Cargill, Incorporated v. Hardin

• Citation: 452 F.2d 1154
• Decision Date: 07 December 1971
• Docket Number: No. 20597.,20597.
• Parties: CARGILL, INCORPORATED, et al., Petitioners, v. Clifford M. HARDIN, Secretary of Agriculture, Thomas J. Flavin, Judicial Officer by Appointment of the Secretary of Agriculture, and the United States Department of Agriculture, Respondents.
• Court: United States Courts of Appeals. United States Court of Appeals (8th Circuit)

452 F.2d 1154 (1971)

CARGILL, INCORPORATED, et al., Petitioners, v. Clifford M. HARDIN, Secretary of Agriculture, Thomas J. Flavin, Judicial Officer by Appointment of the Secretary of Agriculture, and the United States Department of Agriculture, Respondents.

No. 20597.

United States Court of Appeals, Eighth Circuit.

December 7, 1971.

Calvin J. Anderson, Gen. Counsel, Cargill, Inc., Minneapolis, Minn., for Cargill, Inc.

Dorsey, Marquart, Windhorst, West & Halladay by Peter Dorsey, and James

H. O'Hagan, Minneapolis, Minn., for all petitioners.

Ronald R. Glancz, Atty., L. Patrick Gray, III, Asst. Atty. Gen., Walter H. Fleischer, Atty., Dept. of Justice, Washington, D. C., for respondents.

Before JOHNSEN, Senior Circuit Judge, and GIBSON and LAY, Circuit Judges.

GIBSON, Circuit Judge.

This is a petition to set aside an order of the Secretary of Agriculture entered August 13, 1970, finding that the petitioners, Cargill, Inc., and four of its officers (hereafter collectively referred to as Cargill) had manipulated the market price of May 1963 wheat futures¹ on the Chicago Board of Trade in violation of the Commodity Exchange Act, 7 U.S.C. §§ 9 and 13. Proposed sanctions were suspended because of the undue protraction of the proceedings, not due to any fault of the petitioners, and because of their apparent reliance on the case of Volkart Bros., Inc. v. Freeman, 311 F.2d 52 (5th Cir. 1962), as legitimating the conduct in question.

I. THE NATURE OF A COMMODITIES FUTURE MARKET

In order to understand the nature of this case, a brief description of the operation of a commodity futures market is necessary. Trading in commodities futures is regulated by the Secretary of Agriculture pursuant to the provisions of the Commodities Exchange Act, 7 U.S.C. § 1 et seq., and must be conducted only on a designated contract market in accordance with the market rules. The Chicago Board of Trade is a designated contract market, and the parties are in basic agreement with the following description of wheat futures trading on the Chicago Board of Trade during the times in question.

Chicago is the major futures market for wheat, particularly soft red winter wheat. A wheat futures contract on the Chicago Board of Trade is a contract made on or subject to the rules of the Board of Trade, in which one party agrees to sell and deliver and the other party agrees to buy and receive a specified quantity of wheat at a specified price in a designated month in the future. The normal trading unit is one contract consisting of 5000 bushels. The parties determine the price, the number of contracts or quantity of wheat, and the month of delivery. All other items and conditions of the contract are fixed by the rules of the Board of Trade and are incorporated into every contract. When the proper deposits are made, the clearing organization of the Board of Trade is substituted as buyer from the seller and as seller to the buyer and thereafter each of the contracting parties is obligated only to the clearing organization.

A wheat futures contract must be satisfied or liquidated by (1) an opposite and offsetting transaction in the same future prior to the expiration of trading in that future, or by (2) delivery of the specified quantity of wheat by the seller and its receipt and payment by the buyer during the specified delivery month and in conformity with the rules of the Board of Trade.² A trader who fails to satisfy one or the other of these conditions is in default on his contract.

A trader who has bought futures and is therefore obligated to take delivery or make an offsetting sale has an open long position and is referred to as a "long," and a trader who has sold futures and is obligated to deliver or make an offsetting purchase is a "short" and has an open short position. The maximum net long or net short speculative position in any wheat future which any one person may hold or control on any one contract market is 2,000,000 bushels.

