under the present Commodity Exchange Act. It would seem that insuffiient consideration has been given to the problem of incorporating foreign-grown commodities within the present act. The new paragraph (5) which is to be added to the act is not well coordinated with the present section (4) a (3) which provides for limits on trading. Section (4) a (3) provides that There shall be included in the amount of any commodity which may be hedged by any person the amount of such commodity which such person is raising or intends to raise on land in the United States or its Territories which he owns or leases. Quite aside from the matter of margins, the statute, therefore, does not give a grower of coffee or sugar outside of the United States and its Territories a definite right to hedge his production without limitation of amount. The present act defines interstate commerce but makes no provision for wholly foreign commerce. One of our sugar contracts relates to sugar which is shipped directly from a foreign port to another foreign port and never enters the United States. The act is not, therefore, in our opinion, capable of amendment as proposed in bill S. 3936 without a revision of the entire act as well. Other committees of Congress in 1938 and again in 1947 considered the extension of the act and concluded that such an extension should not be made. Moreover, there are exchanges in other countries as, for instance, the coffee exchange in Santos, Brazil. Business in foreign-grown commodities can easily be driven away from our American exchanges to the foreign exchanges resulting in a curtailment of the activities of the merchants here, placing the United States more at the mercy of the producing countries, with a loss in revenue and, therefore, of taxes to our States, cities, and Federal Government. There is also an additional coffee exchange in Rio de Janeiro and on April 20 of this year the French Ministry of Industry and Commerce authorized the reopening of the coffee futures market at Le Havre. The bill authorizes the President to prescribe rules and regulations governing the margin to be required with respect to a speculative purchase or sale and provides that no such rule or regulation shall be applicable to hedging transactions. It is not infrequently difficult to determine whether a transaction should be classified as a hedging transaction or as a speculative one. We submit that curtailing, or eliminating speculation in the exchanges altogether, would not end speculation in the commodities traded in. Lumber is not traded in on the exchanges, textiles are not, chemicals are not, and many other products are not. No one denied that there was speculation and hoarding in these commodities in the hysterical period last year which followed the outbreak of war in Korea. Price increases in many commodities not traded in on the exchanges rose faster and further than those traded in on the exchanges. In support of the views that I have expressed, I append a copy of the remarks made in the House of Representatives by Representative Crawford, of Michigan, on April 24 last, opposing the control by Government agencies of margins on commodity exchanges. The proposed controls are totally unnecessary. Any supposed evil that they are directed against is adequately cared for by the price and wage stabilization provisions of title 4 of the Defense Production Act. As a sufficient illustration of this fact it is only necessary to examine the ceiling price of 55.50 per pound for coffee and the prices on the futures market. The Defense Production Act was approved on September 8, 1950, and the ceiling price for coffce was fixed on or about February 11, 1951, at 55.50 per pound, ex dock (55.78 exchance delivery in warehouse). Since then the price for coffee in the futures market has varied from 55.25 for March 1951 delivery to 48.15 for March 1952 delivery-decidedly below the ceiling price. Through the regulation of quotas the Department of Agriculture already possesses adequate powers under the present Sugar Act to limit sugar prices within the United States. It is obvious that there will be no undue amount of speculation where the speculator can hope to reap only a limited profit but runs the risk of disastrous losses. There is a ceiling but no floor to his operations. Unless the need for extension of authority is clear, we believe that the extension of controls is unnecessary and undesirable. This exchange has been notified by the Senate Bańking and Currency Committee that it would not be necessary to send a representative to testify on the exchange proposals in the Defense Production Act and that the present plans were to refer this matter to the Senate Agriculture Committee. We are hopeful that this committee, after it also considers the matter will come to the same conclusion. Mr. WOLCOTT. Mr. Atkinson, would you care to give us any information about the same questions we were asking previous witnesses, concerning your operations and your marginal requirements? Mr. ATKINSON. I will be glad to do so. The New York Coffee and Sugar Exchange, Inc., provides the facilities whereby the seller makes the transactions; those transactions then go to the clearinghouse for clearance. On all