OVERLAND PARK, KAS. — As the National Grain Trade Council approaches its 70th anniversary, its current chairman, Randal L. Linville, president and chief executive officer, The Scoular Co., said the N.G.T.C.’s role as an advocate and defender of open, competitive commerce in agriculture is more essential today than ever before.

“The Council includes commodities exchanges and railroads,” Mr. Linville said. “It includes grain companies and grain millers. It includes food companies and feed manufacturers. It unites all of us in the common purpose of advocating open and competitive commerce in agriculture and trade. On the strength of our membership, their knowledge and their expertise, we are able to help shape legislation in those directions.”

Mr. Linville said the N.G.T.C. currently is implementing its mission on several fronts, including trade and farm policy and the regulatory environment for agricultural futures.

Farm and trade policy

“We believe that growers want to farm their land productively, and that they want the market to drive what they produce on their land,” Mr. Linville said. “We advocate farm legislation that allows farmers to respond to market signals.

“The N.G.T.C. was instrumental in promoting the ‘freedom to farm’ reforms of the 1996 farm act. And we sought to maintain the reforms made in 1996 in the 2002 farm bill. Unfortunately, the 2002 farm act turned back some of the strong market-oriented reforms of the 1996 legislation. So as we look toward the 2007 farm bill debate, we would like a return of more market-oriented direction in farm policy.”

Mr. Linville said that the N.G.T.C. would play a leading role in assembling a coalition of organizations advocating market-oriented reforms in the 2007 farm bill. Jula Kinnaird, N.G.T.C. president, will serve as coordinator of the coalition, the Alliance for Agriculture Growth and Competitiveness. The coalition will seek to ensure that agricultural policies are crafted so as to enable U.S. agriculture to grow and be competitive in world markets.

Mr. Linville said the current debate over the Central American Free Trade Agreement-Dominican Republic in a sense has been a precursor to the farm bill deliberations.

“The N.G.T.C. has been very proactive in supporting the CAFTA-DR agreement,” Mr. Linville said. “We’re concerned about some attitudes toward trade in the Congress. We understand that politics are local while trade is global, and therein lies a recurring conflict. Nonetheless, we think that fair trade makes the pie bigger for everyone. And fair trade holds great benefits for U.S. agriculture.”

Mr. Linville said the N.G.T.C. also is part of a broad agriculture trade coalition that has campaigned vigorously both for ratification of CAFTA-DR and for market-oriented reforms in the current negotiations for a new global trade agreement under the World Trade Organization. The N.G.T.C. and its partners in the trade coalition have conducted press conferences and rallies and have organized visits with congressional representatives to press the case for free and fair trade. Mr. Linville said it was important to encourage legislators, as they consider CAFTA-DR, to keep in mind the big picture.

“Trade liberalization is a win-win for everybody,” Mr. Linville asserted.

Mr. Linville said that failure of Congress to pass CAFTA-DR would send a negative message about the U.S. role in promoting trade liberalization even as the final stage of negotiations under the Doha Round is under way.

“It would send the message to the world — don’t try to negotiate a trade agreement with the U.S. because you’ll never get it completed,” he said.

Fair treatment for agricultural futures

Mr. Linville said the N.G.T.C. seeks parity for agricultural futures contracts with financial and other non-agricultural futures.

“We’ve been disadvantaged relative to financial markets for a number of years, and we’re working on a number of fronts toward making our exchanges more competitive in today’s global marketplace,” he said.

Mr. Linville said the N.G.T.C. supports the reauthorization of the Commodity Futures Trading Commission.

“We think it has been an effective body in dealing with the very specialized issues of futures exchanges,” Mr. Linville said. “Having said that, we think there is continued room for improvement.

“There has been a long history of special regulation of agricultural commodity futures contracts. This special regulation was born out of government efforts decades ago to protect agricultural producers from business practices and information deficits that placed them at competitive disadvantage.