The crop year for wheat in the United States is from approximately June 1 to May 31 of the following year. At all times material herein the delivery months in which wheat futures could be traded on the Chicago Board of Trade were July, September, December, March and May. The May 1963 wheat future was the last future for the 1962-1963 crop year (old crop), and the July 1963 wheat future was the first future for the 1963-1964 crop year (new crop). June 1, 1962, was the first day for trading in the May 1963 future and May 21, 1963 (Tuesday) was the last day. During the remaining seven business days in May, deliveries of wheat in satisfaction of May 1963 futures contracts could be made. May 31, 1963 (Friday) was the last day for delivery of wheat in satisfaction of a May 1963 futures contract. Any May 1963 futures contract open thereafter was in default.

Approximately 99 per cent of futures contracts on the Chicago Board of Trade are offset by an opposite transaction or transactions. When a futures contract is satisfied by delivery, the delivery is effectuated by tender on the part of the seller and acceptance on the part of the buyer of a warehouse receipt or receipts covering a specified quantity of deliverable grade wheat stored in a designated warehouse in the Chicago area approved by the Chicago Board of Trade as regular for delivery. There are no delivery points outside of the Chicago area. Under the rules of the Board of Trade, during the last three business days of a delivery month delivery may also be made by tendering deliverable grade wheat loaded in railroad cars on track in the Chicago switching district, which cars are consigned to an approved Chicago warehouse or elevator.

Soft red winter wheat is one of various classes of wheat produced in the United States, and Chicago is one of the principal markets for such wheat. The Chicago wheat futures contract is essentially a soft red winter wheat contract because No. 2 soft red winter wheat is the cheapest grade and class deliverable at par in satisfaction of the contract, and therefore the price of the Chicago wheat future tends generally to reflect the value of No. 2 soft red winter wheat.

If the futures market is functioning properly, at the close of trading in the future, the price of the future will correspond closely to the price of the cash wheat which will satisfy delivery. Thus, if in the interim between the making of the futures contract and the close of trading in the future, the price of wheat declines (which decline will be reflected in the decline of the price of the future), then the short will have made a profit on his contract, because he can either buy the wheat at the lower price in the cash market and deliver it for the higher price in his futures contract, or he can offset his short contract in the futures market by buying futures at the lower price. Conversely, if the price of wheat rises, (which will cause the price of the future to rise), the long will have made a profit on his contract, because he can take delivery of the cash wheat at the lower price in his futures contract and sell it at the higher market prices, or he can offset his long contract in the futures market by selling at the higher price.

As the Chicago Board of Trade points out in its amicus curiae brief in this case, futures trading in commodities performs several economic functions. The seasonal nature of crop production created the necessity for a mechanism whereby farmers could spread the sale of their crops over many months. Futures contracts, which allow the agricultural producer to sell his crop for delivery in a future month helps to eliminate the fluctuation of crop prices which results from the imbalance of supply over demand at the end of a harvesting period.

In addition, futures trading in commodities on a large, well-organized exchange provides reliable pricing information for persons and firms throughout the world who buy and sell the commodity on the cash market for consumption, processing or resale. Price quotations for commodities traded on the Board of Trade for future delivery are disseminated around the world and are used by those who trade in the cash commodity as guidelines in their pricing of the commodities.

Finally, since a futures contract permits the immediate fixing of the price of a transaction that will not be consummated until a future date, futures trading performs an "insurance" function. For the seller of agricultural products confronted with the risk of price decline prior to sale, and for the buyer of those products confronted with the risk of price increase prior to purchase, the futures market offers a form of "price insurance" which guarantees the futures price agreed to even if market prices subsequently rise or fall prior to the date of delivery. Persons utilizing the futures market as protection from the risk of adverse price fluctuations are commonly called "hedgers", and the use of futures contracts for this purpose is called "hedging." A grain merchant will usually sell short or hedge its stock of cash wheat in a futures market. The hedge acts as an insurance against drastic drops in the price of wheat. Processors of wheat will normally hedge their mill commitments by buying long futures. The long futures act as insurance against a rapid rise in the price and can be utilized as a source of supply for the processors. In general, hedging transfers the risk of price changes to the holders of futures.

The avoidance of this risk by "hedgers" necessarily means that other persons must be willing to take that risk. These other persons, commonly called "speculators," invest in commodity futures contracts for capital appreciation. Speculation supplies needed risk capital, increases the volume of trade to allow easy market entry and egress, and keeps the various markets in alignment through intermarket training operations.

In order for the futures market to perform its functions effectively, prices must reflect as...