contracts some margins are required. There is no such thing as 100-percent credit by anybody. On every trade there must be some margin. That is, the buyer must have a margin on his contract, and likewise the seller; they put up the ame margin, and that margin is arrived at by the risk of so much. That risk is covered by a margin, which acts as a performance bond for the contract to be completed as of a future date. It differs, for instance, from the purchase of an automobile. You get the automobile when you make the down payment. And there has been some confusion with the margin on a stock trade. When you get the paper certificate and buy the stock, and put up a margin, you have a right to vote, all the right that the security holder has. There is no question of hedging for what you have bought somewhere. With us this is a performance bond, to the extent and amount set, depending upon the risk involved. It involves not only a risk of the price, but it also involves the risk of conditions existing in some foreign country. If they have some difficulty in a country where most of the product is produced, which might result in delay in delivery of the commodity, that margin is evidenced in the risk. You have got to consider the monetary differences, the risks entering into that, in fixing the margin. When the delay of delivery comes around that margin is not applicable just for the amount to secure the contract; that margin stays clear on up until the contract is completed, provides for the delivery of the commodity, and the purchaser has paid the full amount of it, and after he has paid the contract and the contract is completedand it helps to complete the delivery of the sugar, for instance, or the coffee, in the contract. This is a very different thing to trading on the stock exchange, or a very different thing from wanting to buy an automobile. The two have been confused. Mr. WOLCOTT. What has been historically the normal average of margin required? Mr. ATKINSON. Mr. Wolcott, I doubt if you would be able to say there has been any percentage set. I do not think we can look at it in that way. It will vary from time to time. On coffee today it is roughly about 13 percent on the first few contracts that a man has, and the next that he makes the margin goes up. In other words, as his deposit goes up likewise his margin; he has to keep adding as he adds contracts. Mr. WOLCOTT. That is regulated by the exchange? Mr. ATKINSON. That is correct. Mr. WOLCOTT. In each case there is always some margin? Mr. ATKINSON. In all cases; yes. No one has 100 percent of credit. Mr. WOLCOTT. Do you recall what the margin for stock is now? Mr. ATKINSON. Seventy-five percent. Mr. WOLCOTT. And I think you will agree that it could be up to 100 percent, if required by the Federal Reserve? Mr. ATKINSON. That is my understanding. Mr. WOLCOTT. Do you have any voluntary program, or did you during World War II, that affected the marginal requirements on the sugar and coffee exchange? Mr. ATKINSON. Among the members, among them, no. Mr. Wolcott, I wonder if I could add just one small statement? Mr. WOLCOTT. Certainly. Mr. ATKINSON. I think you possibly have in the back of your mind the control of margins, as being a credit control. Now the restraints are just the opposite. If you are trying to control prices through the control of margins, you are talking about control of credits, and the higher you put those margins the greater credit is needed. I will take as an example sugar, which is grown on large plantations, and where you have to plant the crop and where you do not get your money out of it until it is harvested maybe 10 months later, and the amount of money required is considerable. Mr. WOLCOTT. The higher the marginal requirements the more required? Mr. ATKINSON. The more money is required. Mr. WOLCOTT. It has an influence against full production? Mr. ATKINSON. Yes; and, therefore, an influence against what to my mind is really an increase in production. And when you make the requirements so stringent on the producer, to put up margins that are unjustifiable, it means they need that much more money. In other words, he has to pay that margin. Therefore, it seems that the regulation of the margin should be looked at as the amount of money required in carrying out the contract. If you are increasing the production of sugar a certain amount and you increase the margin, you make it more expensive for him to operate. Mr. WOLCOTT. That would offset very much the contention made by some of the witnesses who have been here that speculation on the commodity exchange is, therefore, in favor of inflation? Mr. ATKINSON. Yes; I would agree, with exception of the word "speculation." Speculation to me is taking on, or carrying on, a calculated risk, which we all do, and the producer-and that is what seems to confuse here does not speculate in the sense that the word is often used, but it has never been clearly defined. There are cases, extreme cases, where you have producers of sugar in Cuba. They grind their crop in a 3-month period. It may be that they sell it, or it may be that they hold it throughout the 10-month period, but they pay their help over the entire period. Many of the plantations grow their sugar