A Midwest congressman warned the futures industry today that Congress may be pressured into restricting their markets next year if the agriculture crisis continues.
Rep. Dan Glickman (D-Kan.) reminded participants at the annual Futures Industry Association Convention here that the same House agricultural panel drafting farm legislation will handle the 1986 reauthorization of the Commodity Futures Trading Commission, the regulator of the futures industry.
"There's a widespread populist feeling in the heartland of America that perhaps futures exchanges don't have the farmers' interests at heart," Glickman said. He said constituents have asked him to halt speculative trading that they believe depresses commodity prices.
Glickman urged the industry to defuse the issue by appointing farmers to exchange boards and not fighting reforms aimed at halting manipulation.
FIA Vice President Michael A. Smith, commenting on Glickman's speech, said, "The agricultural crisis is a product of supply, federal policy, international trade and increasing competition. It has nothing to do with the futures industry. Lower prices are not a function of trading. I think most people on Capitol Hill understand that."
A futures contract is an obligation to buy or sell a given quantity of a product at a set price at a future date. Futures are routinely used by agriculture and other businesses to hedge against price or interest rate rises, but they're also used by speculators.
Even though a recent Federal Reserve study declared the futures industry to be economically useful, many members of Congress and the public at large still regard trading as akin to gambling. The Fed study showed that about one-third of individual future traders make money, whereas 57 percent make money on stock options.
Spurred by high and volatile interest rates, futures trading soared in the late 1970s and early 1980s from 13.6 million contracts in 1970 to 149.4 million contracts annually in 1984. Total futures industry revenue last year amounted to $1.4 billion, compared with $35 billion for the securities industry, according to a survey by the accounting firm Coopers & Lybrand.
However, aggressive pricing, the continued development of new products by exchanges, depressed commodities prices, lower inflation and interest rates and a strong U.S. dollar have reduced the inclination of businesses to use futures to protect their investments. That, in turn, has reduced the profitability of the industry, according to FIA President John M. Damgard. In addition, the industry faces increased competition from banks and discount brokerages as well as the growing popularity of simpler, less costly options products.
Consequently, futures merchants find themselves suffering from high fixed overheads arising from growth over the last two years. Industry analysts expect to see increased concentration with the larger markets drawing away most of the action from the smaller ones. The New York Commodity Exchange, for example, has captured 98 percent of the U.S. gold futures trading.