and the Commission have looked for evidence of the transactions' use in commerce, examining whether the parties to the contracts are commercial entities that have the capacity to make or take delivery and whether delivery routinely occurs under the contract.

Farmers Co-op's HTA contracts were offered to producers primarily for the purpose of transferring ownership of grain. The contracts were not offered to the general public, but rather were limited to commercial counterparties. Furthermore, the HTAs in this case included a contractual obligation to deliver. The evidence does not support a finding that the cancellation or deferral of delivery in this case was not limited to reasons of commercial convenience or necessity. For these reasons, I cannot find that the HTA contracts in this case constitute illegal off-exchange futures contracts.

Separately, the evidence is insufficient to support a conclusion that Farmers Co-op operated as an unregistered FCM.

Commissioner Barbara P. Holum ���������������������������� Date: January 12, 1999

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