REGULATION OF COMMODITY EXCHANGES

THURSDAY, FEBRUARY 7, 1935

HOUSE OF REPRESENTATIVES,
COMMITTEE ON AGRICULTURE,
Washington, D. C.

The committee met at 10:30 a. m., pursuant to adjournment, Hon. Marvin Jones (chairman) presiding.

The CHAIRMAN. The committee will come to order, please. We will hear Mr. Davis first, this morning.

STATEMENT OF GEORGE H. DAVIS, VICE PRESIDENT OF THE TERMINAL ELEVATOR GRAIN MERCHANTS' ASSOCIATION, AND CHAIRMAN OF THE CODE AUTHORITY OF THE GRAIN EXCHANGES, OF KANSAS CITY, MO.

Mr. DAVIS. My name is George H. Davis, of Kansas City, Mo. I am vice president of the Terminal Elevator Grain Merchants' Association, and chairman of the Code Authority of the Grain Exchanges.

Our terminal elevator association controls about 300,000,000 of the 425,000,000 storage there is in the country. The balance of the storage is at seaports and private mill storage.

This bill is a bill to control or curb speculation. It seems to me that it has been pretty well covered by the gentlemen who have preceded me.

I want to approach it from a cash-grain standpoint.

Mr. HOPE. You are engaged in the cash-grain business yourself, are you not, Mr. Davis?

Mr. DAVIS. Yes. We run a 102 million bushel grain elevator at Kansas City, Mo.

Now, this bill, aside from its curbing speculation, as I say, has been pretty well covered by the gentlemen who preceded me. That is not our point of view at all. Our point of view is that a futures markets is for the purpose of economically handling the farmers' grain crops.

We are the men who bring the grain in and hedge it and so long as we have hedging facilities we are not especially interested in the speculative market.

Now, there are several features in this bill that will affect the cash-grain handling and also, in my judgment, affect the farmers materially. There is one provision in the bill that allows the Secretary to require up to 10 days' notice on a delivery. If we have to carry grain for 10 days before we can deliver it, that will result in

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a cost in the different markets from three-eighths to three-quarters of a cent a bushel. We cannot pay that. We handle grain now at a half a cent a bushel, take it through the elevator, elevate it, weigh it, mix it, load it out, take our pay in Chicago or Minneapolis, or New York, for a half a cent a bushel or $7.50 a car, average.

So you can readily see we cannot absorb that three-eights to threequarters of a cent a bushel. So it is going to come out of the farmer. There is another provision in this bill that allows the Secretary to stop trading on the 15th day of a current delivery month. Last December corn in Kansas City and Chicago markets, for December delivery, was 3 cents higher than May delivery. If the Secretary elected to take advantage of that provision for the purpose of supposedly or otherwise stopping any manipulation, we would be compelled on the 16th day of the month to reduce our bids for cash corn 3 cents a bushel.

Now, you gentlemen have had some farm experience. Do any of you think that a farmer would submit to having us drop our prices 3 cents a bushel overnight, compared to the futures? There would be nothing else for us to do unless we took a chance and sold some before the 15th was over, which would put us in the position of speculating.

Now, gentlemen, those two items might cost the farmer anywhere from $5,000,000 to $25,000,000. The same thing would apply in July wheat. Up until the 15th day of the month we would buy wheat based on the July. After the 15th of the month we would have to go to a September basis.

I have seen September wheat 10 cents a bushel less than July, when we had bad weather, or something. Do you think the farmers in Mr. Hope's district, or Mr. Nelson's district, would submit to getting 10 cents a bushel less for their wheat because of some regulation of the Secretary? They simply would not stand for it.

Now, as I say, a futures market to us means a cash market for the farmers' grain every day in the year. He may not like the price you offer him, but he can always get cash for his grain on any day he elects.

Now, that is our interest in the futures market.

Here we are faced with a proposition of being licensed because every elevator concern more or less handles a few futures. In our case it does not amount to possibly more than 5 percent of our business, but if one of our mill customers in Ohio tells us to buy 50,000 bushels of May wheat, that next week he is going to trade it for cash wheat to us, why, we buy it. And thereafter we cannot avoid being in the futures business.

Now, when you say that you are going to license us, why, we would be hamstrung in our business arrangements. We would say we could not take that business. We could not buy the 50,000 bushels. We, of course, would not take a chance on having to go to jail for 6 months or a year for the privilege of making a half a cent a bushel on 50,000 bushels of wheat. In our case it would probably throw 30 or 40 men out of work, but that would not have very much affect, I suppose, on the number of unemployed; but it would just add that

much.