“But fast forward to today, and you’ll see there’s been huge changes in commodity exchanges, and huge innovation in contracts and tools available to producers. I think through the commercial channels and exchanges we, as an industry, stand ready with a wide array of products for producers and all other participants to use as part of their risk management programs. The N.G.T.C. has been very proactive in speaking with legislators and the C.F.T.C. about modernizing those rules to enable the industry to introduce and provide additional modern risk management tools to producers and end users of agricultural commodities alike.”

Mr. Linville pointed out that reforms instituted with the last reauthorization of the C.F.T.C. have been fruitful, as indicated by the increased number of contracts being traded. The reforms marked a movement toward more self-regulation by the exchanges, with the C.F.T.C. continuing to exercise oversight. The N.G.T.C. seeks to encourage further movement along this path, he said.

Subjecting agricultural futures contracts to onerous and unnecessary special regulation thwarts innovation, Mr. Linville said.

“The agriculture products are part of a broader suite of futures and financial products, and more and more, there’s an imbalance of scale,” he said. “Many of the other markets have adapted to electronic platforms. We in the agriculture markets are trying to utilize that technology. But it’s difficult in an environment where we’re subject to greater regulation than the other segments of the global industry. I think to some degree our exchanges bear the burden of higher costs due to that regulation, which makes it more difficult to compete.”

In recent months, a dramatic increase in managed money participation in agricultural futures markets has translated into intense volatility and even counterintuitive price moves.

“It’s been a very practical example of the broader issue the N.G.T.C. and the exchanges face,” Mr. Linville said. “In the global capital market, there’s a convergence of agriculture and financial markets. And there’s a real imbalance in scale between the two. The financial markets are a behemoth that can swallow the agriculture markets, and when you also throw in the differing regulatory treatments, the outcome can be incredible volatility in short periods of time.”

Mr. Linville said exchanges have responded to the expanded volume by increasing speculative limits. But more equal treatment of agricultural futures contracts would enable exchanges to be more innovative in accommodating the expanded volume.

Different standards for regulating agricultural compared with non-agricultural futures contracts also has come into play in requirements of the Financial Accounting Standards Board under Financial Accounting Standard 133, Accounting for Derivative Instruments and Hedging Activities, Mr. Linville said.

F.A.S.-133, implemented in 1999, allows financial firms to hedge various components that determine a financial asset’s price, but prohibits firms from designating the risk component of non-financial assets as hedged items. As a result, F.A.S.-133 actually has increased risk in agricultural markets by forcing suppliers to carry the hedging instruments on behalf of the processors and by causing processors to move from the protection of standardized exchange-traded contracts to off-exchange products, Mr. Linville said.

F.A.S.-133 requires a grain or food processor to report, under certain market conditions, the interim gains or losses from a futures hedge. But the processor may not report the offsetting losses or gains from the change in the price of the physical commodity, as though the movement in the price of the hedge instrument had no relation to the movement of the price of the physical commodity that was hedged.

This occurs primarily because F.A.S.-133 prohibits grain processors, such as bakers, from hedging components of non-financial assets. Grain processors often hedge one or more ingredient (such as wheat) of a finished product they purchase, such as flour. This is done because there may not be a viable way to hedge every ingredient of the finished product, or prices of certain components of the finished product may be set by an agreement with the supplier. By comparison, financial firms are allowed to designate whether they are hedging the interest rate component or credit risk component of a financial asset or liability.

“Before F.A.S.-133 firms used agriculture futures contracts at the exchanges as a normal routine part of their hedging activity,” Mr. Linville said. “Post F.A.S.-133, many of those activities were viewed in a different light. Processors were unable to use direct hedging at the exchanges as part of their day-to-day transactions. It caused them either to not hedge or to find alternate ways of hedging their risks through their commercial cash contracts. Either way, it rolled back the effectiveness of the futures contract. We believe that this has impaired volume on the exchanges. F.A.S.-133 has limited the tool kit member firms and other companies in the food industry might otherwise have for hedging their agricultural commodity risk.”

Modifying F.A.S.-133 to allow agricultural commodity hedgers to hedge components of a finished product would promote greater market participation and more accurate reporting of financial condition, Mr. Linville said. MBN

Scoular is a century-old agribusiness company supplying grain and feed ingredients throughout North America.