in a short period but keep it in the warehouse. That would be, practically speaking, a decision they have to make, which includes not only warehousing it but in many cases at least in some cases-selling the sugar; and, in order to protect themselves against any new rise in prices, they may buy. They have, for the 10 months, to pay labor and have to pay the farmers for their sugar; and to protect themselves they will buy a futures contract, and it might be a Philippine sugar contract, where the sugar arrival is 3 or 4 months off. That is the producer who is the buyer of the sugar. Now it would be an awful difficult thing to get anybody to say that the producer who had the right to buy sugar but did not buy it was not speculating If he did not, he surely would be speculating. There is a difference between speculating and hedging, a difference which sometimes is pretty difficult to define. Now, speculation on the exchange is recognized. Mr. BROWN. I have been trying to get a clear distinction from every witness and have not yet succeeded. Mr. WOLCOTT. It would seem from the testimony throughout the hearings that somebody in the Government agency could create by regulation a definition which would apply, but in all these cases it might be construed as legitimate by one individual and speculation by another individual. Mr. ATKINSON. Yes. Mr. WOLCOTT. You would almost have to look into what was in the other fellow's mind. Mr. ATKINSON. Yes; that is correct. You would have to know the history of the whole business transaction. Mr. BUFFETT. Mr. Atkinson, I would like to get a little better understanding of how increasing the margin would decrease production. Is it because the broker or the buyer or the manufacturer in Cuba is required to put up, say, $500,000 in margin against sales he might make on the sugar exchange that has not yet been completed? Mr. ATKINSON. Well, let us take a specific example, without mentioning the actual case, and say you have a high-priced margin on sugar and that it is quite expensive to increase production, because the producer not only takes the risk of increasing the production but he also knows that within 4 months' time he has got to take the risk on the price for that sugar. As long as you have an exchange that permits him to sell futures ahead, the price is then guaranteed, which makes it more likely that he will go ahead and increase his production. Likewise, the more costly you make it for him to put up the margin the more margin required on each transaction; therefore, the more costly will be his operation, because there is a limit to the amount he can put up. Mr. BUFFETT. In other words, if he had to put up $1,000,000 margin instead of $500,000, that extra $500,000 would be taken out of his credit for production? Mr. ATKINSON. That is correct. Mr. BUFFETT. Now, on this matter of hedging and speculation. Suppose I was running a grocery store and I had two choices when I bought for next year: I could go out and buy, say, 10,000 pounds of coffee and put it in my basement, or warehouse? Mr. ATKINSON. Yes. Mr. BUFFETT. But if I bought 10,000 pounds on the exchange I am a speculator? Mr. ATKINSON. That is correct. There are a great many buyers. today who deal in futures; a great many purchases take place on the exchange, and the volume of coffee has not gone up. But if you inventory the supply, stockpile it, that is not the sam thing. There are many things that you cannot reach. Anyway, you cannot reach it by that sort of control. Mr. BUFFETT. If I buy coffee on the exchange for delivery, say, in 6 months, and when I close out the contract in 6 months, sell out the coffee, the transaction has somewhat been balanced? Mr. ATKINSON. Yes. Mr. BUFFETT. In the long run, all these future trades balance each other so far as bulls and bears are concerned. Mr. ATKINSON. That is correct. Mr. WOLCOTT. What happens when there is no buyer? Mr. ATKINSON. The seller is buying underneath there is no contract. Mr. WOLCOTT. What about the producer? Mr. ATKINSON. The producer is willing to increase his production up to the level that he thinks he is insured he is going to get a price for his product at which he can afford to sell. Mr. WOLCOTT. The exchange is a sort of insurance, a guaranty to the producer that he is going to be able to market his commodity? Mr. ATKINSON. That is correct. Mr. BROWN. Mr. Atkinson, are there other coffee and sugar exchanges in the United States? Mr. ATKINSON. We do not have any other coffee exchange. Mr. ATKINSON. That is correct. Mr. WOLCOTT. Did you want to have this statement of Mr. Crawford included in the record? Mr. ATKINSON. We would like to have it. Mr. BROWN. We will be glad to have it. Mr. WOLCOTT. You want to incorporate it as a part of your remarks? Mr. ATKINSON. Mr. Wolcott, I think it is one of the finest statements I have seen, and I do not see any harm in having it incorporated in the record if the committee is willing. Mr. WOLCOTT. I read it, and I talked with him about it, and I quite agree with you that it is quite an outstanding work on this subject, and perhaps it ought to go in as part of his remarks. It is not too long, and I would like to ask unanimous consent that it go in our record as part of it. |