Now, you may think it is strange that I am here speaking for the farmer. I think myself that the organized farm interests such as

my friends of the American Farm Bureau Federation or the Farmers' National should be here showing that that is what this would cost the farmer, but the fact that this bill exempts them from certain cooperative restrictions probably is enough to keep them from doing it. I do not believe they have given this bill the study that they should have. I think that they should be defending the farmers losing from $5,000,000 to $25,000,000. The only possible argument on the other side is the Secretary would not do it. Well, you might just as well hang a man as to keep him in suspense for 30 days believing that he is going to be hung. It would have the same effect on business, because what kills people is not actually things that happen to them; it is the worries over what is going to happen to them. And that is the case with the law, if a law of this kind is passed.

Now, you say, well, it has been told us that we elevator people would not be affected by this bill. The definition of a commission merchant is "soliciting or accepting futures on orders." Futures orders on margin.

Now, you would not solicit the business; but when, as I have shown you, on selling cash wheat we would be bound to take some orders from millers. Now, on the buying side it is customary out our way to buy grain for 30 days' shipment. The farmer in June knows it is just a question of quality on his wheat crop. He knows he has it. The market is up on some of these factors that you gentlemen are trying to control-rightly or otherwise-and he wants to hedge his crop. So he goes to the country elevator and he sells him 4,000 bushels of wheat And he brings it in as soon as the combine gets around to him. The country dealer in turn wires us, "Accept your bid for so much bid for 30-day shipment." We hedge it in the pit.

Now, the Kansas courts have ruled that that is a futures transaction. They did not rule on it regarding futures trading. They ruled on it regarding the warehouse act. They said that that was not a warehouse deposit, that it was a futures contract, and the A. A. A. have accepted that ruling.

So you see there does not seem to be any possible way for our elevator friends to get away from this.

Now, getting back to the question of control and considering the matter for a moment, I want to speak now, Mr. Chairman, as Chairman of the Code Authority of the grain exchanges.

The CHAIRMAN. May I ask you a question or two before you go

to that?

Mr. DAVIS. Would you let me make my statement and then ask me? The CHAIRMAN. Yes.

Mr. DAVIS. Unfortunately, I have been struck with a little larynx trouble, and if I can get rid of that, I will be glad to stay as long as you want me to answer questions.

This question of controlling futures trading is not new. I have been coming down to Washington for 25 years on this subject, and coming as a cash grain dealer, not as a dealer in futures.

We recognized that the Government wanted some control of futures trading, so Mr. Peak and Mr. Chester Davis suggested that we have a code covering these grain exchanges. We spent about 8 months on that code talking to the Government and talking to our people. Everybody had a different idea. But after 8 months' time we have a code with the idea that there was plenty of law, plenty of rules

on the exchanges and what we needed was enforcement, and we drew up this code with the idea of having an overtopping, if I may say, organization backed up by law and by the Secretary, that would force the exchanges to obey their own rules and law.

After that, as I say, we spent about 8 months perfecting that code. It was finally approved by the Secretary of Agriculture. It was approved by the A. A. A. and it was signed by the President.

Well, nobody likes to be a policeman. It is not a very popular job, and the exchanges looked around for the seven members of the code authority. Well, finally there were two members from the speculative element that would take the job and five members of the cash grain industry agreed to be policemen, because we felt that we looked on it from a disinterested point of view, as we simply used the futures market as a method of economical handling of the farmer's grain. We got that far along and then we looked for a goat" to be chairman, who would stand all of the abuses and who would have to get up and defend the code. Well, after considering the matter and thinking that it was a chance to show the Government that the cash grain interests were just as much interested in maintaining a high standard of futures trading as the Government was, I accepted that job, and I have been devoting about a third of my time for the last 6 months trying to make it effective.

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There is not anything 100 percent that I have ever heard of, but we have had no complaints. The people who fought the code most violently were the futures trading element themselves, and the thing they fought most was the 10-percent margin. They said they could not get any business. But even some of those elements, the majority of them in fact, have found that they lose less business in dollars and cents than they lost on accounts before, so even that opposition is dying down.

Now, I feel, and I speak for the Code Authority, that we are entitled after this 8 or 10 months' work, to a fair trial for this code. When a law is passed it is inflexible. It cannot be repealed under 2 or 3 years, at the least, and we feel that the code is entitled to a fair trail before this is reduced to law.

There is not any question in my mind and I think you gentlemen agree with me, that these codes are going to be extended for 2 years. If, after another year of this Code Authority, it does not answer all of these questions, you gentlemen have had at this hearing, then go ahead and pass your law in the light of that sentiment. Now, you say maybe this code does not cover it now. Well, if it does not we can amend that code. We have talked this matter over with the Grain Futures Administration. There are several points they bring up; I think are right. We have told them that we would be willing to amend this code to cover, for instance, the points of limitation of lines. Just at present, what we need more than anything else is increased lines, a billion bushels of speculation to hold wheat prices up in face of a crop of 500,000,000 winter and 150,000,000 or 200,000,000 spring, we need all of the possible speculation we can get to carry this wheat crop over the period of July and August, because the farmer insists on marketing about 60 percent of his wheat from the combine and there is not anybody but the speculators to carry it.